position realty

Position Yourself For Success

How Lenders Evaluate the Self-Employed Borrower

One of the primary factors when issuing a loan approval is to make sure the borrowers can afford the new mortgage payment along with other monthly credit obligations. This is accomplished by comparing monthly payments with monthly income.

For someone who receives a pay check on the 1st and 15th it’s relatively easy to figure out how much money someone makes. But for those who are self-employed and make money when their clients pay their bills, it’s not so easy. Lenders do have a method to properly calculate qualifying monthly income for the self-employed, they just take a few extra steps.

These borrowers must show proof they’ve been self-employed for at least two years. For those who receive a regular pay check from their employers, they too must demonstrate they’ve been in the workforce and receiving a regular pay check for at least two years. This is one of the reasons lenders ask for the last two years of W2 forms.

But self-employed folk don’t have W2s, they have 1099s sent to them by their clients. Self-employed borrowers can demonstrate they’ve been at it for at least two years with copies of their federal income tax returns. Borrowers will submit these returns and also sign a form called the IRS 4506-T. The 4506-T is an authorization form that allows the lender to independently receive copies of tax transcripts for the last two years. Upon receipt, the lender compares the returns provided by the borrowers with the information provided directly by the IRS.

Borrowers will also be asked to provide a year-to-date profit and loss statement. To calculate qualifying income, the lender will average the two years of self-employed income plus the year-to-date amount. The result is the qualifying income lenders use when evaluating a loan application for someone who is self-employed.

When reviewing the year-over-year income, the lender also wants to see some stability. If year one the income shown on the tax returns is $60,000 and in year two the income is $70,000, the lenders will average these two amounts along with year-to-date totals. On the other hand, if the income is $70,000 in year one and $60,000 in year two, that can be a red flag. In this example the income dropped by more than 10% in one year.

Is the business doing okay? Does the P&L also show declining income? In this instance, the lender will want an explanation for the declining income. If there is too much of a decline, the lender can make the determination the income is not likely to continue into the future. The continuation guideline is typically for at least three years.

Note, it’s a judgment call by the lender because no one can see that far into the future but if the person has been self-employed for the minimum amount of time and the business has demonstrated not just stability but growth, the lender can reasonably determine the business and the income that goes along with it will continue.

Lenders understand that self-employed income will be received at different times during the month. That’s why an average is used. And, more importantly, it’s not how much the business is bringing in this month or last or even this year. If you’re self-employed, keep this in mind. And if you’re not sure about your qualifying income, it’s time for a phone call to your loan officer.

Position Realty
Office: 480-213-5251

3 Ways to Reduce Your Closing Costs

Most loans today require some amount of a down payment. But they all require closing costs. There are lender fees, common ones are loan processing and underwriting fees, and there are non-lender fees. Non-lender fees include items such as an attorney fee or title insurance premiums. It’s the non-lender fees that can really add up as mortgage loans require services and documentation from multiple players in the real estate world.

Saving up for a down payment is probably the biggest challenge, especially for first time home buyers, but closing costs also need to be addressed. Here are three ways buyers can reduce or eliminate these costs.

The first way is to have your lender quote you an interest rate that provides a lender credit toward your closing costs. When your lender quotes rates and fees to you, you’ll get a range of rates from lower to higher. Lower rates will require upfront interest in the form of a discount point. One discount point equals one percent of the amount borrowed. On a $300,000 loan, one point is then $3,000.

For example, if your lender offers 4.25% with no points on a 30 year loan you might also be able to get a 4.00% by paying one point upfront. The lender really doesn’t care if you pay points or not, it’s completely your call. You have the option of paying interest upfront in the form of a point or you can pay the interest over the term of the loan without paying a point.

If you take that 4.25% rate one step further, say to 4.50%, the lender may offer a one point credit. Your monthly payment goes up by a little, but you also saved on closing costs. On that same $300,000 30 year loan, the 4.50% rate gave you a $3,000 credit at the settlement table. There is some math involved to determine which rate is best in your situation and your loan officer will walk you through the process.

Another way to reduce your closing costs is to have the sellers pay them for you. This involves you and your real estate agent making an offer that asks the sellers to pay for all or some of your fees. Your offer might include verbiage that asks the sellers to pay a certain percentage of the sales price, say 1% or 2% of the sales price or you might ask for a specific amount, such as $3,000.

Different loan programs place certain limits on how much the sellers can pay so you’ll need to check with your loan officer before making the offer. Most such limits are rarely reached however. The maximum seller contribution for a VA loan for example is 4.0% of the sales price. Taking a $300,000 sales price would then provide up to $12,000. Closing costs are nowhere near that.

Finally, if the sellers decide to decline your request, you can adjust the sales price upward. If the sales price is $300,000 and closing costs are $3,000, you can offer $303,000 while then asking the sellers to pay $3,000 of your costs. The sellers net the same amount at the closing table and you don’t have to come up with an additional $3,000 for closing costs. One potential issue with this method is making sure the property will appraise at the higher amount, but a one percent increase usually won’t cause any problems. And yes, when making a higher offer that also means your loan amount will also go up the difference in monthly payment is barely noticeable.

Closing costs will need to be addressed just as a down payment needs to be. Your loan officer will provide you with an initial cost estimate that will generally match up with your final settlement, so you’ll know what to expect. You can adjust your rate upward, have the sellers pay for them as part of your offer, or increase your offer slightly to include an amount reflecting your expected settlement fees.

3 Things to Consider Before Investing in a Rental Property

Having a rental property can be a great investment. Not only can it appreciate, but many times the rent you receive from tenants will also cover most (or all) of the mortgage.

Of course, it’s not exactly passive income. You’ll probably be managing renters, hiring yard care and cleaning, and taking care of repairs. Even if you hire a management company, you still need to ensure that these responsibilities are covered.

It’s also important to make sure the investment property you choose sets you up for success. There are a lot of mistakes to avoid. With that in mind, here are three things to consider before investing in a rental property.

Understand the Numbers

Before you invest in any rental property, it’s vital to understand both your financial situation prior to the purchase, as well as, the financial results after the purchase. Let’s look at each one.

Your Starting Financial Status

Before you even think about property investment, make sure you have everything you need—personally and professionally. Are you paying your bills easily? Are you in trouble with debt? Do you have enough cash flow for emergencies, insurance, and retirement for your personal life?

If not, now is not the time to invest in a rental property. You can’t buy a home and expect renters to arrive and bail you out of a difficult situation. You want to invest from a position of strength, not an area of desperation.

Once your personal life is in order, take a look at your savings. Do you have money for a down payment? Can you afford homeowner’s insurance, taxes, fees, and repairs? Remember, the more you borrow, the less your property will return to you.

The Rental Property Itself

Once you’re in the right position to invest in a property, you want to understand the numbers behind each purchase option you evaluate. You need to choose one where the return on investment is strong, to ensure that you will actually have an investment and not a burden on your hands.

Consider the location and size of the property to determine how much rent it will command. Think about whether quality tenants want to live in that area. Don’t overlook the repairs you’ll need to make if it’s not a turnkey property.

Compare your return against your expected expenses to make sure you’re receiving positive cash flow from the property over time. Think about taxes, fees, periodic repairs, and anything you’re paying to a management company. Don’t forget to factor in the mortgage payments as well!

Look for a Desirable Location

High-quality renters are attracted to top-of-the-line spaces. It may seem like a great deal to invest in a run-down property or an undesirable part of town because you can get it for a low price. However, even if the expected (lower) rent is a good return, the truth is that you won’t get quality renters.

You need to find an area that people want to live in long-term. Otherwise, your property will be a revolving door, and you’ll always be looking for new tenants. Each month of vacancy is money out of your pocket and dramatically reduces your return on investment.

Think about the good schools and transit routes in your area and look for desirable properties near those amenities. If you can find something near great restaurants, parks, and entertainment, that’s even better.

Of course, these better properties will cost more. However, knowing that you have a desirable location with long-term tenants will make the financial outcome worthwhile. You will also have the added benefit of appreciation. In more desirable areas, the value of your investment will appreciate much faster than in undesirable areas.

Consider Your Risks

Any investment has a risk of loss. That’s why there’s the possibility of a return! When you’re considering an investment property, you need to think carefully about the risks of renting and be prepared to handle them.

Vacancy is probably the most significant risk. Having months of no tenants means having months of no income, but your expenses will remain the same. It’s important to limit this risk as much as possible by choosing a high-quality property in a desirable area. You should also budget to have some additional cash available in case you face lean times.

You also want to be prepared for major repairs. Sometimes these can be planned, and sometimes they pop up out of nowhere. Having proper insurance and a reserve fund is vital.

Finally, you need to be ready in case you have difficult tenants. Some may pay late, promise to pay but never do so, or even need to be evicted. Handling these issues is time-consuming, so be sure to have a plan in place ahead of time.

Be Prepared Before You Invest

Having a rental property can be highly profitable if you do it well. Once you’ve taken these considerations into account, you’ll be able to tell if you have the right opportunity in front of you.

When you go in with a clear vision, you’ll set yourself up for success.

Position Realty
Office: 480-213-5251

Should You Invest in Short-Term or Long-Term Rental Properties?

The benefits of real estate investing are numerous. That’s why millions of Americans decide to go down that road. However, for someone new to the property investment business, choosing the right strategy can be daunting. That’s why we’ve put together the advantages and disadvantages of both short-term rentals and long-term rentals to help beginner investors decide on the best approach for them.

What Are Short-Term and Long-Term Rentals?

If you are new to real estate investing, you might be wondering about the meaning of short-term rentals. This is a relatively recent type of investment properties which get rented on daily or weekly basis. They have become particularly popular after the emergence of Airbnb.com in 2008 and other similar platforms afterwards. They are also known as Airbnb rentals or vacation rentals.

On the other hand, long-term rentals are investment properties which landlords rent out on monthly basis. Most tenants tend to stay in the same property for years before they decide to move to a new city or before they can afford to buy their own home. Long-term rentals are also called traditional rentals as this is the oldest type of rental properties.

Investing in Short-Term Rental Properties: The Advantages

1. Higher Return on Investment

The first and foremost benefit of buying an investment property to rent out on Airbnb or a similar platform rather than the traditional way is that this brings a higher return on investment. Data from Mashvisor, a real estate data analytics company, shows that the capitalization rate for short-term rentals exceeds the cap rate for long-term ones in the majority of big and small US housing markets. This is a very important factor as investors get into real estate to make money from properties, and the more money they can make, the better.

2. Control Over the Pricing Strategy

Vacation rentals are usually marketed on platforms which allow the host – that is, the investor – to set up a unique rental rate for every day. This allows you to customize your pricing schedule to account for the weekend and holidays as well as for the peak season and the off season. In this way you can decrease the daily rate when demand is slower to push your occupancy rate up and increase the rent when the market is hot in order to make more money. Consequently, you can maximize your rental income and return on investment easily and effectively.

3. In Demand

Airbnb rentals are very much in demand right now. Looking for a more welcoming and less pricey alternative to hotels, many business and leisure travelers decide to stay at short-term rentals, pushing the demand for them up. That’s excellent news from the point of view of real estate investors as more demand means that they can raise the nightly rate and still not compromize the occupancy rate. This, in turn, means higher return.

4. For Personal Use

The last major advantage of investing in a short-term rental as opposed to a traditional one is that you can use it for your own purposes. Because vacation rentals’ availability is marked on daily basis, you can decide when you want to stay at your second home with your friends and family and make those days unavailable for guests. In this way, you not only get to spend your holidays in a home-resembling atmosphere in your favorite location but also save money from expensive hotels.

Investing in Vacation Rentals: The Disadvantages

1. Legal Issues

The main drawback of this rental strategy is that short-term rentals are becoming illegal or at least strictly regulated in more and more markets across the US. The local authorities in many major cities such as San Francisco, San Diego, Los Angeles, New York, Boston, and others have issued regulations which basically eliminated vacation rentals for investment purposes there. Moreover, even if you invest in a location where Airbnb is legal at the moment, there is no guarantee that the situation will not change for the worse in a few months or years.

2. High Turnover

Unlike traditional rentals, vacation homes experience a very high turnover. Guests change every couple of days, which means that you have to clean, tidy up, and restock all the time. This increases your running costs and requires a lot of time and efforts. Being an Airbnb host can be equivalent to a full-time job. However, professional vacation rental management companies offer an affordable solution to this problem. They would take care of all aspects of your short-term rental business in a cost-efficient way, maintaining your income or even increasing it.

Investing in Long-Term Rentals: The Advantages

1. Stability and Predictability

The most important pro of buying a traditional rental property is that it provides a sense of stability and predictability. You have to put efforts into screening tenants well to find good ones and then you should take good care of your property, of course. But as long as you do that, you can expect your tenants to stay for a few years. This means that you will receive your rental income month after month without worrying about vacancies and turnover. This is an important consideration for real estate investors.

2. Few Legal Restrictions

The laws governing the relations between landlords and tenants vary from state to state. Some locations favor the former, while others favor the latter. Nevertheless, there are no places in the US real estate market where long-term rentals are absolutely illegal or where the regulations are so tight or restricting that they become prohibitive for investors. So long as you maintain your property, respond to your tenants’ reasonable requests and concerns, don’t discriminate against them, and pay your taxes diligently, you should be out of trouble.

3. Smaller Initial Investment

If you decide to rent out your investment property on long-term basis, you can decide whether to to furnish it or not. Furnishing an entire house or apartment from scratch requires thousands of dollars, no matter how good you might be at finding deals. You have to provide a comfortable and pleasant environment to be able to compete with other investors in the neighborhood. Nonetheless, you save yourself both money and time when you leave your property unfurnished. You don’t have this option with vacation rentals.

4. Minimal Ongoing Expenses

Similarly, long-term rentals entail lower recurrent expenses than short-term ones. As an Airbnb host, you have to replace the toiletries and water, change the sheets, and clean the property between all guests. Moreover, you have to periodically change any broken pieces of furniture and deal with more frequent damages to your property. Meanwhile, long-term tenants see your rental as their home, so in most cases they cause less damage than short-term guests.

Investing in Traditional Rental Properties: The Disadvantages

1. Difficult Rent Increase

Most states tend to protect tenants and make rent increases very hard. As a landlord, you will most probably face limitations on the frequency of changes in the rental rate as well as the actual size of the increase. This means that you might miss on an opportunity to make more money if demand in your market starts going up.

2. Bad Tenants and Eviction

Even if you apply the most scrutinizing screening process when choosing your tenants, you might still make a mistake and end up with bad tenants. However, most states put significant restrictions on the tools you have at your disposal to deal with them. When your tenants don’t pay rent, you have to give them a notice before you can take any legal action. If you suspect your renters are causing too much damage to your property, you can’t just walk in to check on the property; once again you have to notify them. Not to mention that a supposedly simple eviction process can take months in which you cannot make money from your investment property.

3. Suboptimal Return on Investment

As mentioned above, short-term rentals tend to yield higher return on investment than traditional ones. Nevertheless, this doesn’t mean that you can’t make good money with long-term rentals. As long as you select your market carefully and analyze your investment property diligently, you can make doubled-digit return with this rental strategy.

One of the best things about real estate investing is the diversity of options including the two main rental strategies. While both short-term and long-term rental properties have clear, objective pros and cons, you have to take into consideration your personal preferences and your own personality as a real estate investor before you can decide which one to pursue.

Position Realty
Office: 480-213-5251

Contact Form Powered By : XYZScripts.com
Info