Buying a Home

Buying Your First House: Starter Home or Forever Home?

By EMILY STARBUCK CRONE

 

 

If you’re a first-time home buyer, you may be wondering: Should you purchase a small starter home to get into the market now, knowing you may grow out of it in a few years? Or, should you stretch your budget — or spend more time saving — to get a “forever home” that will take care of your long-term needs?

Here are some factors to consider as you weigh whether to get a home best suited for the short term or the long haul.

Market conditions: Mortgage rates are historically low, but there’s no telling how long that will last. Also, many real estate markets nationwide are booming; consider whether to jump in before home prices get even higher, or whether they may weaken.
Where you want to live: Consider if you’d be OK living for a few years in the suburbs, where you might be able to find something more affordable, or if you’d rather try to snag a home in a different area where you want to live long-term.
 How much house you can afford: It ultimately comes down to how much money you have saved and how much you can afford to spend on a monthly mortgage payment. Use a home affordability calculator to see what’s within your price range.
 What kind of house you want: For a starter home, you might go for an apartment, condo or townhouse in an up-and-coming area. If you’re thinking forever home, a single-family detached or a house with land to build an addition later could be a better fit — but it’ll be more expensive.
The costs of getting out early: If you do spring for a starter house now, and you end up getting married or having kids or needing to move quickly, you may face penalties, such as capital gains tax.

Those are some of the big-picture considerations. Let’s dive into the details on what else you need to think about.

Starter home considerations

Your lifestyle: Do you want to be in the middle of a big city, or are you fine with the ’burbs if that means you can own a home? If you want to live centrally, where real estate is most expensive, you’ll probably have to start small. Dana Bull, a real estate agent in Boston with Harborside Sotheby’s International Realty, remembers when she bought her first condo at 22, she could afford only one well outside of Boston, and she had some regret as she missed being in the city near her friends. Consider what you’re willing to sacrifice, both in terms of location and size.

Your future needs: Bull says many first-time home buyers assume they’ll be in a home much longer than they actually are. She says young, single people sometimes don’t realize how quickly life can change. A job switch, new relationship or new baby can alter what you need in a home.

Zachary Conway, a financial advisor with Conway Wealth Group LLC in Parsippany, New Jersey, adds that selling a house can be stressful — especially if you’re in the midst of major life changes such as having a baby.

So, if your life is full of flux and you think you would stay in your starter home for only 1 1/2 to three years, it may be less stressful to keep renting until you’re ready for something large enough to meet longer-term needs.

Capital gains taxes: If you set out to buy a starter home for the short term, be careful, Bull says. If you sell soon after moving in, you may owe capital gains tax on your profit from selling the home.

According to the IRS, individuals are excluded from paying taxes on $250,000 ($500,000 if married) of gain on a home sale as long as the house was used as your main residence during at least two of the five years before selling it. That means you may want to think carefully about buying a home you’ll grow out of in less than two years. Consult a tax professional to see how this could affect you.

Consider an exit strategy: If you’re considering going the starter home route, you should think through from the start how you’ll offload it when the time comes to move, Bull says. For instance, you might buy a property that you could rent out to cover your mortgage, especially during times of economic uncertainty, she says. This helps ensure you can cover your mortgage payment if you need to move ASAP or if the market is weak when you hope to sell but you don’t want to take a loss.

You should also carefully research the area in which you’re looking to buy, Conway says, and confirm “there’s enough resale potential to make sure that even in a market that’s heading downward, you still have a likelihood of being able to get out of where you are.”

Forever home considerations

Interest rates: Conway says that if you decide to wait so you can afford a forever home, there’s a chance that interest rates could increase from their current historic lows. “You might be able to scrape together some additional funds in the next few years, but maybe at that point, we may be closer back to historical norms of interest rates, and your mortgage is more expensive,” Conway says. Nobody can predict what will happen, but it’s important to keep a pulse check on mortgage rates.

Hot markets: In many major cities such as Boston, property values are rising rapidly, Bull says. There’s also a lot of uncertainty as to whether home values will plateau or keep going up, leaving first-time home buyers wondering if they should give in to the “feeding frenzy,” she says. If you wait in hopes of saving for a larger home, it’s possible prices will rise faster than you can save, she says.

Your cash flow: Considering your lifestyle and life events is certainly important, “but really at the end of the day, it comes down to the math of do we have the cash flow,” Conway says.

If you want a forever home, you have to ask yourself whether you can afford the larger down payment and whether your income supports a higher monthly mortgage payment. Conway says it’s key to create a budget and to carefully track what you save and spend, and to be sure you can afford a more expensive home. Don’t assume your income will be higher in a few years and go for a bigger mortgage, he says. And don’t forget to factor in higher ongoing expenses like property taxes and homeowners insurance.

» MORE: How much down payment do you need to buy a home?

Don’t stress too much

While making the decision between a starter home and forever home is a major move, Bull says don’t fret too much about making the wrong decision. Remember, she says, “there are always options — you can sell, you can rent, you can put yourself in a position where you can go out and buy another house.”

Conway adds that if you decide you’re not ready to buy for a while, that’s OK too, and you shouldn’t look at rent as throwing away money. “I wouldn’t jump into buying something for the sake of the fact that’s what we were told we should do,” he says. “It really comes down to what you’re comfortable with from a cash flow standpoint and what you want in your life. There’s nothing inherently wrong with paying rent.”

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25 Tips for First-Time Home Buyers

By EMILY STARBUCK CRONE

Buying a home can be nervewracking, especially if you’re a first-time home buyer. Not only is it probably the biggest purchase of your life, but the process is complicated and fraught with unfamiliar lingo and surprise expenses.

To make the first-time home buying journey a little less stressful, NerdWallet has compiled these 25 tips to help you navigate the process more smoothly and save money.

1. Start saving for a down payment early

It’s common to put 20% down, but many lenders now permit much less, and first-time home buyer programs allow as little as 3% down. But putting down less than 20% may mean higher costs and paying for private mortgage insurance, and even a small down payment can still be hefty. For example, a 5% down payment on a $200,000 home is $10,000. Play around with a down payment calculator to help you land on a goal amount. Some tips for saving for a down payment include setting aside tax refunds and work bonuses, setting up an automatic savings plan and using an app to track your progress.

2. Check your credit

When you’re taking out a mortgage loan, your credit will be one of the key factors in whether you’re approved, and it will help determine your interest rate and possibly the loan terms. So check your credit before you begin the home buying process. Dispute any errors that could be dragging down your credit score and look for opportunities to improve your credit, such as making a dent in any outstanding debts.

3. Pause any new credit activity

Any time you open a new credit account, whether to take out an auto loan or get a new credit card, the lender runs a hard inquiry, which can temporarily ding your credit score. If you’re applying for a mortgage soon, avoid opening new credit accounts to keep your score from dipping.

4. Determine how much home you can afford

Before you start looking for your dream home, you need to know what’s actually within your price range. Use a home affordability calculator to determine how much you can safely afford to spend.

5. Explore your down payment options

Struggling to come up with enough money for a down payment? First-time home buyer programs are plentiful, including federal mortgage programs with Fannie Mae and Freddie Mac that allow loans with only 3% down, plus Federal Housing Administration loans and Veterans Affairs loans. You could also try crowdfunding or asking if family members are willing to pitch in with a gift.

6. Research state and local assistance programs

In addition to federal programs, many states offer assistance programs for first-time home buyers with perks such as tax credits, low down payment loans and interest free loans up to a certain amount. Your county or municipality may also have first-time home buyer programs.

7. Budget for closing costs

In addition to saving for a down payment, you’ll need to budget for the money required to close your mortgage, which can be significant. Closing costs generally run between 2% and 5% of your loan amount. You can shop around and compare prices for certain closing expenses, such as homeowners insurance, home inspections and title searches. You can also defray costs by asking the seller to pay for a portion of your closing costs or negotiating your real estate agent’s commission.

8. Set aside more money for after move-in

Sorry, that’s not all you need to save up for before home shopping. Once you’ve saved for your down payment and budgeted for closing costs, you should also set aside a buffer to pay for what will go inside the house. This includes furnishings, appliances, rugs, updated fixtures, new paint and any other touches you’ll want to have when you move in.

9. Consider what type of property to buy

You may assume you’ll buy a single-family home, and that could be ideal if you want a large lot or a lot of room. But if you’re willing to sacrifice space for less maintenance and extra amenities, and you don’t mind paying a homeowners association fee, a condo or townhome could be a better fit.

10. Research mortgage options

Is a 30-year, fixed rate mortgage a given, or is another loan type right for you? If you can afford larger monthly payments, you can get a lower interest rate with a 20-year or 15-year fixed loan. Or you may prefer an adjustable-rate mortgage, which is riskier but guarantees a low interest rate for the first few years of your mortgage.

11. Compare mortgage rates

Many homebuyers get a rate quote from only one lender, but this often leaves money on the table. Comparing mortgage rates from at least three lenders can save you more than $3,500 over the first five years of your loan, according to the Consumer Financial Protection Bureau. Get at least three quotes and compare both rates and fees.

12. Decide if paying points makes sense

Lenders often allow you to buy discount points, which means prepaying interest upfront to secure a lower interest rate. There may also be an option for negative points, in which the lender pays some of your closing costs in exchange for a higher interest rate. How long you plan to stay in the house is one of the key factors in whether buying points makes sense. You’ll need to do some calculations or speak to a mortgage broker or loan officer to help you decide if buying points is worth it for you.

13. Get a preapproval letter

You can get prequalified, which simply gives you an estimate of how much a lender may be willing to lend based on your income and debts. But as you get closer to buying a home, it’s smart to get a preapproval, where the lender thoroughly examines your finances and confirms in writing how much it’s willing to lend you and at what terms. Having a preapproval letter in hand makes you look much more serious to a seller and can give you an upper hand over buyers who haven’t taken this step.

14. Hire the right buyers agent

You’ll be working closely with your real estate agent, so it’s essential that you find someone you get along with well. The right buyers agent should be highly skilled, motivated and knowledgeable about the area.

15. Stay under your preapproval limit

As your agent shows you homes, look for properties that cost a little less than the amount you were approved for. While you can technically afford that amount, it’s the ceiling — and it doesn’t account for a broken washer or dryer or any other expenses that arise during homeownership, especially right after you buy. Rather than maxing out that amount, set a lower purchase budget to leave yourself wiggle room for unexpected costs.

16. Pick the right neighborhood

Finding the right neighborhood is just as important as locating the right house. Research the schools, even if you don’t have kids, since that affects a home’s value. Look at local safety and crime statistics. How close are the nearest hospital, pharmacy, grocery store and other amenities you’ll use? Also, drive through the neighborhood on various days and at different times to check out traffic, noise and activity levels.

17. Make the most of an open house

Use this as another opportunity to scope out the neighborhood and your potential neighbors. During the open house, pay close attention to the home’s overall condition and look for any smells, stains or items in disrepair. Ask a lot of questions about the home, such as when it was built, when items were last replaced and how old key systems like the air conditioning and the heating are. If several other potential buyers are viewing the home at the same time as you, don’t hesitate to schedule a second or third visit to get a closer look and ask more questions.

18. Buy a home for tomorrow

It’s easy to look at properties that meet your current needs. But if you plan to start or expand your family, it may be preferable to buy a larger home you can grow into. Consider your future needs and wants and whether this home will suit them.

19. Let little things go

When you’re looking at a home, it’s easy to get caught up on superficial details like paint color, fixtures and carpets. These features are easy to change once the home is yours, so don’t let those little details get in the way.

20. Be prepared to compromise

It’s rare to find a house that’s perfect in every way, so think carefully about what you’re willing to compromise on and what you’re not. Perhaps no walk-in closet in the master bedroom is a deal breaker, but an outdated guest bathroom will be tolerable until you can renovate it.

21. Make a strong offer

Your real estate agent can help you with this, but consider how much under or over the asking price you’re willing to pay to obtain your dream home. If there are multiple bids, think about tactics to win over the seller, such as a personalized letter.

22. Avoid a bidding war that blows your budget

In a competitive real estate market with limited inventory, it’s likely you’ll bidding on houses that get multiple offers. When you find a home you love, it’s tempting to make a high-priced offer that’s sure to win. But don’t let your emotions take over; stick to your purchase budget to avoid getting stuck with a mortgage payment you can’t afford.

23. Negotiate

A lot can be up for negotiation in the homebuying process, which can result in major savings. Are there any major repairs you can get the seller to cover, either by fully handling them or by giving you a credit adjustment at closing? Is the seller willing to pay for any of the closing costs? If you’re in a buyers market, you may find the seller will bargain with you to get the house off the market.

24. Buy homeowners insurance

Before you close on your new house, your lender will require you to buy homeowners insurance. Shop around and compare rates to find the best price. Look closely at what’s covered in the policies; going with a less expensive policy usually means fewer protections and more out-of-pocket expenses if you file a claim. Be aware that your insurer can drop your property if it thinks the home’s condition isn’t up to snuff, so you may have to be prepared to find a new policy quickly if it sends someone out to look at the property and isn’t happy with what it finds. Also, flood damage isn’t covered by homeowners insurance, so if your new home is in a flood-prone area, you may want to buy separate flood insurance.

25. Know the limits of a home inspection

Once your offer is accepted, you’ll pay for a home inspection to examine the property’s condition inside and out. But not all inspections test for things like radon, mold or pests, so be sure you know what’s included. Make sure the inspector can access every part of the home, such as the roof and any crawl spaces. Attend the inspection and pay close attention. Don’t be afraid to ask your inspector to take a look — or a closer look — at something and ask questions. No inspector will answer the question, “Should I buy this house?”, so you’ll have to make this decision after reviewing the reports and seeing what the seller is willing to fix.

The Quick Home Inspection Checklist: What to Look for When Buying a Home

BY

Whether you’re a first-time home buyer, or starting to look around for a new one, it always helps to know what to look for when buying a house. There are numerous red flags that can pop up while checking out a home, sometimes it’s the state of the foundation, other times it’s the quality of the appliances. To help you spot them, we’ve put together a few tips and a quick checklist to use when buying a home.

Before You Go House Hunting

 

Find a Real Estate Agent With High Ratings
Use real estate forums and directories, such as Zillow, to find agents with good reputations in your area. You may also consider hiring an Exclusive Buyer’s Agent, a real estate agent who specializes in working with home buyers, rather than sellers.

 

 

Look at the Local School Districts
If you plan to start a family, it’s good to know the quality of the local schools beforehand. There are numerous sites that track school performance, providing a relatively accurate picture of the quality of local schools:

Your Quick Home Inspection Checklist

During the initial home tour, you should mark down specific areas of the house that you want your inspector to examine more closely. Use the checklist below to guide you as you take a look through the house.

Exterior:

Roof/Attic:

o Are there shingles missing?
o Is there flashing and trim installed?
o Are there any signs of leaks?
o When will the roof need to be replaced?

Foundation:

o Are there visible cracks on the outside walls?
o Are there any trees near the foundation?

Yard:

o Does the drainage slope away from the house?
o Are there any soggy areas you can identify?
o Are the walkways and driveway in good condition?

Interior:

Appliances: (If included)

o Do the appliances appear to be well-maintained?
o What are the ages of the:

Refrigerator? ___
Dishwasher? ___
Oven? ___

o Are there any leaks under the sinks (bathrooms and kitchen)?

Structural Elements:

o Has there previously been a fire in the home?
o Do the walls show vertical or horizontal cracks?
o Are there any stains on the floors, walls or ceilings?

Ventilation and Sub-Systems:

o Does the house smell? Can you identify the source?
o Do the heating and AC systems appear to be working?
o Does the water heater produce enough hot water?
o Is there a working exhaust fan in the kitchen?

Miscellaneous:

Electrical:

o Do all the switches work?
o Is each outlet properly grounded?
o Do the ceiling fans work?
o Has the electrical panel been recalled?

Plumbing:

o Are there any unusual noises?
o Do the faucets and other fixtures have enough pressure?

Garage:

o Check all of the following elements for signs of damage or wear:

 Slab
 Walls
 Ceiling
 Vents
 Garage Door
 Lights
 Openers
 Windows
 Roof

 

After the Tour

Hire a Home Inspector
After you’ve toured the house, you’ll need to hire an inspector to give the house a more thorough inspection. Most real estate agents will recommend one to you, but you could also go out there and find one yourself.

 

 

Start by looking up inspectors near you using the American Society of Home Inspectors (ASHI) directory, or your preferred local services platform, such as Angie’s list. You will want to find someone with three to five years of full-time experience, and who can also provide proof of licensing (requirements may vary by state) and insurance (both general liability and errors and omission coverage). These are the inspectors who will know what to look for when you’re buying a house.

 

 

Read Through the Inspection Report
The inspection should take no more than three or four hours, after which you will have a full report to pour over (an example of which can be found here). Any potential problems will be noted on the report – usually with pictures included. Bear in mind that any home is going to have issues. The key is to identify the costliest problems before signing, and using that information to either renegotiate the selling price or walk away.

The most common problems identified on a home inspection checklist include:

  • Faulty Wiring: Wires without wire nuts, open junction boxes.
  • Faulty Plumbing: Low water pressure, water stains on ceilings.
  • Poor Drainage: Soggy areas in the yard, leaks in basement.
  • Bad Gutters: Clogged gutters, basement dampness.
  • Foundation Flaws: Small cracks, sticking doors and windows.
  • Poor Maintenance: Chipped paint, worn shingles, cracked driveway.

All of these problems can be easily fixed with the right contractor, and shouldn’t be deal breakers. However, if any of the following problems are flagged in the report, you might want to have second or third thoughts:

  • The Roof Needs Replacing: The average cost of a roof replacement is $7,000.
  • The House Is in a Flood Zone: Use FEMA’s flood maps to determine if the home is at risk.
  • Major Foundation Issues: Hire a structural engineer to determine if those cracks are actually serious.
  • Aluminum Wiring: This type of wiring almost always needs to be replaced, a process that can cost thousands of dollars.

These are some of the most expensive repairs and conditions you will come across while house hunting. If any of these pop up during the course of your home inspection, be sure to consult with your real estate agent to see if the sellers can be convinced to pay for the repairs. For certain issues outside the home, such as flood zones, be prepared to pay for additional insurance coverage to mitigate your risk.

Don’t let those potential pitfalls deter you from making an offer on the home of your dreams. As long as you keep a checklist when buying a home, and heed the findings of your inspector, you’ll be able to make a fully informed decision.

Steps to Sell a House: How Long Does Each One Take?

By Jamie Wiebe

steps-to-move-628x354

Adam Gault/Getty Images; realtor.com

Even in the hottest markets, selling a house is by no means a transaction that happens overnight. Every step—from listing your house to getting an offer to closing—takes time. But how much time?

To help you pace yourself, here are the steps to sell a house, and how long each one typically takes so you can plan accordingly. Depending on where you live, you may need to settle in for a long ride!

How long does it take to list a home?

Answer: 3 to 5 days

It will take your listing agent a few days or a bit longer to gather all the necessary info on your home (e.g., square footage, special features, and photos). But once your agent has it all, things generally happen fast. Your agent will then upload these details onto the multiple listing service, which will make the listing viewable to agents. A shorter, consumer-friendly version of the MLS listing will also appear on sites like realtor.com®—and since this site refreshes its data at least every 15 minutes, your home will be in front of plenty of eyeballs in no time at all.

How long does it take to get an offer on a home?

Answer: 65 days

The current average age of properties on the market is 65 days. That said, this varies greatly by location and time of year, so there’s no one right answer to how long you’ll wait for that blessed first offer. Is your market hot or chilly? San Francisco residents might sell their house in a hot second, but if your place is rural, expensive, or unique, you’ll probably wait longer.

How long does it take to close after we receive an offer?

Answer: 50 days

Currently, there’s an average of 50 days between when buyers apply for financing and when they get approved and can close on a home. Yes, that’s a long time, especially if you’re selling and eager to get on with it. But buyers and mortgage companies need to do their due diligence—and you certainly don’t want any last-minute surprises before the buyer takes possession. Closings fail for a number of reasons, like contingencies (perhaps the buyer’s home didn’t sell, or the bank rejected her loan). Whatever you do, don’t be a pain and not fix issues that arise during inspection (assuming, of course, you agreed to fix them). Final walk-through surprises can delay closing even longer.

How long before I get paid?

Answer: 0 days!

Here’s good news: Your money should be available immediately after you sign on the dotted line. Cash is typically disbursed by the title or escrow company, which will wire the money to your bank account or cut a check on closing day with little to no lag time. Make sure to check with your attorney or real estate agent, though—they’ll be able to provide specific details on the process for your sale.

How long do I have to move out?

Answer: 0 days, except by special agreement

Typically, sellers are expected to move out by the day they close on the home so the new buyers can move in as soon as they’ve signed on the dotted line. Most people move out in advance of the close, but if you need more time, you can negotiate a rent-back agreement, which allows the new buyers to essentially become your landlords for a few months while you find a new place to live. But considering how long the home-selling process takes, odds are you’ll be chomping at the bit to get out!

Is It Hard to Get a Mortgage?

Standards have tightened from the pre-housing bubble days, but are they actually tough?

 Daniel B. Kline

 

From the early 2000s through the housing bubble’s burst in 2006, mortgages were extremely easy to get for anyone with even decent credit.

Back in those days, legitimate banks and lenders offered no-documentation loans — mortgages where the consumer tells the bank how much he or she makes, which is then not verified — and low-documentation loans, where some checking (maybe looking at pay stubs) was done, but not much. Less-scrupulous lenders even offered something known as a “NINJA” loan, or a “no income, no job, no assets” mortgage.

It’s easy to see why standards needed to be tightened up from those days. People were getting loans to buy houses they could not afford based on banks’ accepting their word that they would be good for the money. That, as you might imagine, led to huge numbers of defaults, which caused housing prices to collapse in many markets.

Post-housing bubble, the mortgage industry tightened up. Nearly all loans required traditional documentation — two years of tax returns, two months (or more) of bank statements, two pay stubs for every borrower, and verification of any non-payroll financial gains. In addition, many banks were less tolerant when it came to credit scores.

Now, while the no-doc days have not returned, standards are looser than they were in the aftermath of the bubble’s burst. It’s not easy to get a mortgage, but it’s certainly easier than it has been.

 

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GETTING A MORTGAGE SOMETIMES COMES DOWN TO SIMPLE NUMBERS. IMAGE SOURCE: GETTY IMAGES.

What does it take to get a mortgage?

It’s worth noting that with mortgage loans, there is always an exception to every rule. For example, when my wife and I recently purchased the condo we live in, our bank granted an exemption on verifying our tax returns with the Internal Revenue Service because we had our identities stolen to file a fraudulent tax return the previous year.

That exemption, which would have been easy to come by in 2004, was only granted because we were well-qualified, buying much less home than we could technically afford, and were putting 25% down. Had one of those three not been true, we may well have been denied.

In general, however, a credible mortgage company (and there still are predatory ones that will make non-traditional loans, generally not benefiting consumers) wants to see borrowers conform to the 28/36 rule. This means that the household should be spending no more than 28% of its verifiable monthly income on housing expenses (mortgage plus insurance and any homeowners’ association fees) and no more than 36% on revolving debt in total.

The other major factor beyond income is credit score. There is no hard and fast rule for credit, but the Federal Housing Administration (FHA), which helps first-time buyers, requires at least a 580 for its loans with the lowest-required down payments. In general, borrowers falling into the poor-to-fair credit range — 501-660 — will face a harder time. It’s not impossible to get a loan with credit at those numbers, but interest rates may be higher, and higher down payments may be required.

It’s harder than it was, but not as hard as it has been

Qualifying for a mortgage has always had some grey area. For example, someone with a 620 credit score but income that puts him or her well below the 28/36 ratio should be able to get approved. Lenders are not being as lenient as they were pre-2006, but they have generally been more flexible than they were in the immediate aftermath of the housing bubble’s bursting.

How hard it is to get a mortgage generally varies based on how qualified you are and how well you have your ducks in a row. A well-qualified buyer with all of his or her documentation ready to go should generally have an easier time of it. Someone pushing against the 28/36 rule or with less-than-stellar credit may have to speak with multiple lenders and will generally have to work much harder for approval.

The $15,834 Social Security bonus you could be missing
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after.

 

4 Ways to Survive Future Real Estate Market Crashes

market-crash-1

 

BY LARRY ALTON

The real estate market may be very healthy compared to what it was five years ago, but that doesn’t mean we’re in some sort of eternal bliss. There will be rough patches ahead — and likely a couple more crashes in your lifetime — but how can you as an investor safeguard yourself against them?

4 Ways to Protect Yourself

“Historically, economic activity rises and falls in marked business cycles,” senior market strategist Susan Green explains. “Periods of recession appear and recede approximately every 5-10 years.” Thus, it’s reasonable to expect that we’ll encounter some economic issues in the next few years. They may not be as dramatic as what happened in 2008, but reverberations will likely be felt in the real estate market.

Luckily, there are a few ways you can protect yourself.

1. Buy properties that rent below the median.

You have to think one step ahead of the market. While it’s a good rule of thumb to have the best property on the street, you don’t want to be stuck charging a rent that’s higher than the median in the area. This may be fine during times when the market is healthy, but you’ll get swallowed up when the market falters.

People still need a place to live in a down market, but they’re naturally going to gravitate towards what they can afford. By purchasing properties that rent below the median, you can maintain steady occupancy rates, regardless of what’s happening in the larger economy.

brrrr-strategy-deal-1

2. Be the best landlord possible.

It pays to be a good person. When you’re a likeable landlord who works with people, deals with maintenance issues in a swift manner, and charges affordable rent, people are more likely to stick with you when the market turns.

Related: How to Make Money in Real Estate — Whether You’re in an Up OR Down Market

On the contrary, if you’re a jerk and tenants are just renting from you because you were the only option at the time, they’re going to bolt the moment they can. Focus on building a strong reputation now so that you’re better equipped to survive a potential crash.

3. Be realistic with cash flow numbers.

When purchasing a new property, it doesn’t do anyone any favors to plug in vague numbers to determine monthly cash flow. Be conservative and honest.

“You should sit down at the computer, open a spreadsheet, and factor in all your expenses,” real estate investor Jason Hanson says. “What is insurance going to cost? Is there an HOA fee on the house? Are you getting a home warranty? You want to know down to the penny what your cash flow will be on a property.”

When the market does eventually take a downturn and rental rates decrease, you’ll at least know that you have some play in your numbers. On the other hand, if you were liberal with your computations, you’ll find yourself underwater in very little time.

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4. Pay down mortgages when possible.

There’s always the question of whether it makes more sense to pay down on an existing mortgage or put that money into a new piece of real estate. While there are schools of thought that apply to both, consider paying down rental property mortgages when you can. This gives you some leverage if the market crashes and you have difficulty making payments.

Related: The Best and Worst Markets for Residential Real Estate Investors, 2016

 

Never Put All of Your Eggs in the Same Basket

At the end of the day, financial diversification is your friend. Real estate may be one of the more stable and appreciation-friendly investments you can make, but don’t put everything you have into real estate. Spread yourself out a bit and diversify as much as possible. This mitigates your risk and provides more tolerance in a down market.

Got the Need for Speed? 10 Timely Tricks for Buying a Home in a Hurry

By Jamie Wiebe

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Ostrid/iStock

Buying a home can be a mind-numbingly slow process, broken up by periods of confusingly frantic activity. It goes something like this:  Look at a zillion homes before you think you’ve found one. Hurry up and get in your offer … and then wait. Submit a million letters to the underwriter … and then wait. And don’t even get us started on closing. The average time for closing on a loan is 50 days, according to Ellie Mae, and the process can often take even longer.

But sometimes you don’t have the luxury of waiting. Maybe you’re moving from another state and need a place to live now. Or maybe your current home sold significantly faster than expected—and if you don’t find a new place, the deal will die.

Regardless of the reason, if you’ve got the need for speed, real estate transactions can fly through quickly. But you’ve got to have a little luck and a lot of preparation. Here’s what you need to know before kicking off the buying sprint.

1. Pick your Realtor® carefully

The No. 1 secret to purchasing a home super-quickly? Find a Realtor intimately familiar with your preferred area—one who knows which homes are about to hit the market.

“This will give you a head start in finding out if that listing is right for you,” says Adriana Mollica, a Realtor in Beverly Hills, CA.

2. Ask questions early

The home-buying process can be mind-blowingly confusing—especially if you’re a first-time buyer. You shouldn’t feel guilty about peppering your agent with questions, but getting the most important ones resolved early on will expedite the process.

“When you fall in love with a home in a competitive market, you need to be prepared to sign the offer fast and submit it before the deadline,” Mollica says. “There may be some questions you want to ask your lender, lawyer, or accountant. If you wait until the offer to ask these questions, you may miss the deadline.”

3. Get pre-approved (not just pre-qualified)

It’s a good idea to get pre-qualified for a mortgage before starting your house hunt—but a pre-approval is a necessity if you’re eager to close quickly. The two are vastly different beasts: A pre-qualification requires little more than a quick conversation with your lender and perhaps a peek at your credit score.

A pre-approval basically front-loads the entire underwriting process. (Be warned: It might not eliminate all underwriting concerns.)

It “makes your offer look stronger,” Mollica says. “It also minimizes any surprises that may delay or force a cancellation during escrow.”

4. Be narrow-minded

Agents often tell buyers to stay open-minded about homes that don’t fit their wish list precisely. But if you’re in a rush, it’s best to be particular about the homes you see. Just don’t bring a super-long list of attributes you think you need. Define your absolute, must-have features and only look at homes that fit that list.

But first, “consult with your Realtor to determine if your wish list is possible in your area and price range,” says Michael Shaffer, a broker associate with LIV Sotheby’s International Realty in Greenwood Village, CO. If you run out of homes to see that check all your boxes, you may want to review your criteria.

5. Look for slow sellers

Often, the sellers who are most motivated to move quickly are those who haven’t been able to sell their home for a while.

“Ask your Realtor to look into homes that have been on the market for a long time,” Schaffer says. “In some markets, that may be a week or two. In others, it could be a year or more.”

6. Make a strong offer

Now isn’t the time for underbidding—even if you’re convinced that all that ratty wall-to-wall carpeting should lower the asking price.

“Make sure your offer is as strong as possible, with your Realtor’s expertise and guidance,” Schaffer says.

That doesn’t just mean offering a lot of money. You can also offer a larger down payment and more earnest money. And that fast closing date will definitely help. Remember: Sellers who aren’t worried about the buyer backing out are more likely to accept an offer.

7. Be prepared to waive contingencies

When you’re buying a home, it’s standard to throw in some contingencies. (A contingency is a clause in the offer that allows you to walk away from the deal under certain circumstances—with all of your cash in hand.)

But if you’re looking to buy in a hurry, you might have to take a deep breath and bypass some of those bad boys. Just beware: Waiving certain contingencies can spell trouble down the line—and possibly land you in a money pit. Choose your battles—and your concessions—carefully.

8. Have your paperwork in order

Even with a pre-approval—the buying process requires reams of paperwork. Get everything together beforehand: At least three months of bank statements, pay stubs, letters of explanation for any weird or unusual expenses. If your mom’s giving you cash for the down payment, make sure the payment is documented.

When you think you’ve provided enough proof of everything, double it. The more documentation, the better, when you’re trying to buy fast.

“In most cases, things get held up because paperwork and information isn’t readily available,” says Raena Casteel, a Realtor with the Casteel Little Real Estate Group in Tucson, AZ. Even the smallest omission could end up delaying your closing for a week.

9. Write a letter

If you can’t eliminate contingencies or offer more money, and the sellers aren’t moved by a quick closing, consider writing them a personal letter. Tell them about the children you plan on raising in the house, or about your love for the home’s vintage ’20s details.

“Sellers often want the highest price, but oftentimes, offers come in very similar,” Mollica says. “Your letter could be the edge in getting the seller to choose your offer.”

Keep it short—nobody wants to read your autobiography. (Sorry.) One or two paragraphs are all you need to prove your worth.

10. Don’t tell the seller

Beyond writing a quick closing date into your contract, don’t hint to the seller you’re desperate for a home.

“When [buyers need] to buy fast, they are at a disadvantage in a negotiation,” Schaffer says.

Millennials: Ready to Buy a Second Home and Rent Out Your First?

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You’re ready to move on, but that doesn’t mean you have to let go of your first property.

There comes a time in many homeowners’ lives when it’s just time to move on to the next home. Maybe it’s because of a job change, the arrival of a kid (or more kids), a marriage or divorce, or you just don’t like where you live anymore.

Many millennial homeowners — who represent half of all home buyers these days, according to the Zillow Group Consumer Housing Trends Report  — are ready for that next home purchase. Maybe that describes you.

So, now you have a decision to make: Do you sell your first home, or hang on to it and rent it out?

Kate Currett, a millennial homeowner, rented out her first home in Utah for three years while living in her second home in Ohio. Her goal, like most who rent out a property, was to earn additional income.

Sounds simple enough, but there are many factors that you should weigh when making this big decision.

Financial perks and considerations

In addition to having the potential to make some money on renting a house, buying a second home and renting the first is one way to build a real estate investment portfolio.

Millennials, in particular, are typically in a good position to do this: You can convert your primary residence into a rental and “leave your owner-occupied mortgage intact, which was likely (and hopefully) obtained with a down payment and the most favorable mortgage interest rate, as low as 3.5 percent,” says Kelly Hannah, a certified residential specialist at Eightline Real Estate.

Purchasing a non-owner-occupied property (that is, a house that you’re purchasing specifically to rent out) generally requires a 20- to 25-percent down payment and has an interest rate .375 percent to .75 percent higher than you’d get for an owner-occupied property.

Bottom line, it will likely cost less to convert the house you live in now into a rental and buy a second home to use as your primary residence than to purchase a second home to use as a rental property.

The financial hurdle you will have to leap is qualifying for a second mortgage. “In the beginning, [it was difficult] making sure we could qualify for a dual loan,” Currett admits.

But if you have a lease in place on your first home prior to closing on your second home, “your lender may allow a portion of those future rents to count as income in their calculation of your debt-to-income ratios,” Hannah says.

However, lenders “prefer to see that you have property management experience in order to count those future rents as income,” he warns.

Tax advantages

As for tax advantages to renting out one of your properties, Leigh Anne Bernal, a property consultant with cityhomeCOLLECTIVE, advises making it a priority to speak with an accountant, as tax rules can be complicated when renting out a property.

Generally, “the most substantial tax advantages to converting your current home into a rental come in the form of depreciating that property, the deduction of maintenance expenses, and the deduction of your mortgage interest,” Hannah explains.

The ideal rental property

Before you make any moves toward converting your home into a rental, you need to assess whether or not your home is  rentable.

Generally speaking, a “one- to three-bedroom home is going to be easier [to rent] than a larger home,” Bernal notes.

She suggests researching who the renters are in your city and the types of properties they rent. “The broader the appeal, the more luck you will have,” Bernal says.

Hannah adds that the best way to determine whether your home is an ideal rental property is to meet with a professional and “create a comprehensive strategy tailored to your individual situation and specific market.”

How to assess rental fees

Needless to say, rental rates vary greatly, “especially with respect to single-family homes and condominiums,” Hannah says, as rental rates for privately owned homes are not easily tracked.

Currett agrees, and notes that a tough part of owning a home while renting out another was balancing having a competitive rental rate and still making a profit.

However, a reliable way to determine the rent for your first home is to search the rental market for homes similar to yours.

“This will allow you to see what rental rates are in real time and space, and price your rental competitively,” Hannah notes.

“Do your homework,” Bernal says. “Take all of the costs into consideration, including property taxes and insurance.”

Perhaps the most difficult aspect of renting a property is being a landlord for the first time. Costs can come at you from all sides, from repairs to late or unpaid rent from tenants to property damage. Go in planning on incurring expenses beyond the mortgage payment.

“Some of this can be handled with a property management company, but that comes at a price, so make sure you have that included in your math,” Bernal advises.

Words of wisdom

When it comes to renting out your extra home, “Do it,” is Hannah’s advice. “Buy and hold is almost always a good idea.”

But Bernal recommends really analyzing your situation before making a leap: “If you’re in a seller’s market, that can make it tougher to get into your new home without cashing out the equity in your first home. You may be able to refinance your first home to get some of that equity out.”

What Is a Multifamily Home? A Budget-Friendly Way to Own, Rent, or Invest in Real Estate

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Greg Chow

What is a multifamily home? It’s a building with more than one unit where people can live, each with their own separate kitchens, living rooms, electric bills, and so forth. Also called a multidwelling unit, or MDU, they are typically found in densely populated areas such as cities where space is at a premium. Multifamily homes can be rented, be owned, or serve as an investment property where landlords can collect rent from tenants.

There are around 4 million multifamily dwellings nationwide, compared with 90 million single-family homes. Although living in close quarters with others may not be ideal in terms of privacy or noise, people in multifamily homes generally pay less than those in single-family homes and are taxed with less home maintenance, because a management company may be responsible for repairing the building’s exterior or mowing the lawn.

Types of multifamily homes

Multifamily homes come in all shapes and sizes. Here are some of the more common designs:

  • Duplex: Two homes in one freestanding structure
  • Townhouse: Any number of homes attached at the sides with separate entrances
  • Condominiums (condo): A private residence in a building or community with multiple units
  • Apartment building: Could be up to hundreds of homes in one structure. Unlike the above dwellings, apartment building units are often rented by tenants rather than owned.

 

How to invest in a multifamily home

Buying a multifamily home to rent out (or where you live in one unit and rent out the rest) is a smart financial strategy—today more than ever. The reason: Homeownership is decreasing, recently dipping below the 66.6% historical average.

“That makes it a great time to think about buying investment properties, because people have to have a place to live,” says Daren Blomquist, senior vice president of ATTOM Data Solutions, a property data company based in Irvine, CA.

Unlike house flippers, who invest a little time and tolerate a lot of risk, investors in multifamily housing should anticipate owning the property and playing landlord for decades, advises Blomquist, who owns two rental properties with his wife.

“If you take care of a rental property for 20 years, it will take care of you for life,” Blomquist says. “The goal is very much long-term.”

The trick is to expect the unexpected: You’re likely to experience flaky renters and issues with damage. Consider these factors before investing.

  • Cap rate: The capitalization rate is a formula that indicates the potential return of an investment. Calculate the cap rate by dividing the net operating income (how much you pocket after expenses) by the price of the property. Blomquist would consider a rental property with a cap rate of more than 6% to be acceptable.
  • Expenses: Some multifamily property expenses such as mortgage, taxes, and insurance are relatively fixed; maintenance, however, is always unpredictable. New properties, with appliances and furnaces still under warranty, usually require little maintenance. However, properties more than 20 years old are bound to require new roofs, foundation repairs, and upgraded HVAC equipment. These unexpected maintenance bills can really eat into the profit of investment properties.
  • Turnover: Rarely does one tenant leave and another move in the next day. Blomquist says two months between tenants is common, and that means two months without income likely coupled with higher-than-usual expenses as you repair walls, clean carpets, and maybe paint to make the property more appealing.
  • Your personality: Do you have the patience of a saint? Can you focus on the forest rather than the trees? You’ll need those Zen-like qualities, along with some handyman chops, to succeed in multifamily investing. If your personality isn’t suited to being a landlord, you can always hire a property manager to fix things and find renters. But don’t forget you’ll be charged a fee, usually about 6% of your rental income, which eats into profits.

Sanity Check: 5 Numbers to Consider Before You Buy a House

by Anand Chokkavelu

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IMAGE SOURCE: GETTY IMAGES.

On the life decision scale, buying a house is often closer to marriage than it is to the purchase of a car. It can be one of the best decisions you make or something you bitterly curse forevermore.

And like marriage, the rent vs. buy decision is unique to the individual, requires you to try to predict your life for the next few decades, and depends on too many factors to summarize in one article.

But fortunately, with housing there are five fairly simple numbers we can look at to help suss out when buying a home is clearly a bad financial idea. I’ve rank-ordered them, starting with…

1.) Housing (and savings) as a percentage of your income

The first and most important metric to check is whether you can afford it. Duh, right? But believe it or not, too many people mess this up. Instead of thoughtfully considering what they can afford for themselves, they go with whatever their banker tells them they’re approved for. Or blindly buy something comparable to a friend or rival. Big mistake!

What you’ll mostly see online and from bankers is a rule of thumb to keep your housing costs below 30% of your gross income — basically, what your employer reports on your W-2.

Let’s say your job pays you $50,000 a year, or $4,167 a month, and you expect to make at least that much in future years. Using 30%, that means your monthly mortgage and any home equity loans (or rent if you don’t own), taxes, insurance, condo or homeowners’ association fees, and utilities should add up to $1,250 or less.

For context, about half of renters and a third of homeowners with a mortgage fail to get to 30% or less. But please don’t use “Tommy’s mom let him spend 50% of his earnings on a condo” as an excuse to overspend — remember, WAY too many people are pretty darn awful with their money. That’s why the majority of folks who receive Social Security depend on it (vs. income from savings) as their primary source of income.

So if you value your financial independence, get as far under 30% as possible. Under 20% is a tough goal in many housing markets, but if you can achieve that with a 30-year fixed mortgage, you’re probably in really good shape unless your income takes an unexpected hit.

Looking at it another way, here’s your gut check: How much of your gross income are you saving?

The average American saves less than 5% of gross income. The median is likely much worse given that 41% of people don’t even have a $500 emergency fund and that the millennial generation as a whole has a negative savings rate(!).

What should you be saving? At a bare bones minimum, 10% of your gross income (ideally not including principal payments on your mortgage). A gold star if you can get to 20%. Using that $50,000 a year income, 10% puts you at $416 a month and 20% puts you at $833 a month.

If you’re buying a house that has you saving less than 10%, you’re either paying too much for the house or you need to reassess other expenses like transportation, vacations, food, child care, etc. Alternatively, you can think about how you can increase your income without proportionally increasing your expenses. That could include sharing the house with a renter.

Rules of thumb necessarily abstract away from your personal situation. A single person in their 20’s is treated the same as a couple in their 40’s with three kids. And there will always be compelling-sounding, I’m-a-special-flower excuses to put off saving till tomorrow. Regardless, though, living below your means should be an always-on phenomenon and the 10% savings minimum holds. That’s even more so the longer you wait.

 

2.) Price-to-rent ratio

While your housing costs as a percentage of your income helps you figure out if you’re spending too much on housing, it doesn’t tell you whether you should be renting or buying.

The price-to-rent ratio helps here.

Simply take the price of the house you’re looking at and divide it by what you could rent it for on an annual basis (Sites like Zillow can help you get a ballpark estimate quickly).

If a house costs $200,000 to buy and you could rent it for $12,000 annually ($1,000 a month), the price-to-rent ratio is 16.7.

Put another way, it would take 16.7 years’ worth of rent to buy the house in cash today.

I used this example because monetarily that 16.7 figure is roughly the indifference point between renting and buying. When you get much lower than 16.7, buying becomes more attractive. When you get much higher than 16.7, renting becomes more attractive.

Don’t get too carried away with the decimal places, though. There are many more financial and non-financial factors to consider, so 18.2 doesn’t mean an automatic rent and 13.7 isn’t an automatic buy. But at some point, the numbers get compelling. For instance, at 10 times rent, I’d be very tilted toward buying. At 25 times rent, I’d be very biased toward renting.

What might surprise you is the variability of the price-to-rent ratio, both across the nation and within metropolitan areas.

SmartAsset recently compiled the ratio by U.S. city. San Francisco tops the list at an otherworldly average of 45.9, over seven times higher than Detroit at 6.3.

If you live in high price-to-rent cities like San Francisco, New York, or my home area of Washington, DC, extreme caution is warranted if you choose to buy. Fortunately, even in these areas, there’s a lot of variability. In these “sellers’ markets,” you may have to use bargain hunting tactics — trolling less desirable areas, foreclosures/short sales, extreme patience — just to get to a somewhat reasonable price. Or you may be better off renting. Nothing wrong with that… and don’t let anyone socially pressure you otherwise.

3.) Size of your down payment

Mortgage is just a fancy name for debt — usually the largest debt we’ll take on in our lives. Fortunately, the larger the down payment, the less scary that debt becomes – for both you and your lender.

That’s why lenders require you to pay private mortgage insurance (PMI) of as much as 1.5% of your original loan amount per year until your skin in the game (i.e. equity) reaches 20%.

Not paying that extra fee alone is reason enough to do a 20% down payment. But also remember that you’re committing to 360 months of payments, so saving up 20% of the price of the house helps ensure you have the discipline to see it through, is a check against buying beyond your means, and is just a smart, conservative thing to do.

In fact, in an ideal scenario, you save at least 30% of the price of the house — 20% for the down payment and 10% as a cushion against unexpected expenses. A leaking roof or an unexpected electrical problem can eat into that cushion quickly.

On a $200,000 house, that means saving $40,000 for a down payment and an additional $20,000 as a cushion beyond your regular emergency fund.

If you think a 20% down payment plus a 10% emergency cushion is too onerous, consider that in the early 1900’s, down payments of 50% were commonplace. That’s $100,000 on a $200,000 house.

I’ll end this section with one real-world consideration that muddies the waters a bit. Folks who have a hard time saving for a down payment probably are poor savers in general. Those are also people who are often saved in retirement by the home equity they’ve built up for decades.

What this means from a practical standpoint for folks who have a hard time saving is that if you limit your housing costs to a low percentage of your income and ensure that your price-to-rent ratio is also low, it may make sense for you to buy with a lower-than-recommended down payment. You’ll want to make darn sure that you have a good 10% emergency cushion in any case, though. It doesn’t do any good to “buy” a house only to have the bank take it back from you in a few years.

4.) What’s the least amount of time you’re committed to staying in the house?

The longer you stay in a house, the more advantageous it is versus renting.

If you stay the full term, you’re locking in your mortgage payment against 30 years’ worth of inflation.

Meanwhile, every time you sell a house, you’re paying something on the order of 6% of the house price to real estate agents and then another 2% to 5% in closing costs. Not to mention any moving costs and potential double mortgage payments during the transition.

All-in, we’re talking something in the neighborhood of 10%, so $20,000 on a $200,000 house. That’s roughly as much as a late-model used car, five to 10 fantastic vacations, or maxing out your 401(k) for a year.

Also, on a 30-year fixed mortgage, you’re mostly paying interest in the early years. When you get a new mortgage or refinance, you reset the timeline.

For these reasons, a lot of people use five years as the minimum you’d want to stay in a house you buy. That’s not an awful rule of thumb, but I’d likely push for an even longer time period.

Let’s say a couple I’m friends with is in the market for a house. Let’s say further that they know for a fact they are going to sell the house in five years — either because it’s a starter home or otherwise. Unless the price-to-rent ratio is amazingly low, I’d ask them to really think about whether the costs, risks, and pain of owning a house are worth it versus just saving up more money to buy when they’re ready to fully commit.

At 10 years, I get much more bullish on buying.

There is an exception and a caveat, though.

The exception: If you are willing and able to rent out your house to cover your mortgage, insurance, taxes, homeowner fees, maintenance, and any property management costs, it could make sense to buy at five years or even fewer.

The caveat: We’re all pretty bad at predicting our futures, even five or 10 years hence. Just be as honest as possible with yourself based on your history and really consider worst-case scenarios.

5.) Your credit score

Here’s one a lot of people don’t consider. For obvious reasons, lenders give lower interest rates to people who have a strong history of paying back what they owe. On a mortgage, the difference can currently be as much as 1.5%.

On a $200,000 house with 20% down, that means someone with a credit score of 740 or higher (850 maximum) could save about $140 a month versus someone with a low-but-approvable credit score. $140 a month may or may not sound like a lot to you, but that’s a whopping $50,000 discount over the life of a 30-year mortgage.

For that reason, it may make sense to delay a home purchase until you can get your credit score to 740 or above. On a more game theory note, if you’ve had poor credit in the past, you may want to prove to yourself that you can handle a mortgage. Living with foreclosure constantly hanging over your head isn’t the American Dream.

Good luck!

Could you come out ahead buying a house that costs you 50% of your gross income, that’s 30 times a comparable annual rent, and that sports a 5% down payment? Absolutely. And you could win a million-dollar game of Russian roulette, too.

But I wouldn’t advise it.

Getting safely on the right side of each of the five numbers we’ve discussed above — especially the first two — will get you far in disaster-proofing your housing decision.

I wish you all the best as you weigh the options. If any of the above helped you in your housing decision or if anything above could be better, I’d love to hear from you on Twitter.