Tips for Selling Your Investment Properties

Tips for Selling Your Investment Properties

 

Planning to list your investment property for sale?

Under favorable market conditions, selling your rental property could be lucrative. And you could also have properties in your portfolio that are not performing as you expected. In these cases, putting your investment property up for sale may be a smart step, explains T-Square Real Estate.

Selling this type of property comes with a set of unique challenges. When you plan and strategize in advance, you could save yourself a lot of time and money.

In this article, we’ll go over the top tips for selling your investment properties. By reading this piece, you’ll gain an understanding of the options you have for wasting less time and closing your sale more profitably.

 

Tip #1: Study the Market Situation

The first step before selling your investment property is conducting thorough research on the local market conditions. When you see great potential in how the market behaves, it’s important to communicate this to prospective buyers.

Map out the employment situation, occupancy rates, and the overall status of the rental market. Real estate investors would see more value in a property that is situated in a district with:

  • Low unemployment rates
  • High occupancy rates
  • Favorable rental conditions

 

Tip #2: Understand the Tax Laws

Taxes on rental property sales differ from residential unit transactions. You need to find ways of utilizing the US Tax Code (Section 1031) in a financially sustainable way.

Making complete sense of these laws is essential for preventing a negative return on investment. It’s possible to defer paying capital gains taxes if you know how to work the regulations to the advantage of your business.

 

Tip #3: Stage Your Rental Property

Maximize the appeal of your rental property by using the services of a professional stager. The difference in perception between staged and unstaged properties may be tremendous.

Here are the main benefits of staging your rental unit:

  • Depersonalization makes the property more appealing.
  • You’ll sell your property quicker.
  • Your stager will emphasize the key positive features of the rental property.
  • Prospects might perceive that your home has a higher value.

 

Tip #4: Reduce Your Investment Property’s Expenses

One way to make your investment property more attractive is by reducing the monthly operating costs. When the cash flow improves, your property gets an instant boost in investor appeal.

There are numerous ways to minimize operating costs. For example, you could upgrade all the major appliances in the unit. Even though this involves an initial expense, the resulting savings are bound to impress your buyers.

 

Tip #5: Find the Right Price

Selling your rental property calls for figuring out the correct price. You want to hit the right spot between too expensive and undervalued. Both of these extremes would work against your best interest.

The groundwork for successful pricing is a comparative market analysis. Without going through with this, you won’t know what the optimal price for your investment property is. This analysis aims to figure out what have been the recent sales prices for similar properties in the same area.

 

Tip #6: Provide High-Quality Visuals

Hiring a professional real estate photographer is the best approach if you want to have high-quality photos accompanying your listing. And there are plenty of reasons to provide these photos.

Your prospective buyers are more encouraged to visit for a showing when they see photos that showcase the property’s selling points. Plus, taking great photos of a property has the potential to sell your rental unit quicker and for more money.

 

Tip #7: Prepare All the Documentation

Investors want to see all the stats linked to your rental property. The most important documents are those that concern the financial health of your unit. Make sure that your prospects have ready access to the budget and expense sheets and income data.

Additionally, hand over complete documentation regarding maintenance and repairs history. This should include a complete overview of capital expenditures. Transparency builds trust and helps your potential buyers to make the final decision.

 

In a Nutshell: Selling Your Investment Properties

Quite a few investment property owners face a big question: should I sell my investment? In many cases, it’s a sound plan that allows you to make further investments or cash out because of necessity.

You can take action to sell your investment property more successfully. Here are our top tips for making a quicker and more profitable transaction:

  • Stage your rental property to improve its appeal.
  • Provide plenty of visual materials in the property listings.
  • Prepare all the documents, including the complete financial history.
  • Understand the market situation and its implications on your sale.
  • Conduct comparative market analysis to find the best price.
  • Study the tax laws and regulations relevant to your situation.
  • Cut the running expenses of your investment property.

 

Written for Merriman by Kellie Tollifson at T-Square Real Estate Services in Seattle.

What to Consider Before You Refinance Your Mortgage

What to Consider Before You Refinance Your Mortgage

 

For many people, a home is one of their largest assets. Also, because most people don’t pay cash to buy their home, they need to get a mortgage to finance the purchase. Even though a mortgage is typically 15, 20, or 30 years, that doesn’t mean everything stays the same during that time. What might be a great interest rate at the time of purchase could be considered a high interest rate just a couple years later. This is why millions of Americans choose to refinance their mortgage when interest rates go down. What’s important to keep in mind, though, is that there are many factors besides the interest rate that a homeowner should consider before refinancing. There are seven key considerations that one should review before applying for a refinance.

To help me understand what’s happening in the mortgage market, I reached out to my friend Phill Becraft. Phill is a mortgage advisor with Guild Mortgage and has more than a decade of experience in the greater Seattle area. Phill was able to provide insights into some of the key considerations outlined below.

Key Considerations

  1. Your Credit Score
  2. Refinancing Costs
  3. Home Equity
  4. Debt-to-Income Ratio
  5. Rates vs. Term
  6. Private Mortgage Insurance
  7. Break-Even Point

 

1) Your Credit Score

One of the biggest factors that lenders consider when evaluating an application is a borrower’s credit score. While current interest rates are at historic lows, that doesn’t mean everyone will qualify for these low rates. It’s helpful to know what your score is beforehand so that you’re not surprised when you apply for a refinance. A general guideline for getting the lowest mortgage interest rate is having a credit score of 760 or higher.

Tip from Phill Becraft:

“Online credit check companies are a great tool for consumer lending products, but in the end, they are a for-profit business. Don’t be surprised when a mortgage lender pulls your credit and it’s different by 20–30 points. Mortgage lenders use a more complex FICO scoring system for their reports to supply to their investors. It’s called FICO Score 9, and it’s on a different level than what is used at the online credit check companies.”

2) Refinance Costs (closing costs)

All borrowers should keep in mind that refinancing is not free. Even when lenders offer a “no-cost” refinance, that just means the rate will be higher to cover the costs of the refinance. Typically, a borrower should be prepared to pay 2%–6% of the total loan amount to refinance. That 2%–6% range should make it obvious that not all lenders are the same, and oftentimes it pays to shop around. If you’re worried about out-of-pocket costs, many lenders allow closing costs to be wrapped into the new loan—but you need to have enough equity in your home for this option to work.

Tip from Phill Becraft:

“If you refinance with your current loan servicer, you may not need to reestablish/rebuild an escrow account to ensure your property taxes and insurance are paid. This can lower your upfront or financed loan costs.”

3) Home Equity

If you want to refinance, then you should confirm that your home is worth more than the mortgage amount. The more the better, but a good target is at least a loan-to-value (LTV) amount of 80% or better. In other words, you should try to have at least 20% equity built up in your home.

Quick example: Home Value = $500,000 | 80% LTV = $400,000 | 20% Equity = $100,000

If your home is worth less than your current mortgage, that is considered “underwater.” When a home is underwater, your refinancing options are limited. Most conventional lenders won’t refinance a mortgage if the home is underwater, but a homeowner may be able to qualify with a government program. It’s always best to check with your lender first.

Another reason to have 20% equity is figuring out if you will be required to pay private mortgage insurance (PMI). We’ll discuss this more in a later topic.

Tip from Phill Becraft:

“Many conventional loans make you keep mortgage insurance for the first 24 months regardless if you have enough equity (20%+). Sometimes it’s best to look at a refi to get an updated appraisal to better your LTV or equity position.”

4) Debt-to-Income Ratio

Just because you currently have a mortgage, it doesn’t mean you can simply refinance into a new one. Lenders have not only increased their standards for credit scores, they’ve also become more stringent when it comes to your debt-to-income ratio. Ideally, your monthly house payments should be under 28% of your gross income, and overall debt-to-income should be less than 36%. This means you need to calculate how much your other monthly obligations are, such as car payments, credit card bills, student loans, and other credit lines when figuring out your total debt-to-income ratio. Having a steady job history, a high income, and some money saved are all helpful attributes, and some lenders may allow your debt-to-income ratio to go into the 40%+ range, but you shouldn’t count on that.

Tip from Phill Becraft:

“Childcare costs are not considered when looking at debt-to-income ratios. Also, some lenders can eliminate monthly liabilities like auto loans with less than six payments left.”

5) Rate vs. Term

Getting the lowest possible rate doesn’t always make the most financial sense. Many people looking to refinance put a lot of emphasis on the interest rate, but it’s also important to know the cost of getting lower rates. Make sure you pay attention to the refinancing points that are paid to get a mortgage at a lower interest rate. These points are either wrapped into the closing costs or added to the principal of your new loan.

Another way to get a lower interest rate is choosing a mortgage with a shorter term. A 20-year mortgage will typically have a lower interest rate than a 30-year mortgage. If your goal is to reduce your monthly payments, choosing a shorter-term mortgage will most likely result in a higher monthly payment. If your goal is to lower your monthly payment and pay off your mortgage faster, then you can refinance into a loan with a lower rate and the same term, but keep making the same amount you were paying on the previous mortgage. Let’s use an example:

Original Mortgage: $300,000 | 4.00% | 30 Year Term | Monthly Payment = $2,387

Refinanced Mortgage: $300,000 | 3.50% | 30 Year Term | Monthly Payment = $2,245

In the original mortgage above, the minimum payment of $2,387 is made every month for 30 years until the loan is paid off. Say you refinance into the new mortgage at 3.50%, but instead of making the new minimum payment of $2,245, you keep making the previous mortgage payment from the original loan, $2,387 per month. This strategy “feels” like your monthly payment hasn’t changed, but now your loan will be paid off in approximately 27 years instead of 30 years! You can save 3 years of mortgage payments by simply lowering your interest rate and sticking with your original monthly payment.

It’s important to note this simple example does not take into account closing costs, refinance points, or how long you’ve been paying into the original mortgage, but you should get the point that you can make payments above your minimum monthly payment. This strategy also allows you to reduce your monthly payments back down to the minimum amount during times that are financially challenging.

6) Private Mortgage Insurance

Most lenders require a borrower to have at least 20% equity in their home, otherwise private mortgage insurance (PMI) is required. Lenders will calculate your loan-to-value ratio during a refinance to ensure the mortgage amount will not exceed 80% of the home’s value. The costs for PMI vary and are typically 0.25%–2% of the loan balance per year. This means the higher the mortgage amount, the higher the PMI costs. For many homeowners, putting 20% down at the time of purchase is a big hurdle, so it’s not uncommon for PMI to be added to a mortgage. As home values increase, refinancing may be a way to eliminate PMI and get a mortgage at a lower interest rate. The opposite is also true, though. If your home has decreased in value, a lender may require PMI on a refinanced mortgage if the LTV exceeds 80%.

Tip from Phill Becraft:

“Did you know there are many ways to pay mortgage insurance? Gone are the days of monthly payments! You can choose “split” or “single” paid premium options with most mortgage brokers. Choose a small lump sum down and finance less each month (split) or just pay the single premium up front and don’t have any monthly MI costs!”

7) Break-Even Point

If you are considering refinancing your mortgage, you should at some point ask yourself, “Is it worth it?” This question cuts to heart of making this decision. Ultimately, you need to calculate if the costs to do the refinance will be paid off eventually by the monthly savings.

For example, if your refinance costs are $12,000 and you end up saving $400 per month, then it will take 30 months to “break even.” This means you should plan on staying in your current home for at least another two and half years, or you won’t end up saving anything by refinancing your mortgage.

 

Hopefully these seven considerations have given you enough “food for thought” to realize refinancing a mortgage is complex, and it’s not just about getting the lowest rate. Before you make the decision to start the process, I encourage you to speak with a professional who can help assess your financial situation and determine if now is the right time to refinance your mortgage. Here at Merriman, a Wealth Advisor can assist you with this decision as part of our financial planning process. Reach out today if you have any questions.

With the World Working from Home, How Can Real Estate Be a Good Investment?

With the World Working from Home, How Can Real Estate Be a Good Investment?

 

One of the most noted and real impacts of the coronavirus is that employees are working from home. While it has been a huge shift, four plus months in, the results have been positive for many, and headlines in business publications are examining whether a substantial fraction of these employees may never return to the office. There is solid debate about how big the impact will ultimately be, but there is no doubt that companies will be revisiting their spaces.

This trend might lead one to worry that real estate values will plummet as demand falls and supply stays constant. To this I would offer two counter points. First and foremost, commercial real estate encompasses a wide range of investments. The pie chart below shows the sub-sector breakdown of the holdings of our most widely recommended real estate investment, the Dimensional Global Real Estate Fund (DFGEX).

REITs that focus on office properties as of June 30th, 2020, made up just 12% of the fund’s allocation. Office REITs do not just own high-rise commercial office buildings in downtown cores. Much of the space they own is in suburban office parks and includes space leased by dentists, hairstylists, lawyers, and small research and engineering firms. While many more things can be done virtually, there are still many businesses, such as orthodontists and spas, that will always require an in-person experience.

While demand for some types of office space may be dropping, demand for other types of real estate in the fund is growing. As of June 30th, the top three holdings in the Dimensional fund were American Tower Corporation, Crown Castle International Corporation, and Prologis Inc. American Tower and Crown Castle are owners and providers of infrastructure for wireless communication and fall into the Specialized category. Prologis is in the logistics real estate business, leasing distribution facilities to support direct fulfillment to customers. All three of the companies are poised to see substantial growth from increasing demand. The fund owns many other businesses, from cold storage warehouses to multi-family apartments to medical facilities, where demand remains high.

The second point is that changes always follow any societal upheaval. There is no doubt that COVID will have an impact on our world. However, it is unclear that the shifts will be as radical as some are predicting or that COVID alone will cause the demise of industries or institutions. Large scale change rarely happens that quickly or dramatically.

For example, the idea that demand for office real estate will suddenly drop 60–70% seems overblown. IBM was an early proponent of telecommuting. In a 2009 report, they boasted that “40 percent of IBM’s some 386,000 employees in 173 countries have no office at all.” According to an Atlantic article from 2017, they unloaded 58 million square feet of office space at a gain of nearly $2 billion. By all accounts, it sounded like a winning strategy. Only, it did not work out, and in March of 2017, IBM decided to move thousands of its workers back to physical company offices.

The problem was likely a drop in what the Atlantic terms “collaborative efficiency”—or the speed at which a group successfully solves a problem. Physical distance still mattered when it came to team creativity, and remaining competitive in a rapidly changing landscape more and more requires novel solutions to complex problems. Offices may look different, but I believe that more than ever people and employees will need places to gather and connect.

The future trajectory is never clear even to the greatest minds. What is clear is that people will always need spaces to live, work, and conduct business. What those spaces look like will evolve, but companies are motivated to adapt. And historically, they have changed industrial warehouses and former malls into Amazon fulfillment centers and multi-family apartment complexes. Despite the recent drawdowns and changing landscape, we believe that investing in a diversified real estate portfolio continues to offer the potential for equity-like returns, current income, and solid inflation protection, all important elements of a well-balanced portfolio.

 

Top Financial Tips for Property Investors

Top Financial Tips for Property Investors

 

For people who are just starting as property investors, investing in real estate can feel like a maze. They know where to enter as well as their desired exit point, but everything else is a puzzle.

Newbie investors can see that there is a lot of money to be made by investing in properties. They also know that all they need to get started as a property investor is to go out and buy an investment property. But as Windermere Management warns, the problem lies between buying the property and making it profitable.

Are there secrets to profitable real estate investing that new investors need to know? Yes, there are, and this post will help you get started on some of the most important ones. Here are the top tips for property investors.

 

1. Clarify your investment goal

Before you set out to look for a property to invest in, you should ask yourself what you want from the property. There are many options for what your investment goal for a property can be, and the particular goal you choose will define the best real estate investment strategy to pursue.

Your goal can be to save money on rent by investing in a property that you can live in and rent out at the same time. It can be a regular income and long-term value appreciation. It could also be that you want to make small to medium profits in a very short period. Clarifying your goal is the first step to defining your investment strategy.

 

2. Define your investment strategy and niche

There are several real estate investment strategies, and each one has its pros and cons. The best strategy for you depends on your particular circumstances and needs. Examples of real estate strategies include buy-and-hold, fix-and-flip, long-term rental property or vacation rental, and long-term rental property.

Apart from choosing your strategy, you should also decide your niche. This is the specific property type to which you want to apply your strategy. Examples of property niches include single-family houses, small apartment buildings, commercial retail, etc.

 

3. Understand what makes a location good

What factors make an area good or bad as a potential location for your investment properties? These are referred to as the area’s fundamentals. They include population demographics (age, income, education, etc.), good neighborhoods, a surplus of local shops and entertainment centers, good road networks and multiple modes of transportation, schools, hospitals, amenities, security, and employment opportunities. Gaining an understanding of the fundamentals will help you make a good decision about the best locations for your investments.

 

4. Find a mortgage broker who specializes in investment properties

Most mortgage brokers are familiar with residential mortgages, but the process for obtaining a buy-to-let mortgage is completely different from that of a residential mortgage. Using a broker who is familiar with investment property mortgages will help you get the best terms from lenders.

Who your broker is can mean the difference between an application that is rejected and one that is approved. And when buying houses below market value, the speed with which mortgage processes are completed can make or break a deal. This will depend on the experience and connections of your broker.

 

5. Use interest-only mortgage

When getting a mortgage for an investment property, you usually have a choice between interest-only payments or paying both the principal and interest. Choosing a mortgage that allows you to pay interest only is better.

It allows you to maximize cash flow and equity growth on the property while saving thousands in the mortgage payment. The money saved can be redirected into paying off the mortgage principal on your primary residence. Using interest-only mortgage also lets you take advantage of tax deductions for the interest payments on the investment property.

 

6. Avoid cross-securitization

This is when your investment loan is secured using more than one property. A common example is when an investor uses their home and the investment property as security for the investment loan.

The problem with this kind of loan structure is that it gives the bank control over properties that should normally not be connected to the investment loan. In the event that you default on the loan, the bank can sell your home. The better way to structure your loans is to split them up by using different banks for your investment property and your home. It costs more, but it is safer.

 

7. Understand the relevant tax laws

Getting a handle on the various tax laws as they relate to investment properties can be very difficult. Unless you are an accountant, it is highly unlikely that you will know all the small loopholes you can exploit to cut down on your tax expenses.

This is why you should not view the money spent on a good accountant as an expense. It is an investment that can help you make more money from your real estate business.

 

Written for Merriman.com by:
Tom Flanigan who is the owner of Windermere Property Management in Spokane, WA.
They manage rental properties in Spokane, Airway Heights, Liberty Valley, and Spokane Valley areas.