Let’s talk about buying a rental investment property and the potential expenses of home ownership that you may incur. Yes, there are advantages to homeownership. However, buying a property as an “investment” is not as clear cut as many seem to think.
Many people think owning rental property is a simple, and easy way to make a lot of money. It is much more complicated than that. There are many unexpected and unpredictable expenses that can and will arise. This happens both in the purchase and renovation of an investment property. It also happens in the actual use of the property.
Visit here to see if you qualify to buy a rental property.
Even though some expenses can be predicted, there is still an element of uncertainty that cannot always be eliminated. For instance, insurance and tax payments are predictable in the sense that they are paid annually and at the same time every year. However, based on insurance claims being paid out or assessment changes from the city government, those payment amounts can sometimes vary widely.
Also, taxes and insurance tend to increase in cost over time. It makes sense that if a property has an increased value, the taxes and insurance for that home would go up as well.
There are many variables that can affect that insurance amount as well. There are different kinds of insurance that pay you differently based on how the policy values your property. Some policies will use “Replacement Cost” while others will use “Actual Cash Value”.
Replacement Cost policies are usually more expensive. This is because they will pay out however much it costs to rebuild and “replace” the physically damaged house or part thereof with brand new materials, and labor costs. This is a higher figure than what an “Actual Cash Value” policy would pay.
An “Actual Cash Value” (ACV) policy pays for the cost of replacing the damaged premises, but it subtracts out the “depreciation” of the premises. That means, if a roof lasts for 20 years, and it needs to be replaced due to a covered loss after 10 years, the insurance company would pay you ½ of the cost to replace it with a brand new one.
Obviously, this could be a serious amount of money you may have to come out of pocket for this roof replacement. If the new roof installation is $20,000.00 then, in this case, the insurance company would pay you $10,000.00, and you would be responsible for the other $10,000.00. It is clear why this type of policy costs less than a “Replacement Cost” policy.
What also adds to the list of expenses is flood insurance. Flood insurance is different from property insurance. If a flood occurs and you have only property insurance, you may get nothing from the property insurance company towards your loss.
Flood Insurance can be purchased using replacement cost or actual cash value for the valuation of the lost property. However, it is not a true replacement cost or actual cash value policy. This is because a true replacement cost policy has a guarantee that will replace the total of the damaged property regardless of the coverage amount.
A true actual cash value policy will pay the full depreciated cost of replacement regardless of the coverage amount. Most government flood insurance programs are written on an actual cash value basis. The main difference is that a flood insurance policy will only pay up to the coverage amount.
Most government flood insurance programs have a maximum coverage limit of $250,000.00. An additional policy can be purchased to cover additional amounts if a property is worth more than $250,000.00.
Some costs can be more easily predicted. For instance, when buying a property that has a sales price, you know that while you pay somewhat more or less than the purchase price, the price itself is a pretty good benchmark for what you can expect to pay to purchase the house.
You can also predict and estimate the closing costs of buying the house at a decent level of accuracy. It is usually based on the price but also may depend on any additional legal services or filings that arise. However, some expenses of home ownership can be extremely hard if not impossible to predict.
We refer to these as “unpredictable expenses”. Some of these expenses are, repairs, market fluctuations, default by tenants, vacant property carrying costs, natural disasters, change in law or ordinance, and environmental changes.
Some repairs can be predicted in advance. If you can see that paint is starting to peel or wear away, or if a roof looks like the shingles are not in good shape you can estimate when it will need to be redone or replaced. But some repairs come out of the blue.
A plumbing repair is usually hard to predict and can depend on how the tenant is using the plumbing. Some other unpredictable repairs might be due to appliance or some other kind of installed fixture malfunctioning. If the air conditioner goes out in the summer, that will be not only unpredictable but also would need to be fixed A.S.A.P.
The same situation would occur if a heater or heating element goes out during the winter. Also, some repairs that you think maybe far off can sometimes progress quickly and become imminent. Such as some woodwork that is deteriorating suddenly falling off or becoming dangerous.
Go here if you need to get financing for a repair or property renovation.
Market fluctuations can also become an immediate cost or expense. Overtime rental amounts usually go up. However, this is not a hard and fast rule. If you are trying to rent a house or unit, and it is sitting vacant for too long, you may need to decrease the rent amount in order to get it occupied.
If you are asking $1200 per month, and you go for two months with no rent, you will have lost $2400 in income. Dropping the asking rent amount to $1100 instead and rent it after one month the overall loss after a year would be $1200.
So, holding out for a higher rental amount isn’t always worth it. This may have absolutely nothing to do with the market though, it could just be a coincidence that it still hasn’t rented. It is impossible to know the exact cause of demand changes for rental properties.
An additional option if it seems like you are not able to get the rent amount your property should be getting is to update parts of or all of a property. Some updates are more costly than others, and you should make sure your updates will translate into increased rental amounts. This would fall into the category of unpredictable expenses of home ownership.
Do you qualify to refinance your rental property for needed updates? Go here and find out!
Tenant default is another expense that can be hard to predict. You should try to limit the risk of a tenant defaulting on rent by screening your tenants carefully via verifications of employment, credit reports, and referrals from previous landlords. Even with this, it’s impossible to predict all of the changes that could affect a tenant’s financial health. Just a few things pop into mind; a health problem, a family problem, even a legal problem.
Damages from natural disasters can also be an unpredictable expense. Who can predict a natural disaster? Nobody! However, you can have a property insured. But not all insurance policies are the same, and yours may not cover “loss of rent”.
You can have that coverage added, but it will cost you to do so by adding to your premium. Even if you do have insurance, there is almost always a part of the loss that is to be paid by the insured. That is usually referred to as a deductible, coinsurance provision, or a retention amount.
Natural disaster expenses can also be tied to changes in the global environment. We have been seeing over the past 10 years historic amounts of storms, as well as larger more powerful and slower-moving storms.
We have also been seeing a steady increase in sea levels. This changing environmental situation has led to an evolving threat. If we are experiencing more storms and more covered insurance losses than before, we may need to change how we cover our property with insurance.
If you are having more flooding problems, or many more dangerous storms in your area than before, you may need to either increase your coverage amounts or reduce the Deductible amount. These efforts will help to avoid an even bigger loss. Other more costly adjustments can also be made, such as raising a house or adding impact-resistant windows.
Find out if you qualify to raise your house or make it hurricane ready, visit here.
The final, in the category of unpredictable expenses of home ownership, is a change in law or ordinance. This means if rules about rental property change it can directly affect your bottom line. For instance, if it turns out that the Federal government changes interest deductions for individual or business income taxes, that could cost or benefit you.
It seems to really depend on the current government and its desires to influence or change policy. You can typically expect a conservative government to reduce taxes, and a liberal government to increase taxes. However, it can depend very much on who has the majority in Congress.
Another change in law or ordinance that has happened nationally but locally as well are the changes in the Air BNB laws. Initially, many people rented full houses out to Air BNB tenants for unlimited periods of time. There are now new laws and penalties locally that make it much more difficult to rent out Air BNB units.
Based on the new rules surrounding Air BNB’s, you could end up falling short of your needed income. Another change in the law that could affect income is film tax credits.
When Louisiana enacted tax credits for films it brought an onslaught of short-term rental business to the city. However, what goes up must come down. Once the tax credits ended, so did the short-term rental business that came with it. If you had planned on that demand being there, it could come as an unpleasant surprise.
In summary, there are an awful lot of potential expenses for home ownership to consider before embarking on a rental property as an investment journey. Make sure you can afford it before setting sail!
If you would like to know if you can afford to buy a particular rental property, use our mortgage calculator.
The post Expenses Of Home Ownership Both Expected And Unexpected appeared first on Sun Mortgage Funding.
There are several ways to invest in real estate. In this article, we will explore investing in a property to be used as a primary residence. There are many benefits of home ownership and we have selected what we think are the best, both psychologically and financially.
Be The King Of Your Castle
To many people, the ultimate feeling of freedom and control is to own the residence they live in. Nobody can tell you how to live in your house.
If you decide to keep the AC set at 59 degrees, you can do that without anyone else’s permission. Well maybe with the exception of your significant other that is. If you decide that you don’t need an alarm system, you don’t have to have one.
However, this does bring up another side to this coin. If you decide not to have an alarm system, or to not pay for insurance, if the house gets burglarized, or gets struck by lightning, you could be left paying for the repairs out of pocket. As the property owner, these would be your decisions to make.
Contact us on exploring insurance costs through our financing resources. There surely is a higher level of responsibility for a homeowner than a tenant. It is important to be certain that you can afford all the expenses related to home ownership. Would you like to calculate your mortgage payments? Visit our “calculator” page here.
One of the many benefits of home ownership is being able to deduct interest paid on mortgages. One way the IRS helps U.S. homeowners is by allowing some interest paid on mortgages to be deducted from income for tax purposes. That way some of the money that gets paid to the mortgage company is “saved”.
An individual can currently deduct interest paid annually on debt up to $375,000.00 for an individual, or $750,000.00 for a married couple. There is a higher interest deduction limit of $1,000,000.00 per married couple for debts that were incurred prior to 12/16/17.
Part of the “American Dream” is the ability to improve one’s life situation. Imagine if you didn’t qualify for a mortgage and had to purchase a house using only whatever cash you had saved.
For most people, that would seriously limit the houses you could afford to purchase. Some loans require little or no money down at all. This makes the amount of cash you might have available for a down payment would hardly matter. If the mortgage you are looking for requires 20% of the purchase price as a down payment in cash, that means if you were interested in a $100,000.00 house, you would be required to put up $20,000.00 as a down payment.
If you didn’t have the option to finance the purchase of the house through a mortgage, you would be limited to a house that costs no more than $20,000.00. A mortgage gives the homeowner the ability to pay for a nicer house than they could otherwise afford. This is accomplished by paying for it over time. Fill out an application and find out what mortgage programs you qualify for! Go here to fill out an online application.
Another benefit of owning your own house is that property typically increases in value over time. Physical buildings on a property “decrease” in value over time through use. The cost of land typically increases in value over time, since the supply of land is finite.
The number of people on earth has historically increased whereas the amount of land has stayed the same. It’s all about Supply and Demand. If there is less of a supply of land, then the demand is higher, and therefore the prices as well. Although it will cost some money to keep a property in good condition and well maintained, one can expect the overall value of the property to increase over time.
One of the key benefits of home ownership is having a savings plan working for you that you probably weren’t aware of. Having the structure and requirement of making a monthly mortgage payment assists people in their savings goals. This is the result of the monthly mortgage payments being required to keep your mortgage in good standing. Those payments work as a type of forced savings program.
Yes, you have to make the payments, but with each payment made you are increasing the amount of equity you have in the house. If your monthly payment shows $120 going to principal, then that means now you own $120 more of the house than you did prior to that payment.
You can save more or less depending on your situation. You can pay it off faster or slower, as long as you make the minimum payment. If at some time you need to access some money, you will be able to “Refinance” if you have equity in your house. Visit our loan programs page to see what options would work best for you.
One of the best reasons to buy a home is to stop paying rent, and instead, pay down your mortgage. When you make your mortgage payments not all of that money disappears down a “Rent” black hole. The amount paid to principal is the amount the loan balance is reduced by, and your equity (the part you own) is increased by.
For most mortgages, the amount going to principal will increase with each made payment, as the principal balance the interest is based on decreases. With each mortgage payment, you are one payment closer to having it paid off. Once it is finally paid off, all that money that used to be spent first on rent, and then on a mortgage, will be able to be saved.
Another problem with paying rent is that it is subject to change. It is a common practice to increase rental amounts for tenants when they extend their lease.
This is something else an owner can avoid by owning their own property. Although your taxes may go up or down, you will never be at the mercy of a landlord asking for more in rent.
This list was intended to summarize some of the main benefits of home ownership. While careful thought and preparation are required to make sure a purchase is the right decision for you, the benefits mentioned above are well understood to be beneficial to a consumer.
The post Benefits Of Home Ownership appeared first on Sun Mortgage Funding.
