Investing in rental property is one of the best ways to invest your money. You don’t have to worry if you don’t have enough money, because just like regular property, you can also get a mortgage for rental property. However, when you want to buy a rental property, you should prepare to do a lot of work and research. Investing in rental property is one of the toughest businesses, and there are many land mines that can ruin everything. If you bought the wrong rental property, your investment can turn into a nightmare.
Just like many other people who invest in property, you may want to get help from a real estate agent when you want to buy a rental property. However, it is better for you to do the rental property search by yourself. If you use an agent, you will face unnecessary pressure to buy because the agent wants you to buy the property that he or she has found for you. This can be a problem if it turns out that you don’t really like the property. But if you do the rental property search by yourself, you are free to decide whether to proceed or not. The following are 5 things that you should think about when you want to buy rental property for your investment:
1. Neighborhoods
The neighborhood is one of the most important things that you need to consider before you buy a property. The neighborhood quality will influence your rental property’s occupancy rate and the types of tenants that you will have. For example, if you buy a rental property near a university, most of your tenants will be students, so that your rental property may have lots of vacancies during summer.
2. Property Taxes
Property taxes differ from neighborhood to neighborhood. As an investor who wants to make money from renting property, you should know how much you will have to pay in taxes. To get more information about the tax in a certain neighborhood, you can ask homeowners in the community, or visit the town’s assessment office.
3. Schools
The availability of schools is often being a point of consideration for people who have children. They usually want to rent a place near a school with good quality. So when you want to buy a rental property, you may want to find one that is near a good school.
4. Crime rate
Make sure that the rental property that you are going to buy is not located in a neighborhood with high crime rate. Nobody wants to live in a place where there are lots of crimes. To see the accurate crime statistics of a neighborhood, you can visit the public library or the police station.
5. Jobs
You should try to find a rental property that is located in a neighborhood with growing employment opportunities. When you know that a big company is moving to a certain neighborhood, for example, you should buy a rental property there because you can be sure that the workers will flock there and they need to rent a place to live. However, when a big company moves to a neighborhood, usually the property prices are affected.
As you can see, there are so many things to check before you decide to buy a rental property. Checking those things may take much of your time, but doing so will enable you to find the safest and the most profitable property investment
Tuesday, August 23, 2011
Alternatives for People Who Can’t Get a Mortgage
Most homeowners are buying their home on a mortgage. However, getting approved for a mortgage is not an easy task. If you find yourself stuck because you need to buy a house but you can’t get a mortgage for it even though you can actually afford it, you can choose from several alternatives below:
1. Borrowing from Your Whole Life Insurance Policy
If you have a whole life insurance policy, you’re lucky because you can borrow money from it. As you make your regular insurance premium payments on regular basis, you accumulate cash value, and you earn both dividends and interest. You can borrow money against your accumulated cash value. Because the accumulated cash value is actually your own whole life insurance policy, you don’t even need to pass any loan qualifications. However, borrowing money from your whole life insurance policy reduces the face value of it if you don’t pay back.
Before you actually borrowed money from your whole life insurance policy, make sure that the benefits that you will get from buying a property is more than the drawbacks of cashing in your whole life insurance policy.
2. Get a Seller Financing
You can try to get a seller financing to buy a home. When you get a seller financing, you don’t have to deal with the bank. You just need to make your payments directly to the person who sold the house to you. However, getting a seller financing is not easy because most homeowners do not own their house free and clear. People who do own their home free and clear mostly don’t want to become lenders because they don’t want to deal with the risks.
3. Getting a Rent to Own or Lease Option
With rent to own or lease option, you can rent a property for a certain length of term, and at the end of the term, you will have the option to buy it. The drawback of rent to own or lease option is that the rent payments are usually a bit higher than market price.
These alternatives are great options if you need to buy a home but you can’t get a mortgage. However, they have their own potential problems that you need to be aware of. Make sure that you know all the risks before you take one of them. It is a good idea to consult a financial advisor before you make any decision.
1. Borrowing from Your Whole Life Insurance Policy
If you have a whole life insurance policy, you’re lucky because you can borrow money from it. As you make your regular insurance premium payments on regular basis, you accumulate cash value, and you earn both dividends and interest. You can borrow money against your accumulated cash value. Because the accumulated cash value is actually your own whole life insurance policy, you don’t even need to pass any loan qualifications. However, borrowing money from your whole life insurance policy reduces the face value of it if you don’t pay back.
Before you actually borrowed money from your whole life insurance policy, make sure that the benefits that you will get from buying a property is more than the drawbacks of cashing in your whole life insurance policy.
2. Get a Seller Financing
You can try to get a seller financing to buy a home. When you get a seller financing, you don’t have to deal with the bank. You just need to make your payments directly to the person who sold the house to you. However, getting a seller financing is not easy because most homeowners do not own their house free and clear. People who do own their home free and clear mostly don’t want to become lenders because they don’t want to deal with the risks.
3. Getting a Rent to Own or Lease Option
With rent to own or lease option, you can rent a property for a certain length of term, and at the end of the term, you will have the option to buy it. The drawback of rent to own or lease option is that the rent payments are usually a bit higher than market price.
These alternatives are great options if you need to buy a home but you can’t get a mortgage. However, they have their own potential problems that you need to be aware of. Make sure that you know all the risks before you take one of them. It is a good idea to consult a financial advisor before you make any decision.
Mortgage Options for Self-employed
People’s employment status affects their chance of getting a mortgage. But what about people that are self-employed? People that are self-employed are still eligible for a mortgage. However, getting a mortgage is usually a bit harder and more expensive for them. Most lenders are worried to see the fact that they don’t earn steady income like employees to make their monthly mortgage payments. Some lenders even simply refuse to give loan to people that are self-employed because of the extra risk and paperwork involved in the whole process. But if you are a self-employed, you must not let these facts discourage you from trying to get a mortgage. There are lenders that provide mortgage products that are suitable for people who are self-employed.
First, you have to understand that lenders are not seeing people that are self-employed as their ideal borrowers. If you manage to get a mortgage, you will definitely have to pay higher interest rates compared to people that are employees. The rates that you see when you visit the websites of lenders are rates for prime borrowers, and those are not the ones that you will be paying because you don’t have steady income like them. Because you are a less attractive candidate for lenders, you may not be able to get a lot of options and negotiate to get a lower interest rate. You will also need to put up some extra effort to find lenders who are willing to provide loan for people who are self-employed like you. One more thing that you need to prepare when you want to apply for a mortgage as a self-employed is a larger down payment.
The subprime mortgage crisis made it even harder for people who are self-employed to get a mortgage because banks are trying to avoid risky investments. However, you can still get one of the following loan types:
1. SISA (Stated Income/Stated Asset Mortgage)
In this type of mortgage, you can tell the bank how much your income is, and the bank will not do anything to verify it. However, the bank will check your sources of income. Usually, you will need to provide a list of your recent customers or clients and your other sources of cash flow. You may also list your income-producing investment if you have one.
2. No Documentation Loan
If you are a self-employed but your tax returns show that your business has a very low profit or even loss, this type of loan may be a good option. In No Documentation Loan, the lender will not verify your income information that you provide. However, because this kind of loan is considered high-risk by the bank, you need to prepare to pay higher interest rate compared to other types of loans with full documentation.
If you can’t get any of the options mentioned earlier, you can try to get a joint mortgage with a trusted friend or relative who is an employee. Getting a joint mortgage is easier than getting a SISA or No Documentation Loan because it is safer to the lender.
First, you have to understand that lenders are not seeing people that are self-employed as their ideal borrowers. If you manage to get a mortgage, you will definitely have to pay higher interest rates compared to people that are employees. The rates that you see when you visit the websites of lenders are rates for prime borrowers, and those are not the ones that you will be paying because you don’t have steady income like them. Because you are a less attractive candidate for lenders, you may not be able to get a lot of options and negotiate to get a lower interest rate. You will also need to put up some extra effort to find lenders who are willing to provide loan for people who are self-employed like you. One more thing that you need to prepare when you want to apply for a mortgage as a self-employed is a larger down payment.
The subprime mortgage crisis made it even harder for people who are self-employed to get a mortgage because banks are trying to avoid risky investments. However, you can still get one of the following loan types:
1. SISA (Stated Income/Stated Asset Mortgage)
In this type of mortgage, you can tell the bank how much your income is, and the bank will not do anything to verify it. However, the bank will check your sources of income. Usually, you will need to provide a list of your recent customers or clients and your other sources of cash flow. You may also list your income-producing investment if you have one.
2. No Documentation Loan
If you are a self-employed but your tax returns show that your business has a very low profit or even loss, this type of loan may be a good option. In No Documentation Loan, the lender will not verify your income information that you provide. However, because this kind of loan is considered high-risk by the bank, you need to prepare to pay higher interest rate compared to other types of loans with full documentation.
If you can’t get any of the options mentioned earlier, you can try to get a joint mortgage with a trusted friend or relative who is an employee. Getting a joint mortgage is easier than getting a SISA or No Documentation Loan because it is safer to the lender.
Buying vs. Renting a Home
In general, people who are looking for a place to live have two options. They can rent or buy a place to live. To decide which option to take, people need to consider the financial and personal or emotional aspects. The following are the financial factors as well as the pros and cons of owning a home:
Examining Financial Conditions
The first thing that people need to do when they want to decide whether to buy or rent a home is to determine whether they can actually afford to buy a home. Some of the things they need to consider are their ability to prepare money for the down payment, which is usually between 5% and 20% of the property price, and the closing costs of the mortgage that is usually about 5%. In most cases, the initial costs of buying a home through a mortgage are substantially higher than the costs of renting one. Another thing to consider is the fact that when people manage to cover all the initial expenses for buying a home with a mortgage, they have only gone through half of the battle.
Getting approved for a mortgage and pay all the initial costs are not the only things that people need to think about. They also need to calculate the costs that they will have to pay to stay in their future home. According to some financial experts, the ideal monthly mortgage payment should not be more than 28% of people’s gross monthly income. To be financially safe, people’s total monthly debt payments should not be more than 36% of their gross monthly income. People who crossed these suggested limits may run into trouble because they still have many other things to pay. In the other hand, people who rent a home instead of buying one will find it easier to manage their expenses because they only have to pay fixed monthly expenditure. Even if something needs to be repaired, that will be the landlord’s problem.
Some of the solid reasons to buy a home instead of renting one are the ability to build equity, and the investment value of a home. However, there are downsides of these reasons. For example, nobody can guarantee that a home can be a good investment. We have to admit that history shows that home values tend to increase over time. But there are also some areas where home values have significantly decreased.
Examining Financial Conditions
The first thing that people need to do when they want to decide whether to buy or rent a home is to determine whether they can actually afford to buy a home. Some of the things they need to consider are their ability to prepare money for the down payment, which is usually between 5% and 20% of the property price, and the closing costs of the mortgage that is usually about 5%. In most cases, the initial costs of buying a home through a mortgage are substantially higher than the costs of renting one. Another thing to consider is the fact that when people manage to cover all the initial expenses for buying a home with a mortgage, they have only gone through half of the battle.
Getting approved for a mortgage and pay all the initial costs are not the only things that people need to think about. They also need to calculate the costs that they will have to pay to stay in their future home. According to some financial experts, the ideal monthly mortgage payment should not be more than 28% of people’s gross monthly income. To be financially safe, people’s total monthly debt payments should not be more than 36% of their gross monthly income. People who crossed these suggested limits may run into trouble because they still have many other things to pay. In the other hand, people who rent a home instead of buying one will find it easier to manage their expenses because they only have to pay fixed monthly expenditure. Even if something needs to be repaired, that will be the landlord’s problem.
Some of the solid reasons to buy a home instead of renting one are the ability to build equity, and the investment value of a home. However, there are downsides of these reasons. For example, nobody can guarantee that a home can be a good investment. We have to admit that history shows that home values tend to increase over time. But there are also some areas where home values have significantly decreased.
Knowing the Most Common Mortgage Frauds
We have to admit that there are a lot of ethical violations and even criminal activities in banking, financial, and housing industry. This article will discuss about frauds in the mortgage industry, to help people to avoid them. Mortgage fraud is not only unfair practices that may be done by mortgage industry professionals, but also the ones that may be done by the borrowers. There are many reasons why borrowers and industry professionals do mortgage fraud, but we can group them into two types – fraud for housing and fraud for profit.
Mortgage fraud for housing is unfair practices done by borrowers, in which they provide false details about their employment, income, and other things that may influence their ability to be approved for a mortgage. The goal is of course to get or maintain property ownership. This kind of fraud is not only being done by people who need a place to live, but also by investors who intend to turn the property into a source of income by renting or re-selling it.
Mortgage fraud for profit is done by industry professionals. Usually this kind of fraud is done by providing false details about their clients or their own condition in order to maximize profit on a mortgage loan transaction. Mortgage industry professionals that may commit such fraud include real estate sales agent, real estate appraiser, real estate builder, loan officer, credit or debt counselor, mortgage broker, insurance agent, property inspector, title company, escrow agent, and attorney. Sometimes mortgage industry professionals commit fraud together as a network to maximize the fees and share profits on all of their services.
Common Fraud Schemes and Scams in Mortgage
The most common mortgage fraud schemes that are being done by investors are occupancy fraud, property flipping, and the straw buyer scam. In general, property flipping is not illegal. However, it became unfair when a property is purchased below market price with help from a corrupt real estate appraiser and then being sold at profit. Occupancy fraud is being done by investors by claiming that the home will be owner-occupied. This will allow them to gain favorable bank status even though the property will actually be vacant. Occupancy fraud also allows them to get lower mortgage rates. The straw buyer fraud is being done by investors in which they use their identity credit and other information to obtain mortgage for a buyer who may not qualify for a mortgage.
Mortgage fraud for housing is unfair practices done by borrowers, in which they provide false details about their employment, income, and other things that may influence their ability to be approved for a mortgage. The goal is of course to get or maintain property ownership. This kind of fraud is not only being done by people who need a place to live, but also by investors who intend to turn the property into a source of income by renting or re-selling it.
Mortgage fraud for profit is done by industry professionals. Usually this kind of fraud is done by providing false details about their clients or their own condition in order to maximize profit on a mortgage loan transaction. Mortgage industry professionals that may commit such fraud include real estate sales agent, real estate appraiser, real estate builder, loan officer, credit or debt counselor, mortgage broker, insurance agent, property inspector, title company, escrow agent, and attorney. Sometimes mortgage industry professionals commit fraud together as a network to maximize the fees and share profits on all of their services.
Common Fraud Schemes and Scams in Mortgage
The most common mortgage fraud schemes that are being done by investors are occupancy fraud, property flipping, and the straw buyer scam. In general, property flipping is not illegal. However, it became unfair when a property is purchased below market price with help from a corrupt real estate appraiser and then being sold at profit. Occupancy fraud is being done by investors by claiming that the home will be owner-occupied. This will allow them to gain favorable bank status even though the property will actually be vacant. Occupancy fraud also allows them to get lower mortgage rates. The straw buyer fraud is being done by investors in which they use their identity credit and other information to obtain mortgage for a buyer who may not qualify for a mortgage.
Avoiding Classic Mistakes in Buying Property for Investment
Investing in real estate has become harder than it used to be. The real estate market is slowing down, and making money from buying and selling properties will not be an easy task. However, you can still make money from investing in real estate if you are doing everything carefully and avoid the following classic mistakes that many investors do:
1. Buying Without Doing Enough Research
When people buy things like a television or a car, they usually ask a lot of questions and compare different models to get the best deals. But when you are going to buy a property for investment, you have to do your research more thoroughly. You have to ask a lot of questions not only about the property, but also about the neighborhood because it may have a great impact to the property price.
Some of the things that you need to check before you buy a property are:
- The reasons why the homeowner is selling the property
- At what price the homeowner bought the property and when did he or she bought it
- The location of the home, whether it is located in flood zone or other areas with potential problems
- The permit and whether it has issues to take care of
- What needs to be replaced or repaired in the house
2. Choosing the Wrong Financing Option
If you plan to buy a property on a mortgage, you need to make sure that you choose the right type of financing. If you choose mortgage loans with adjustable/variable rates, you have to be sure that you will be able to pay your mortgage payments in case the interest rates go up. However, it is better for you to choose a conventional mortgage with fixed rate.
3. Doing Everything without Help from Anyone Else
Many real estate investors and first time home buyers do the same mistake. They do everything on their own because they think that they know everything. If you want to have a safe and profitable real estate investment, you should find every possible resource and ask people that are expert in the industry. You can ask a competent home inspector, an expert real estate agent, an insurance representative, or maybe even a handyman. These people will provide you with some information about the home and neighborhood.
4. Paying Too Much for a Property
This issue is closely related to the lack of research before purchasing. If you don’t do enough research, you may end up paying too much for a property. To avoid overpaying for a property, you have to search for information about similar homes that are recently sold in the area and find out how much they were sold for.
1. Buying Without Doing Enough Research
When people buy things like a television or a car, they usually ask a lot of questions and compare different models to get the best deals. But when you are going to buy a property for investment, you have to do your research more thoroughly. You have to ask a lot of questions not only about the property, but also about the neighborhood because it may have a great impact to the property price.
Some of the things that you need to check before you buy a property are:
- The reasons why the homeowner is selling the property
- At what price the homeowner bought the property and when did he or she bought it
- The location of the home, whether it is located in flood zone or other areas with potential problems
- The permit and whether it has issues to take care of
- What needs to be replaced or repaired in the house
2. Choosing the Wrong Financing Option
If you plan to buy a property on a mortgage, you need to make sure that you choose the right type of financing. If you choose mortgage loans with adjustable/variable rates, you have to be sure that you will be able to pay your mortgage payments in case the interest rates go up. However, it is better for you to choose a conventional mortgage with fixed rate.
3. Doing Everything without Help from Anyone Else
Many real estate investors and first time home buyers do the same mistake. They do everything on their own because they think that they know everything. If you want to have a safe and profitable real estate investment, you should find every possible resource and ask people that are expert in the industry. You can ask a competent home inspector, an expert real estate agent, an insurance representative, or maybe even a handyman. These people will provide you with some information about the home and neighborhood.
4. Paying Too Much for a Property
This issue is closely related to the lack of research before purchasing. If you don’t do enough research, you may end up paying too much for a property. To avoid overpaying for a property, you have to search for information about similar homes that are recently sold in the area and find out how much they were sold for.
Avoiding Excessive Mortgage Closing Costs
Buying a home is something that most people don’t do too often. Usually people are only involved in real estate transactions once or maybe twice in a lifetime, so that most of them are not familiar with the whole process. In real estate transactions, there are mountains of papers to sign with plenty of unfamiliar terms. People also need to deal with mortgage brokers, real estate agents, and others, who just want to get everything done quickly so that they can get paid. They just smile and tell home buyers where to sign without explaining everything in detail. People who have never been involved in real estate transactions before can easily lose track of what they are paying for. The boredom from signing mountains of papers makes it even easier for them to lose track of how much they are spending on everything.
The mortgage is not the only thing that people need to pay. There are also lots of other expenses that are categorized as mortgage “closing costs.” Homebuyers should pay a close attention to everything that is included in the closing costs because by doing so, they may be able to save a lot of money. Closing costs are actually the sum of all potential costs that occur during the process of purchasing real estate through mortgage. Closing costs can be grouped into two categories as recurring and non-recurring.
Recurring costs are paid not only at the closing of the mortgage, but also on monthly basis for the life of the loan. Recurring costs include real estate taxes, homeowners insurance, and private mortgage insurance (for homebuyers with less than 20% down payment). All these costs must first be paid in advance at the mortgage closing, so that the funds will be readily available to cover the following year’s obligations. In some cases, homeowners also have to prepay interest to cover their first few days or weeks.
Non-recurring costs are also paid at the mortgage‘s closing. Non-recurring costs may include application fee, a series of loan fees, a broker’s service fee (for homeowners who use the service of a mortgage broker), home appraisal fees, Federal Housing Administration fees, and more. There is no way that homebuyers can completely avoid unnecessary mortgage fees. But to minimize them, homebuyers can look out for excessive fees that are charged for things like application fee, underwriting fee, mortgage rate lock fee, loan processing fee, and broker rebate. Some lenders realize that homebuyers are overwhelmed by the mortgage closing fees, and they are offering what is called “all-in-one” flat-rate fees with all closing costs included.
In general, the amount of mortgage closing costs that homeowners have to pay is from 3 to 5 percent of the property price. To see the closing costs in detail, homeowners have the right to see the HUD-1 document 24 hours before the mortgage‘s closing.
The mortgage is not the only thing that people need to pay. There are also lots of other expenses that are categorized as mortgage “closing costs.” Homebuyers should pay a close attention to everything that is included in the closing costs because by doing so, they may be able to save a lot of money. Closing costs are actually the sum of all potential costs that occur during the process of purchasing real estate through mortgage. Closing costs can be grouped into two categories as recurring and non-recurring.
Recurring costs are paid not only at the closing of the mortgage, but also on monthly basis for the life of the loan. Recurring costs include real estate taxes, homeowners insurance, and private mortgage insurance (for homebuyers with less than 20% down payment). All these costs must first be paid in advance at the mortgage closing, so that the funds will be readily available to cover the following year’s obligations. In some cases, homeowners also have to prepay interest to cover their first few days or weeks.
Non-recurring costs are also paid at the mortgage‘s closing. Non-recurring costs may include application fee, a series of loan fees, a broker’s service fee (for homeowners who use the service of a mortgage broker), home appraisal fees, Federal Housing Administration fees, and more. There is no way that homebuyers can completely avoid unnecessary mortgage fees. But to minimize them, homebuyers can look out for excessive fees that are charged for things like application fee, underwriting fee, mortgage rate lock fee, loan processing fee, and broker rebate. Some lenders realize that homebuyers are overwhelmed by the mortgage closing fees, and they are offering what is called “all-in-one” flat-rate fees with all closing costs included.
In general, the amount of mortgage closing costs that homeowners have to pay is from 3 to 5 percent of the property price. To see the closing costs in detail, homeowners have the right to see the HUD-1 document 24 hours before the mortgage‘s closing.
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