Along with cash or finance, related questions I get frequently are: How do I finance my investment? What rates can I expect (if I finance it)?
Caveat: Although I have an active NMLS license (i.e Mortgage Loan Officer), I’m not a practicing loan agent; a precise answer to the questions above tailored to each individual are best given by a Mortgage Expert.. but, some principles I can point at from personal experience..
Firstly, the obvious answer: if you can afford to do cash, ALWAYS do so.. leveraging debt to do investments automatically adds risk to any portfolio, instantly becomes a risk-management exercise to account for market downsides and interest rate fluctuations, to name a few.. There is a more subtle angle to cash investments, especially for first time investors, that is to do with learning curve around valuation.. per my earlier blog, you want to get into income properties with a long term game plan, a dollar-cost-averaging mind-set; to develop a long term eye for IRR, cash-flows, or more sophisticated models you will encounter later on: Is LOT easier if you don’t get into the challenges of evaluating a second loan in your overall portfolio from the outset.. let’s chat more if unclear..
How do I finance, what rates can I expect?: Again, the most popular way to get an investment mortgage (similar to the home-ownership model). Typically you will need to have 25% or more as down-payment, pay a small premium on prevailing interest rates, depending on you credit risk, financial asset strength. There are other ways to finance your investment property, will get into it next time..
Let me know if you need recommendations for good lenders who specialize in investment property loans?
Happy to chat more.. call/txt me @510.676.1940
Till next time… I will answer another question: Does matter if I only have $50,000 to invest? What’s the minimum I need to invest?
Primary Mortgage Insurance (PMI) is an added insurance policy for homebuyers who make down payments on their homes that are less than 20%. The monthly PMI fee you pay protects the lender if you are unable to pay your mortgage.
How It Works
If you make a down payment of less than 20%, PMI will be part of your monthly mortgage payment.
- The cost of PMI varies based on the amount you owe on your mortgage compared to its value and your credit score. You can expect to pay between $200-$300 per month In addition to your mortgage.
- You’ll have to pay PMI until you’ve built up more than 20% equity in your home. Borrowers with FHA loans are responsible for paying FHA mortgage insurance premiums for the life of the loan.
- If you’re current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original value of your home. That date will be given to you in writing on a PMI disclosure form when you get your mortgage.
You can request that your lender cancel your PMI if you’ve made additional payments or if rising home values have increased your home equity to more than 20%. Your request must be in writing and meet additional criteria that your lender specifies.
It’s a fact that the more you put down as a down payment, the lower your monthly mortgage payment and the less you’ll owe the bank. It’s also a fact that homebuyers who put down at least 20% don’t have to pay PMI. However, if putting down 20% will deplete all of your savings and leave you with no financial cushion, it’s probably not in your best interest.
PMI is no doubt an added cost, but it enables you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.
Know your loan options before you start looking for a home. Every buyers personal situation and finances differ so it’s not “one loan fits most”. Do your research before you buy. Work with a Realtor that can guide you in the right direction.
Transfer of Base Year Value for Persons Age 55 and Over
The Propositions allow a person who is over age 55 to sell his or her principal place of residence and transfer its base year value to a replacement dwelling of equal or lesser value that is purchased or newly constructed within two years of the sale. These propositions are implemented by Revenue and Taxation Code section 69.5.
Proposition 60 allows for the transfers of a base year value within the same county (intracounty). Proposition 90 allows for the transfers of a base year value from one county to another county in California (intercounty) if the county has authorized such a transfer by an ordinance.
As of today, the counties that fall with the Proposition 90 inter county transfer are the following: Los Angeles, Tuolumne, Alameda, San Diego, Orange, San Mateo, Santa Clara, El Dorado, and Ventura Counties. These are subject to change so make sure to check with your assessor before buying or selling a home.
You or your spouse residing with you, must be at least 55 years of age when the original property is sold. This is a one time benefit. The new home must have been purchased within two years before or after the sale of the original, low-tax based property. If the new home was purchased within one year of selling the former home, the new home must be 105%, or less, than the value of the former home. If the new home was purchased between one and two years after selling the former home, the new home must be less than 110% of the former home’s sale price. The original property must be subject to reappraisal at its current fair market value at the time of sale.
Be aware of these deadlines when shopping for your dream home in retirement.
What is the purpose of a Home Inspection?
Many people misunderstand the purpose of a home inspection.
Home inspections are an instrumental part of the home buying process that can save you a lot of time and money in the long run.
Here are some great reasons to have a home inspection before you buy:
1.Don’t Judge a Home by Its Facade
Especially for those buying newer construction, a home inspection may feel like a waste of money. No matter the age of the home, there can be costly troubles unknown to the average buyer. Problems with wiring, plumbing or structural issues may not be visible during a showing and you’ll want to get an expert opinion.
2. Save Money
Home inspection costs vary depending on size and age of the home. Those who skip out on the expense may realize in a few years that an inspection is much cheaper than rewiring the entire house.
3.Know What You’re Buying
In the end the most important reason to have a home inspection before you buy is to really know what you’re buying. Research your potential home like you would any other major purchase. The more you know, the fewer surprises there will be down the road. Home inspectors can help you make a decision based on your current budget as well as your future time and money investment.
Your home is your biggest investment. Get connected with an experienced team such as Team SKYE to guide you through the homebuying process.
If you are planning on listing your home in the next three to six months, and don’t know what project you should invest in, consider the following top 4 renovations for greatest return of investment.
- Garage Door Replacement – A clean and good looking garage door tops the list when it comes to getting cash back on your investment when you decide to sell your home, according to the 2019 Cost vs. Value Report. (Source: BANKRATE) Remember, your driveway and garage are the first things buyers will see when they pull up to preview your home. (First impression is lasting)
- Manufactured Stone Veneer – If your home has vinyl siding, consider replacing part of your home with stone veneer at the front entry as this will add a big curb appeal to your home. For stucco siding, we recommend homeowners to seal all the cracks, power wash and paint.
- Minor Kitchen Remodel – The kitchen is one of the most used area of a house. Thus, creating a modern looking and functional kitchen will add more than just value to your home. Studies show that a beautiful, open, functional and bright kitchen can boost your enjoyment of everyday activities like cooking, entertaining friends and the sharing of your daily meals with your family.
- Deck Addition – Plain big back yard is boring! If you own a home with a large backyard, a wooden deck will be eye pleasing and an extra enhancement to enjoy the outdoors around your home. Depending on your budget, you can build with cover or without. If your backyard gets a lot of sun/heat, consider having a cover.
There are more ideas we can share with you if you are interested. Our SKYE Real Estate Team members will be happy to assist you with your options. Call us today for your free and NO OBLIGATION consultation.
We here in the west coast get a significant source of home buyers from China.. a sustained negative environment there will impact house prices here. BUT, the tech job market is equally robust, per various internal company projections, so there is some leeway, If job markets are stable, no adverse news on H4-EAD visa and trade dispute gets settled with China, we are in for a very strong early 2019..
This is a question for which I have to define the scope: Investments, even rental income, can include 1-4 units, multi-plexes, vacation rental, college housing, build-small=home-on-vacant-land (my favorite), plus others.
I’m defining it assuming a fixed income requirement, likely for a first-time investor.. So, will narrow it to 5-6% yield generating, low-maintenance 1-4 units.
Given the above self-constraint, The answer is actually not really that hard, you can start trying to answer on your own: Look at areas around you that HAVE NOT appreciated, maybe where properties stay on market for more than 2 open-house weekends? Well.. for San Diego, Los Angeles suburbs, SF Bay Area friends: Please don’t laugh.. I know you think none such pockets exist anywhere in California.. Not true, though in those areas you are unlikely to stumble upon one easily, if you work with a good Realtor (or advanced Redfin user), you will find opportunities.. But, as general guide, suggest gong 40-50 Miles away from any major metro/city, except Sacramento suburbs, and you will start seeing a steady stream of properties (Condos esp), that will start to look attractive; these need to be supported by a local job economy (blue or white collar), low-crime, low-litigation etc. BUT, I’ve seen pockets in Oakland, Hayward, San Jose, down to Universal City, La Jolla neighborhoods, that are fairly attractive…
I’m definitely going to put a plug here for a Real Estate agent, who knows local pockets well, as they themselves are on look out for personal investments, is good to team up with them, if they are in your social circle..
I know the above might sound too broad a guide, less of an enumerated list of areas/cities.. But, that’s intentional: a) To provide as a starting point for an in-depth conversation with me or with a Realtor, b) I truly believe there are opportunities everywhere, you can develop a skill to identify even with the areas you know..
I’m going to switch gears a little bit, focus on an International investor pitch, keeping in mind my summer of traveling to various pockets globally where there are opportunities. We will come back to California market and nuances of investments after a few global-focused blogs.
My next topic: Global Curiosity: How’s the Real Estate Market in India? China? Dubai?
I’m going to answer this question, assuming ‘value’ means appreciation value.. there is always value in a rental income property, SF Bay Area of anywhere else, but think the question most asked is about appreciation of a property bought for residential use..
Well… A no-frills answer is NO. As in values have gone up so much that (as of August 2017), if your prime consideration is upside, of a residential unit, I would like to think they have 5-6% more upside, but tough to get more. I know there are a lot of follow-up questions. For e.g
1) Does it mean it’s due for correction: Not at all.. at least not necessarily anytime soon.. (I’m happy to discuss more in-person, is too many factors to describe here).
2) Does it mean I shouldn’t buy now, continue to rent? Not at all.. Rental values are going up big time (for other factors), so Rent Vs Buy is a different analysis. As also is the tax advantages of a residential home.. so.
Back to SF Bay Area: The popular wisdom in Real Estate Broker circles is that residential inventory is low, prices are going to be 5-7% trending for next 2 summers, with seasonal (year-end) adjustments.. I concur.
If you are buying a single family home for a rental income, depending on your tax considerations, like 1031 exchanges, highly recommend looking at North Hayward.. Still a lot of value there, good schools, a lot of local infrastructure being built next 2 years.
This is a topic where a lot of folks have varying opinions.. The above is a point of view, starting point for am in-depth debate, that will be personalized. Not a decision making factor I hope 🙂
I’m going to jam through a series of short blogs next 2 weeks, so pardon the brevity.. Contact me anytime via email for more…
Next Topic: What areas in California would you recommend buying an investment property?
Firstly, It does matter how much you invest in the sense that without a minimum 25% down-payment or if the minimum isn’t in synch with your long term investment plan, you are at a disadvantage from the beginning..
But, the spirit of the question and the context it is usually asked is from first time investors, in California, asking what is the recommended minimum.. I’ll examine the question in that context.
My advice is to not think the amount as small or big, but about the asset size you are taking on and your cash flow requirements: For e.g. IF you are buying a $250k condo in Sacramento, putting 25% down, $7k more for closing costs, i.e. a total of $70k approximately, you really need to be making $1400+ in monthly rental to make your investment meaningful.. But that same $70k can buy you a decent piece of land in other areas of California, which over a 7-10 year period, can give you very decent return, but no immediate cash flow..
So it is really your cash flow requirement and asset quality in the portfolio you intend to accumulate, over successive years of dollar-cost-averaged investing, that are the key factors..
Yes, btw, I would definitely recommend first time investors buying land, especially if is within city parcel, residential zoned.. these parcels, in outer metros, tend to be good starting points for investors who don’t have a lot of time to manage properties, don’t need the cash flow near term.. You ALWAYS have the opportunity to build on the land later, convert it into a rental income property.
There are a lots of ways of getting started, some more creative than others, of course more risk-loaded than others as well.. Let me know if you need ideas to get started with your investment 🙂
call/txt me @510.676.1940
Till next time… I will answer another hot topic: Is there still value in SF Bay Area real estate buying?