Should You Buy a Home for Your College Student?

Many parents who are interested in real estate investing might consider buying a property for their child to live in during college. After all, your student can take care of your property, and you can even earn some equity from your ownership, right?

Not so fast. Many issues come along with owning a student rental, and you should really think them through before you get yourself a “tough and expensive” college lesson of your own.

 

Short-term ownership

Rule No. 1 of prudent real estate investing: Focus on long-term ownership. The longer the property has to accrue in value, the higher the chances it will be a wealth-building investment for you. How long will your child be in school? Likely only 4-5 years, and then he or she will move on. Are you then going to hold onto the property and rent it to other students each year going forward? Probably not. You’ll end up selling the property after only a few years. At a minimum, you won’t earn a dime and most likely you’ll lose money.

 

Lack of good deals

It’s actually very hard to find a good student rental real estate deal. A “good deal” means it will be cash-flow positive and provide a fair rate of return on your invested capital. Because many people think student rentals are a good money-making venture, and they like to brag about owning one, they drive up the prices and drive down investment returns. If it isn’t a good deal from day one, it will probably never be a good investment for you. So pencil out your deal first with conservative estimates of rents and expenses, and if you can’t get a fair cash-on-cash return investment, keep your money in other assets or find a rental property elsewhere — preferably in your city — that pays the bills.

 

Hassles of management

What’s more important: for your child to get good grades and secure a good job coming out of college, or for your child to get a lesson in property management? All real estate has hassles and issues. Do you want your son or daughter worrying about broken pipes, collecting rent and dealing with neighbors instead of studying? What about when the A/C or heat breaks during finals and the tenants/roommates aren’t happy? Let students be students. They have enough other stressful issues on their minds to deal with than an overflowing toilet.

 

Summers and insurance

Many student rentals are vacant over the summer, and most insurance expires if your property is vacant longer than 30 or 60 days. So you will need to buy some extra insurance in addition to not collecting any rental income during that period. Most people don’t do this and go without procuring the right insurance. You’d better hope nothing happens!

The bottom line: Let local property ownership companies deal with the student rentals. It’s a lot less expensive and much less hassle for your child to rent someone else’s property than for you to handle one on your own.

My House Was Mapped Into a High-Risk Flood Zone: Now What?

You’ve probably heard the story: The Federal Emergency Management Agency mapped the house of someone you know into a high-risk flood zone, requiring the owner to pay thousands of dollars in flood insurance rates. Maybe you’re that homeowner, and the back corner of your yard now measures slightly below your neighborhood’s base flood elevation.

What do you do now?

First of all, don’t panic. The U.S. government recently took steps to soften the impact of many of the most drastic proposed changes to flood insurance this year. The Biggert-Waters Reform Act of 2012, by eliminating insurance subsidies in high-risk areas and through other measures, was designed to make the National Flood Insurance Program (NFIP) self-sustaining.

While the act remains in effect, President Obama in March signed the Homeowners Flood Insurance Affordability Act, which modifies key parts of Biggert-Waters to make for a more gradual transition toward sustainability. However, if you received a letter from your mortgage lender indicating the need to purchase or pay higher premiums for flood insurance, you should take it seriously.
Here are few ways to reduce your risk of flood damage and lower your payments.

 

Learn the terms

Whether you already have flood insurance or are new to the coverage, it helps to know the important terms:

• Base flood elevation (BFE): The elevation at which there is a 1 percent or greater annual chance of flooding. The higher your house’s elevation sits above the BFE for your neighborhood, the lower the flood risk. FEMA uses this elevation to determine your home’s risk.
  
• Special flood hazard area: If you’re just now finding out that your house is high-risk, your lender probably sent you a notification that it’s in a special flood hazard area. This area is based on the base flood elevation and can determine your flood insurance rates.

 

Check the map

If you believe there’s been a mistake regarding your house’s placement in a flood zone, take a look at FEMA’s maps. The agency’s online map service center can provide you with the basic information you need. It will tell you the base flood elevation for your house’s location. Use these maps generally, as they aren’t the official Flood Insurance Risk Maps that FEMA uses to determine risk.

 

Get a professional opinion

If you intend to challenge your house’s position on the flood map, you must first send a Letter of Map Amendment request to FEMA. After that, you should hire a licensed land surveyor to perform an elevation survey and determine the official risk for your property.

 

How to reduce the amount you pay

If the challenge fails and your house remains within the boundaries of a high-risk flood zone, purchasing flood insurance is a mandatory requirement for most mortgage holders. There are ways, however, to cut your monthly premiums:

•  Purchase a Preferred Risk Policy: Most preliminary maps take 6 to 12 months to take effect, according to the National Flood Insurance Program. FEMA recommends purchasing a Preferred Risk Policy during that time, which can provide coverage at a lower cost. The premium for a Preferred Risk Policy can reach as low as $128 per month, according to FloodSmart.gov. The NFIP recently extended eligibility for Preferred Risk Policies to apply to properties remapped on or after Oct. 8, 2008.
  
  
• Grandfather in old rates:
  • If you buy a Preferred Risk Policy before the new maps go into effect, you may renew your lower rates for 2 years. In the third year, you potentially can qualify for low-to-moderate risk rates instead of high-risk rates.
  • If you already have a flood insurance policy and the base flood elevation has increased in your area, your premiums could increase. Grandfather rules, however, allow you to use the earlier elevation to calculate rates, as long as you’ve maintained continuous flood insurance coverage on the property.
  • You also can use grandfather rules if you can prove that your home was built in compliance with the flood map that was in effect at the time of construction, according to FloodSmart.gov. 

 

Enjoy your protection

Your flood insurance rates might increase as a result of remapping, but at least you’ll have coverage if the worst should happen.

Even homeowners in lower-risk areas should consider purchasing protection and could qualify for Preferred Risk Policies. In fact, 20 percent of flood insurance claims come from moderate-to-low risk areas, according to the Insurance Information Institute (III).

The average flood insurance claim from 2008 to 2012 was nearly $42,000, according to FloodSmart.gov, so purchasing coverage isn’t a bad bet. Even if your lender doesn’t require you to purchase flood insurance, flood protection could save your house from high water and you from taking a financial bath.

Father’s Day Idea: Organize the Garage

Commonly used as the family dumping ground, the garage is undergoing a revival as a functional workplace. Installing a garage storage system that frees up some of this space can have the same effect as adding a room, and it’s a good way to increase your home’s value. Here are three tips to make the most of your garage:

 

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Why You Shouldn’t Rush Through the Final Walk-Through

The final walk-through in real estate was designed so that the buyer could literally “walk through” one last time before the closing. From time to time, a buyer and seller will have negotiated any number of fixes during escrow. The walk-through gives the buyer an opportunity to make sure all the agreed-upon work has been done to specifications and that everything is in working order.

Sometimes, buyers are so excited to close that they quickly whisk through the walk-through without taking time to inspect the property. This can lead to small issues once the buyers take ownership. On the other hand, the final walk-through can raise both positive and negative emotions during this final part of the sale process.

It’s smart to think things through and take the walk-through seriously. Don’t see it as simply checking a box.

Here are some things buyers should consider before and during their walk-through.

Don’t do the walk-through the day of closing
A walk-through can uncover repairs that need to be made, but that you didn’t know about before. If you do the walk-through the same day as the closing, there may not be time to get things remedied. It’s not uncommon for two walk-throughs to happen. The first identifies some issues for the buyer, and the second makes sure those issues were addressed.

Check the power outlets
Nowadays with mobile phones, it’s easy to plug a phone in and out of all of the outlets to make sure the electricity works. You want to avoid moving in all your stuff, only to realize some outlets don’t work and you lack light in a bedroom. Bring your phone and charger to the walk-through and test all the outlets. It’s quick and easy.

Be on the lookout for the sellers’ leftover junk
Sellers are notorious for leaving junk behind, so take the time to check the garage, attic and under the deck. The sellers may just assume you want their old paint cans or a propane tank for a future grill. In fact, they should leave the place completely empty. At times some left-behinds, such as the paint, can be toxic or require special provisions for disposing. (In one situation, a seller left behind all kinds of used oil that needed to go to a certain, state-approved car repair shop to be disposed of properly.) These unwanted items become yours after you close.

Be prepared for a surprise
Often times, buyers fall in love with a home that’s full of furniture, art and belongings. They see it as a home and remember a warm feeling. Fast-forward to the close of escrow and you’re faced with an empty home, which can feel cold, sterile or hollow. Buyers are often surprised by how they feel entering an empty home. Not only is it absent any furniture and “stuff,” but sometimes an empty home shows its imperfections, too. The sun may have slightly bleached floors, showing the outline of a rug. There may be carpet stains or holes in the wall from a flat screen TV or paintings. An empty home tends to show poorly, so prepare yourself before the walk-through.

The journey toward homeownership is often a long one, filled with lots of excitement and ups and downs. The final walk-through is one of the very last steps of what could be a multiple-year process. Consider the walk-through in advance and prepare for it mentally, emotionally and physically. Know what you want to look for, have a checklist and keep your emotions and feelings in check. Doing so will make for a smooth ride to the close of escrow.

How to Protect Your Outdoor Furniture (and Save Money)

When choosing outdoor furniture for a garden room, outdoor kitchen or multi-level deck, some consumers prefer quality tables, chairs and assorted pieces that become an investment to protect. Quality furniture in good condition with good bracing can be refurbished at a substantial savings over replacing it, while less-costly furniture may be refurbished to avoid adding to the growing waste stream. In either case, the best way to keep outdoor furniture looking its best is regular maintenance.

Outdoor furniture comes in many materials, from exotic woods to metals to recycled high-density polyethylene to plastic, so check the guide that accompanied your purchase for how to care for your specific product. Most importantly, keep it clean and immediately wipe up spills or deposits. Here are some other tips for maintaining your outdoor furniture:

Replace materials or parts

Exposure to the sun, rain, pool, suntan lotions and body oils, and the outdoor casual lifestyle eventually take their toll on outdoor furniture. The vinyl strapping on chairs and lounges eventually fade, crack and break. Slings might rip or discolor. Glides can disappear.

When it comes to repairing or replacing materials or parts, there are options. Replacement parts are available that include anything from vinyl strapping to tires, custom-made slings to end caps, even chair glides to keep bare metal ends from scratching decks.

Chair Care Patio, based in Dallas, TX, is one business that caters to those caring for their outdoor furniture. “Most people are not aware that they can refurbish their lawn furniture,” says Lelia Brown. “Before I came to work here, I threw away a chair because I did not know you could replace the sling.”

Brown says Chair Care Patio is both a traditional business that offers patio furniture repair and refinishing at its Texas store as well as a web-based parts and materials business. Brown says the web-based portion of the business has grown astronomically.

Through do-it-yourself instructions on supplier websites, such as Chair Care Patio’s, customers can learn how to measure, cut and install vinyl straps, for example, using common installation methods such as single wrap, double wrap or slotted conversion.

Freshen up the finish

Wrought-iron:

A fresh coat of stain or paint can work wonders in updating outdoor furniture. For wrought iron, touch it up with a rust-resistant primer, such as Rustoleum’s, whenever bare metal is exposed and it can look good for years. But if the rust has spread, consider having the piece sandblasted and powder-coated for a new look.

Aluminum:

Aluminum furniture will resist rust but is subject to pitting that can dull the metal. Wash it frequently and wax it with automobile wax to keep it in good condition.

Wood:

Most wood outdoor furniture will benefit from a mild scrubbing and rinsing at the start and finish of each season. Many pieces also work best with an annual sanding and a fresh coat of protectant, such as a good outdoor varnish, to prevent drying or cracking. Maintenance will vary depending on the type of wood.

Wicker:

Today’s wicker furniture comes in both natural and synthetic. Organic natural wicker is best kept for short uses outside and in the shade. Its synthetic cousin of vinyl or resin better handles exposure. Rinse and scrub away dirt to keep a good-looking synthetic wicker surface.

Bamboo:

Bamboo, another popular natural material, is fine on a covered porch or deck but tends to split and separate if left out to weather. Keep it looking good by bringing it inside when not in use.

Plastic:

Putting a new face on plastic furniture has had its problems. It’s easy to scratch the surface when trying to clean it. Applying paint often results in a coating that beads up or peels away after it dries. Instead of sending a good but faded piece of plastic furniture to the landfill, there are options.

Krylon® Fusion for Plastic® is one. This is a no-prep, super-bond paint that works on most plastics as well as several other surfaces. Available in a variety of colors as well as “textured shimmer” shades and a clear “Mystic Prism Effect,” it is dry to the touch in 15 minutes or less and cures to full-chip resistance after seven days.



Care for fabrics
Keep cushions, pillows and other fabrics clean, smelling and looking fresh. Mold or mildew can set in older, cotton-batting fillings. Fabric colors can fade.

Among the options to consider are a fabric-protecting spray finish, such as Krylon’s Outdoor Spaces® UV Fabric Protector. It can be used on canvas — and everything from tents to table napkins — to keep colors or patterns looking good longer and water resistant.

Another option is to replace faded and smelly cushions and pillows with upgraded items. New fabrics include Sunbrella® that is made from acrylic fiber. It resists sunlight, mildew and rot and is coated with a soil- and stain-resistant finish for easy cleanup. New cushions can be filled with high-density, all-weather foam or fiber filling. If the cushions have zippers, remove the core for cleaning or replacement.

Dust furniture before washing in a solution of mild detergent and water. Avoid using ground water that may contain sulfur, iron oxide or other minerals that can stain the furniture. Rinse and dry thoroughly.

Extend the lifespan

Here are a few quick tips for how to prolong and recycle your outdoor furniture:

Wipe up any beverage or food spills right away.
Wipe off furniture after it rains.
Remove any tree or bird deposits as soon as possible.
Remove any residue from suntan lotions and body oils that can stain or accelerate the breakdown of materials. Have towels available to provide an easily cleanable barrier between chairs and their occupants.
Store or cover furniture that doesn’t stand up well to constant exposure, such as bamboo.
Check all bolts and screws and tighten any that may be loose.
Replace broken, rusted or missing pieces.
Use a silicone lubricant on all wheels and hinges.
Bring the furniture inside during harsh winter weather or store under a breathable cover.
Look underneath chaises for damage to the glides from dragging. Replace if they are worn out or missing.
Aluminum is one of those great recyclable items. Strip this furniture to the aluminum only, removing webbing, hardware (if not aluminum) and glides. Recycled aluminum is made into cans, pie pans, small appliances and lawn furniture.
If the furniture is still serviceable but your design ideas have changed, donate the item to a local charity that sells used goods.
If the lawn furniture is made from No. 2 plastic, it also can be recycled into other durable products.

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Karen Davis Real Estate Does It Again!

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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