Rental properties & 2nd homes

While it’s true that Real Estate can be one of the most safest ways to accumulating or maintaining wealth, the reality is that most become a Real Estate investor by accident.

You have a home that you might have acquired from an inheritance or due to reluctance to sell when you purchased another home. Whatever the reason, you’re stuck with a piece of Real Estate and you don’t know if it’s a curse or a blessing.

Keep in mind that ideally, you should never sell Real Estate. There are tons of reasons why hanging on to a property indefinitely would be in your best interests.

However, we don’t live in an ideal world. Here are a few questions that can assess your situation:

1. Do you need the money from the sale now? There are other options to selling: A Cash-out refi or Home Equity Line of Credit (HELOC). Keep in mind that this is a loan and will directly affect question #3 below. If you don’t need the money now, how long can your lifestyle and bills continue to be paid until you do need a lump sum of cash?

2. If you determined a time period from answering #1, what do you think is the market outlook X years/months from now? National Association of Realtors and your local Real Estate association provide both national and local forecasts. Obviously, if you think prices are going down, it might be a good idea to sell. If you think your value will appreciate, keep in mind that a negative cash-flow situation might negate any gain.

3. How does your investment look from a cashflow standpoint? Before you make the common error of simply subtracting the mortgage payment from the market rent, keep in mind that there are other significant costs: property management fees, vacancy periods, maintenance, taxes, HOA dues, etc. You can create your own spreadsheet or use a software tool such as REAP. If your property generates income after subtracting everything, you likely have tax liability. If you have negative cashflow, can you refinance your home? Is it time to raise rent on a long term tenant?

4. What tax advantage(s) would you be walking away from? Since one of the advantages to owning Real Estate is lowering your tax liability, do you know how much additional dollars you’d have to pay in tax? Speaking of tax, you’ll want to familiarize yourself with the new Obamacare tax and how it applies to Real Estate.

5. Are you looking to obtain a loan to purchase another property? If so, your “debt ratio” is even more important than your credit score when obtaining a loan. Your cash-flow determined from #3 above would directly affect this. In most cases, the lender will only use 70% of gross rental income.

Being a landlord should be treated like owning a business.

6. Do you want to be a landlord? Collecting monthly rent, maintenance, advertising to new tenants, evictions, bookkeeping, and tenant disputes all go with the territory of being a landlord. Even if you’re letting relatives or friends live in the home for free, you’re still a landlord.

If this evaluation has you leaning toward selling, it would be a good idea to meet with a Realtor to get some additional input. Although agents always love to sell homes, the good ones always look to keep relationships intact by advising clients and the public what’s in their best interests for the long term.

If you’re like many, you’ve been watching the Real Estate market on the sidelines and decide it’s time to make a move. What to do with your existing home? Should you keep it as an investment property? Or do you cash out the equity and use it toward your down payment? Maybe use the equity toward another type of investment?

When deciding to move from an existing home, you need to classify yourself in one of two categories:

A homeowner who must sell in order to buy
A homeowner who can qualify to own an additional property

In order to find out which category you belong to, you’ll need the help of a loan officer and Realtor. The Realtor will determine your home’s value and potential rent from today’s market conditions. After those numbers are determined, a loan officer can determine if your credit, income, and other factors will allow you purchase an additional home.

Without getting into too many details, some situations allow you to use potential rent as part of your income when your home has enough equity. Your income and existing debts will factor into your “debt-to-income” ratio.

If the loan officer determines that you can’t qualify for an additional property without selling your existing home, the analysis ends here. You need to sell before thinking of purchasing.

If the loan officer thinks you can qualify, this brings to the table further analysis. Not all properties should be held as a rental.

Most Real Estate investors take into account 3 factors when evaluating a property:

0913081134a — A local investor shares his methods at a Landlord Workshop.

Appreciation & rent improvement potential – does the neighborhood or local area have an upside that will outpace surrounding markets? Some examples include a new school, shopping center, rejuvenation or updating projects by government, influx of affluent neighbors, etc. Are there improvements that can be made to the home that can increase rent or value? Especially in the case where a property has 2 bedrooms or less, adding an additional bedroom can make rent and value increase significantly.
Cash flow – I know several homeowners who have neglected this aspect of an investment property. In one instance, I remember a homeowner who had a negative of $2,000 per month and ended up selling when his home’s value increased by $50,000 in 3 years. He actually thought he “made money” when the truth was that he LOST money from -$72,000 in cash flow. Another common mistake is when a homeowner incorrectly calculates their expenses with only their mortgage and property taxes. Don’t forget about maintenance, your time, repairs, income taxes, and time the home will be vacant. Some landlords simply deduct 20% from their income to estimate their “NOI”, or Net Operating Income.
Acquisition price – Buying a home low and below market value is the key to everything. You probably realize that it has a direct effect on #2 above. Since you already own the home in this situation, it’s something to be mindful about on your next rental.

Meet with a local Real Estate Agent to help you plan. — Meet with someone experienced at rental properties.

It would be a good idea to sit down with someone who has investing experience. Buy them lunch or have a discussion over a cup of coffee. Their advise can go a long way. I have a friend who keeps things simple without anything fancy: “if it doesn’t have positive cash flow, it’s not worth it to me.” In contrast, I have a co-worker that has detailed spreadsheets where it looks like the stuff Fidelity would give you when you invest in one of their mutual funds. I personally use Dolf De Roos’ Real Estate software called “REAP”: http://dolfderoos.com/software/

Thinking of cashing out your rental property or 2nd home? 6 questions that will help you decide if you should sell or wait

Moving? What to do with your existing home? Selling vs. Holding as a Rental