Should I Pay Off My Mortgage Early or Invest the Money in Rental Properties?

Many financial experts advise people to pay off their homes as quickly as possible to reduce debt.  They refer to debt as a lurking monster that will eventually destroy us if we don’t get rid if it as quickly as possible.  I could not disagree more, and I have found many others that agree with me including Ben Stein!  Debt allows investors and businesses to create much greater returns on their investments than paying all cash.  I have discussed how leveraging your money to buy rental properties gives you much higher returns than paying cash on rental properties here.  Rental properties also generate much better returns than most consumer debt including car loans.  I feel as long as my returns on my investments are greater than the debt used to fund those investments then I like that debt.  When you ask yourself if you should pay off your mortgage early, make sure you look at all the numbers first.

Here is my complete guide to investing in long term rental properties which details how debt allows me to get over 24% cash on cash returns on my rental properties.

Home Loans

Let us take a look at your personal residence first.  Most people are able to get a very low interest rate and put little money down on their personal residence.  Right now interest rates are below 4% on an owner occupied, 30 year,  fixed rate loan.  This is really cheap money!  If you can find an investment that gives you better returns that that 4% interest rate then it may make sense to invest that money and not pay your mortgage.  For instance, when I invest in rental properties I make over 20% cash on cash return and that does not factor in tax advantages, principle pay down or appreciation.  It makes no sense to me to pay off my house quickly when I have such a low rate locked in for 30 years and I am making so much on rental properties.  I pay the absolute minimum payment I can on my personal home mortgage and save that money to buy more rental properties.  If you have nowhere else to put your money besides a CD or bank account that pays less than 1% interest than yes, it would make sense to pay off your mortgage quickly.  If you are willing to work a little harder and find an investment with a better return than your mortgage,  stop paying extra towards your house payments and invest!

Auto Loans

The experts will also tell you how horrible it is to have an auto loan.  Their reasoning is that debt on any item that will depreciate is bad, but I completely disagree with this as well.  I look at it as a numbers game, why would I care what my debt is secured against as long as the debt allows me to buy more rental properties.  The rental properties provide a much higher rate of return than the auto loan interest rate.  I have my current car loans locked in for 6 years at less than 3% interest.  I do not pay one cent extra on them, because I want as much cash as possible available to buy more rental properties.  I am not advocating purchasing the most expensive car you can, because you still want to save as much as possible to invest with.  If you have the cash available to buy a car, why not finance the car instead and invest that cash in something else?

Credit Cards

There are even some investors who will use credit cards to buy properties!  It may make sense to use a credit card to buy rental property if the return from the rental is higher than the rate on the card and you have no other options.  While I don’t use this strategy, I’m not against it either.  If there is a deal you can’t pass up and cash availability is holding you back, be creative to make it work!

What about the security of paying off my mortgage?
Don’t get me wrong, I am not condoning racking up debt to go on vacation or buy furniture.  A lot of debt can be very, very destructive if you have no assets providing you cash flow or a return on that debt.  People will still ask; “what happens if I lose my job and I have all this debt I can’t pay off?”  I think you are going to be much better off with cash producing properties than if you had paid off your primary house.

Let’s assume you have a 200k house that you have a $180,000 mortgage on.  If you put all of your extra cash into the mortgage to pay it off early you will eliminate your mortgage payment and save about $900 in principal and interest.  We will assume you paid about $150,000 extra into your mortgage to pay it off early.  I could buy five rental properties with that cash which would cash flow at least $500 a month on each property.  I am making $2500 a month off those rentals, a lot more than the $900 I would be saving on my mortgage.

Not only I am making more money each month with rentals, I also see an immediate return on my investment.  If you accelerate your mortgage pay off, you won’t see that $900 savings until the mortgage is completely paid off.  With rental properties I start seeing immediate cash flow as soon as I rent the first property.

If you are choosing the accelerated mortgage payoff route and lose your income before your house is paid off, you still have the same mortgage payment to make.  The only way to get that money back that you invested in your home is to sell your house or refinance.  You may not be able to refinance with no income and your only option may be to sell.  If you lose your job and you have rental properties you still have income coming in from the rentals.  You could sell a rental property to get immediate cash or refinancing a property would be much easier because you are still showing some income from the rentals.

On the surface it may seem like paying off your mortgage faster will provide more security, but there is actually a much better chance of making it through rough times if you have rental properties producing income to back you up.  I know I would much rather sell off a rental property in bad times than my personal house.

New Information on paying off your mortgage early
I wanted to add this paragraph after hearing from a follower of the blog.  She paid off her mortgage and then decided to retire early and focus her time on investing in Real Estate.  It was a lot of hard work saving and diverting her money towards her mortgage and it felt great when it was finally paid off.  Now that she is actively investing in Real Estate she wanted to tap into the huge amount of equity in her house.  Since she has no job and very little income at this point, she can’t find a bank to refinance her house.  Even though she did what the experts told her to do and worked her butt off to pay0ff her mortgage, she can’t access that money unless she sells her home.  This is another reason to think twice before you start sinking all of your extra money into your principle home.  If she had bought more rental properties with that money instead of paying off her mortgage, the bank may be willing to loan to her, because of all the rental income coming in.

Conclusion
Investing your money in Real Estate, instead of paying off your consumer debt quicker will leave you thousands and thousands of dollars ahead.  I feel rental properties provide much more security as well and give you more options if you were to lose your income.  Just because the experts tell me to do it, doesn’t mean it makes send to pay off my mortgage early.  Think about where you are putting your money and what kind of returns you are getting.

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3 Myths About Home Staging

There’s been a lot of talk about staging a home to sell these days because for the first time in a long time, sellers are getting above asking price offers! Making the most money on the sale of the house is the name of the game, and the agents who can do that for a neighbor/friend becomes the agent of choice.

Unfortunately, there are quite a few myths about home staging that need to be corrected…

Myth #1 – Staging is mostly “decluttering.”

FALSE! Staging is about “styling for the photo shoot.”

While removing the extraneous in a home in order to give the seller a view of the architectural details is a part of staging, completely clearing off the kitchen counters, dining tables, and coffee tables is most definitely NOT what a good home stager recommends.

Listing photos online often show kitchens, for example, with completely cleared countertops and that are overall lifeless.

But an expert home stager works with the home’s integrity to capitalize and merchandise the space into something that will resonate with the buyer online first — so they’ll then want to see the home in-person.

Myth #2 – Staging is mostly for vacant homes.

FALSE! Staging is more critical in occupied homes because it costs a lot less and has a huge impact.

Myth #3 – Staging is about neutralizing and painting all the walls beige.

FALSE! Staging is about working with what the seller has, so that the more expensive cosmetic changes don’t need to done.

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The Ins and Outs of Homeowners Associations

About 20 to 30 percent of home buyers purchase properties within common-interest developments, commonly referred to as homeowners associations (HOAs). Before weighing the pros and cons of owning a property in an HOA community it’s important to understand what HOAs are, how they are governed and how they affect a homeowner’s bottom line.

Here are some basic facts home buyers should know.

What is a common-interest development?

In a common-interest development individual owners typically share some parcel and the buildings on that parcel as co-owners. A common-interest development would generally be a condominium building, a town home community or lofts, or could be a single-family home community, private neighborhood or other similar arrangement. Buyers in the development or building agree to live by the community rules and regulations.

These regulations mean that as an owner you have certain rights and restrictions as outlined by development documents commonly called CC&Rs (covenants, conditions and restrictions). The CC&Rs govern your allowed ownership, use and behavior at the property —  everything from use of your unit to parking restrictions, insurance, architectural rules, paint colors, storage of RVs or boats, pets, allowed inhabitants and more. These rules and regulations can be changed, subject to approval by a majority of the owners.

How are HOAs governed?

To interpret and enforce the rules and regulations, most HOAs elect a board of directors who follow the regulations of the community and make prudent financial and operational decisions. As an owner, you get to vote for the board members (this process is usually outlined in the community bylaws).

However, most owners in a typical community don’t go to board meetings and don’t get involved in the operations of the community. And that’s fine, as there’s no requirement for an owner to vote or otherwise be involved. Most owners only show up to meetings when HOA fees are raised or if they are affected by a particular issue. Keep in mind though, if you have an issue or disagree with a restriction in your community, you should attend the board meetings and work with the HOA toward finding a solution that the majority of owners can agree with.

Are there financial risks with HOAs?

HOAs are nonprofit organizations, but their complex financial and legal operations can sometimes cause owners significant financial pain in the form of unexpected dues increases and special assessments. Unfortunately, few buyers know how to evaluate HOA documents ahead of time, which could help mitigate the considerable risks.

Many people don’t like having to follow rules and decide to avoid living in an HOA-governed community altogether. But don’t forget, the HOA makes sure your neighbors don’t park cars in their front yards and/or that a neighbor doesn’t paint a house pink or carry out other nuisance behaviors — any of which could easily occur in an area not governed by an HOA.

5 Things Sellers Do That Can Keep Your Home From Selling

After years of being stuck on the sidelines due to poor market conditions, millions of homeowners are dipping their toes back in the water as they consider selling their homes. With home values on the rise and banks easing lending standards, it’s quite possible that a homeowner can finally be in a position to sell their home, and maybe even buy one at the same time.
Though the market has turned, it’s not necessarily as simple as handing over the keys to your agent, doing an open house and getting some offers. To get top dollar and move on, sellers still need to work with a good local agent early on. A good agent is looking out for the client’s best interests at every stage of the game — they know it’s not over until it’s over.

Ideally, the seller-agent relationship should remain strong and positive throughout the process. But sellers can sometimes get in the real estate agent’s way, and in doing so, diminish their chances for a successful sale at the best price and in the shortest amount of time. Here are five ways sellers often drive real estate agents nuts.

1. You think your property is unique and therefore worth more money.

Your home is no doubt very special to you. You’ve built memories, tracked major life events and used it as more than just a place to lay your head at night. When it comes time to sell, it’s often hard to think of your home as a product on the open market. Because of your emotional attachments to it, you may feel your place is unique, which you then equate to being more valuable.
If you find yourself resisting your agent’s pricing advice, take a step back and consider if you’re absolutely ready to sell. Resisting may be a sign you’re not yet ready to emotionally detach. Keep in mind that an overpriced home, even in a strong market, will ultimately sell for less than a home priced well from the start.

2. You don’t clean up the home.

When your home is on the market, it needs to be ready for a showing on a moment’s notice. That means you need be “seller aware” 24/7. If you’re serious about selling, it’s par for the course. Make a plan to remove Fido’s saliva-stained tennis ball from the couch or Susie’s Barbie doll off the floor. Before you list, move away the stuff you won’t need until you settle into the new home. Make a special space in a closet or storage bin for the day-to-day stuff that could turn off potential buyers. Even though Inventory is limited and buyers are out in full force in many markets, homes that don’t show well may not get the top dollar they deserve. Who wants to leave money on the table?

3. You stick around during an open house.

There’s a reason why real estate agents don’t want sellers hanging around when potential buyers arrive. While you may be perfectly friendly and agreeable, your presence can alienate buyers or make them feel uncomfortable without even knowing it. A buyer wants to dig their feet into their potential new home. That means they need to feel free to open closets, poke around in cabinets and make comments to their partners or kids. Your presence prevents them from getting to know your home and can backfire. If you’re desperate to know what’s going on at an open house or how buyers are responding, make a plan with your agent to show up anonymously during the open house.

4. You hold out for extra money at the last minute.

A home sale negotiation can be a rocky road, even in strong markets. If you sense the market is in your favor, you may second-guess the list price if you see activity quickly, particularly in the form of multiple offers. It’s a great and powerful feeling. But imagine if, in an attempt to squeak out an additional $3,500 from a serious buyer, you pit them against a not-so-great buyer and you lose both? It happens, much to the dismay of the listing agents who advocate working with the best buyer and not necessarily the best “offer.” In other words, you should always be thinking of the big picture, which isn’t always the same as the biggest offer.

A serious buyer is working with a good local agent, has a bank pre-approval, has seen the home on multiple occasions and demonstrates a high level of experience in the market. A not-so-serious buyer may submit blindly after only seeing your home once, may be unrepresented, or represented by a not-so-well known or respected agent.

5. You don’t clean up before turning over the keys to the new buyer.

Imagine yourself as a future buyer. Would you want to walk into your new home and find 12 cans of old paint in the garage? Or an old baby carriage in the attic? Clean your home and deliver it in good condition to the new buyers. Not only will they appreciate the gesture, but also if you need them in the future for things like forwarding mail or packages, you’ll have them on your side.

Making the Most of an Open House Visit!

 

For the most part, open houses are just that — open. They make it possible for anyone to see a property in a certain time period, without an appointment or even being a very serious buyer

Open houses are the gold standard in real estate. They’ve been around for decades and will be ingrained in the buying and selling of homes for years to come. But as a buyer, are you making the most of your open house visits?
Here are some best practices for buyers at all ends of the home-buying spectrum.

Use the open house to learn the market without committing

New buyers should leverage the open house opportunity to get a feel for the market. In today’s world, using online search tools, mobile apps and the open house, a buyer can start to get a feel for pricing and the market before committing to an agent. Most importantly, open houses are some of the best ways for buyer and agent relationships to start.

You don’t have to sign in (but don’t be rude)

The biggest fear of some newer buyers is that a real estate agent at an open house will be all over them, ask for their contact information and then start harassing them for the next three weeks. It does happen, but it’s also common courtesy to at least recognize and say hello to the agent at the open house.  Don’t forget, in addition to trying to sell the home for her client, for safety reasons, the agent is keeping a look out for who is coming and going. It’s polite to say hello and introduce yourself to the agent, but you can also politely decline to sign in.
If you’re an active buyer, you should make yourself known to the agent. Let the seller’s agent know who your agent is and don’t be afraid to express interest. When it comes time to review an offer with a seller, listing agents like to put a face to a name.

Watch the other buyers

You can tell a lot about the activity and marketability of a home by watching the other buyers. If you observe a lot of people walking in and out quickly, the home probably has some issues. Are the buyers hanging around, asking questions of the listing agent and huddling in the corner talking to their spouses or partners? If so, it could be a sign this is a well-priced and “hot” listing. If you’re interested too, observing other buyers at the open house could help you learn about the competition.

Ask the agent questions

The real estate agent is there for a reason. It’s his job. If he is the listing agent, ask him questions. He is a direct line to the seller. He should know more than anyone about the property and the seller. Your agent can funnel your questions to the listing agent. But if you’re there, ask away. Watch the agent’s facial expression and reaction to your questions. If it’s a competitive market, ask questions such as: “Why is the seller selling?” “Is there a certain day to review offers or have you had a lot of showings?” In a slow market, ask how long the property has been on the market and what the seller’s motivations are. A good agent will engage you because it’s good for his seller.

Be open to meeting your future agent

When considering a new doctor, lawyer or CPA, you don’t get the chance to see them in their element until you’ve decided to work with them. Not true for real estate agents. Some of the best buyer/seller/real estate relationships begin at open houses.
A good agent is wearing two hats at the open house. In addition to watching the serious buyers and getting feedback for the seller, an active agent is also looking to interact with future clients.
Face to face, informal and relevant, the interaction with an agent at an open house is important. You can get a feel for a person just from a brief meeting. If you sense the agent could be someone you could work with, ask some open-ended questions, such as “How’s the market?” and “What areas do you cover?”

Why open houses have been around for decades

At any open house, there are people at every stage of the home-buying game, from just testing the waters to looking at homes daily, making offers and working closely with an agent. For someone new to the market, it’s helpful to know the best practices for visiting open houses and interacting with the real estate agent. For more experienced buyers, the open house is an opportunity to make a second or third visit, getting a closer look at the details and uncovering things you may have missed earlier. There are lots of reasons why open houses have been around for decades — and why you should take full advantage of them.

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Be ready to buy your first home

First-time home buyers have it tough. The supply of homes for sale is tight, and lenders are tightfisted. Student debt, at an all-time high of nearly $30,000 per grad, is getting in the way of saving for a down payment, says David Stevens, president and CEO of the Mortgage Bankers Association. But it's a great time to get your foot in the door.

"Interest rates remain the envy of even your grandparents," says Keith Gumbinger, vice president of mortgage publisher HSH.com. First, make your finances sparkle.

THE TURNING-POINT CHECKLIST

12 months in advance

Make sure the time is right. Use Trulia.com's rent or buy calculator to see if you'd really come out ahead, based on loan rates, taxes, and where rents and prices are headed in your area. Nationwide it's 38% cheaper buying vs. renting.

Clean up your act. Devote this year to saving money and paying down debt. You'll need at least 3.5% down for an FHA loan, or 10% to 20% for a conventional mortgage. Lenders also like to see job stability, so settle in for now.

Learn what you like. When a home catches your eye -- a listing, say, or a photo -- pin it to a board on Pinterest. Or try Swipe, a new app from the site Doorsteps, which lets you browse listing photos and mark them pass or save.

Six months out

Look better to lenders. To boost your credit score, order your free credit reports at annualcreditreport.com and fix any mistakes. Pay bills on time, chip away at credit card balances, avoid new debt, and don't close any accounts or apply for new credit. The average credit score for approved mortgage applicants is 755.

Figure out what you can buy. Use an online calculator like the one at Zillow.com to estimate how much house you can afford based on your income, savings, and debts. That'll help you research homes and drill down on costs.

Forecast future bills. With an idea of how big a house you can buy, you can do a more detailed budget. Scan listings for property taxes on homes you like. Get a homeowners insurance quote at Insweb.com. Call local utility companies for the typical bills. And tack on 1% of the home's value for yearly maintenance.

Three months out

Pick your loan. Fixed mortgage rates, now 4.4%, may edge up to 5% this year, forecasts HSH.com. If you are confident this is a starter home, you can save with a 7/1 adjustable-rate loan, now 3.5%. The risk: You end up staying longer than seven years and rates rise sharply. Most -- 92% of mortgage borrowers -- opt for fixed-rate loans.

Prove you're a serious shopper. Based on your income and credit, a bank will give you a mortgage pre-approval. "It's the No. 1 thing you want in your back pocket when you go shopping," says Svenja Gudell, an economist with Zillow.

Even better in a hot market: Pay a few hundred to go through underwriting upfront.

Mortgage Pre-Approval 101

Getting pre-approved for a mortgage gets you one important step closer to securing the home you love. Pre-approval shows sellers and real estate agents that you are a serious buyer, it proves you are credit-worthy and in competitive markets, it helps you to move fast on the house you want. Many times, sellers will not even engage with a buyer if they are not pre-approved.

See other reasons why it’s important to get pre-approved:

 

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Rain or shine...KAREN DAVIS REAL ESTATE does it again...GONE!!!!