Tag: Homebuyers

Downsizers: Use Your Existing Home To Finance Your Next Move

Posted on by Julie Tsai

DOWNSIZERS: USE YOUR EXISTING HOME TO FINANCE YOUR NEXT MOVE

 

With some of the highest rental rates in the country, many Bay Area homeowners who are near retirement or are recent empty-nesters are using their existing homes as a creative source of income. This option allows them to downsize and relocate in-state, out-of-state, abroad—or even stay right on their properties.

Opportunity In Disparity

It’s no secret that high local housing costs have been part of a recent exodus from California to places with much lower housing costs. For example, close to 700,000 people left California in 2018. Texas was their first choice, followed by Arizona, Washington, Nevada, and Oregon. No doubt many were lured by the relative affordability of single-family homes in those areas: Texas at $209,000, Arizona at $272,000, Washington at $419,000, Nevada at $303,000, and Oregon at $366,000 (according to data provided by Zillow through January 2020).

With an average cost of $313,000 across these five states, the monthly mortgage payment for a new home would amount to roughly $1,400, if financed at 100% loan-to-value at current interest rates.

Conversely, with rental rates in San Jose, for example, at $3,200 per month for a two-bedroom unit, or San Francisco at $4,520 (according to Rent Jungle), Bay Area homeowners are uniquely positioned to convert their primary home into a rental property to finance a move to a smaller home.

Even if you’re thinking of downsizing but not planning to vacate entirely, you may even consider consolidating your belongings and living arrangements and renting out a bedroom or portion of your home to create supplemental income.

Ease Of Property Management

In the past, homeowners were reluctant to rent out their properties because of the hassles involved in being a landlord. However, a growing number of professional property management companies is now making it possible to outsource the hassle at a very competitive price, usually averaging 8% of the monthly rent. If you’re considering renting out your property, Julie and our team can help you find the property management team that best suits the intentions for your property.

New Legislation

Recent rental legislation in California allows landlords to raise rents by 5% annually. This is in addition to the regional cost-of-living increase, or a maximum of 10%. Based on current inflation rates, Bay Area landlords could raise rents by an estimated 7.7% per year, which could translate to a healthy, regular profit that downsizers can put towards a smaller, less expensive home.

Accessory Dwelling Units

Another option being considered by a growing number of aging couples is building an accessory dwelling unit (ADU) on their existing property. When ready, they can move into this ADU while concurrently renting out their primary residence to outsiders or younger family members. Recent housing legislation now gives homeowners greater flexibility to consider this option. Click here (“Homesellers, New ADU Housing Bills Could Add Value To Your Home”) for more information.  

Can We Help?

Of course, the viability of pursuing a strategy like this will obviously depend on your current monthly mortgage payment, property insurance, and ongoing maintenance costs, as well as the carrying costs of the new house. As with any key financial decision, considering turning your primary home into an income property to finance your next move should be done under professional counsel from your financial, tax, and real estate advisors.

For more information on how we can help with your downsizing needs, please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

 

Should You Flip Or Hold

Posted on by Julie Tsai

“Flipping” a property—that is, buying a property then reselling it after some time has passed, usually after installing upgrades—is popular amongst beginner and seasoned investors alike. However, there are cases when it makes more financial sense to hold on to your property instead of flipping it.

The question of flipping versus holding does not have one correct answer. It all depends on trends and numbers.

Market Trends

When asking this question, far more important than national economic indicators are the conditions of your local real estate market. Deciding whether to flip or hold on to a property requires a thorough understanding of real estate trends in your area.

Factors like job and income growth, past and forecast trends in home prices, housing affordability, demographic shifts, pending legislation, zoning laws, future development plans—even the growing impacts of natural disasters—must be carefully scrutinized.  

While by no means exhaustive, the following list provides some pointers: 

  • Hold on to rental properties located in stable markets, especially ones which have had solid tenants for several years.
  • Consider flipping a rental property located in an area which has experienced runups in home prices for several years and that could be reaching peak value. Then, through a tax-deferred 1031 Exchange (link to Investors: Defining A 1031 Exchange), you could acquire a new income property in neighborhoods that still have room for further appreciation (link to Investors: Where Are The Best Local Places To Invest?).
  • Consider flipping out of areas under rent-control and shifting your investments to unrestricted localities. Also, keep an eye on pending legislation intended to increase housing supply.
  • Areas increasingly prone to damage by floods or wildfires could experience higher insurance premiums and deductibles in the future. Consider flipping in areas less susceptible to natural disasters.
  • Neighborhoods experiencing growth in crime are likely to experience decreased demand and lower rental prices. Keep your finger on the pulse by frequently assessing the crime rate in your area.    
  • Keep a close watch on future development plans which could increase the housing stock and drive rental prices lower in the areas where you own income properties, and consider flipping those assets for real estate in areas with more restrictive zoning laws. 
  • A deteriorating school district, both in educational achievement and finances, can trigger an exodus of families seeking better schools for their children and depress the real estate market in the troubled area. Stay current on local school news.

The Numbers

All things being equal, deciding whether to flip or hold will require a thorough financial analysis. This means you should compare the profitability index of each set of numbers.

Our comprehensive online research has found the following tools to help you run such analysis:

Fix-&-Flip Analysis and Reporting Tool

Rental Property Calculator

Property Flip-or-Hold App

Taxes

Incorporating the tax treatment of both flip and hold strategies is crucial to your comparative analysis. Click here for a summary and examples.

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Julie and her team of experts are ready to help you achieve your investment goals, and we look forward to helping you with any real estate investment questions you may have.

Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

The information in this post is being provided for informational purposes only and not for the purpose of providing tax, legal, or real estate investment advice. No liability is assumed by Julie Tsai Law or Compass Realty with respect to such information.

 

Figuring Out How Much House You Can Afford

Posted on by Julie Tsai

“If you fail to plan, you’re planning to fail.” – Benjamin Franklin

Americans are an optimistic bunch. Consider a recent study from Bank of The West that found 85% of millennials are confident they’ll achieve the American Dream, of which owning a home is a big piece. Yet more than half of those surveyed don’t have a plan to actually get there, and once they start on the path, are often shocked at how much it costs. Not surprisingly, 68% reported buyer’s remorse, wishing they had been more prepared going into the purchase.

The last thing you want to do is jump into a home loan that’s too expensive for your budget, even if you can find a lender willing to underwrite the mortgage.

What You Should Consider

  1. The 28/36 Rule

Lenders generally use the 28/36 rule when considering a conventional loan. The 28/36 rule states that a household should spend no more than 28% of its gross monthly income on total housing costs, and no more than 36% on all debt which includes total housing costs plus other recurring debt payments.

The first part of the 28/36 rule requires your front-end ratio to be no more than 28%. The front-end ratio equals your monthly housing costs divided by your gross monthly income. Monthly housing costs, or PITI, include:

  • The principal and interest portion of your mortgage payment
  • Property taxes, and
  • Property and hazard insurance.

The second part of the 28/36 rule requires your back-end ratio to be no more than 36%. The back-end ratio equals your monthly housing costs (PITI) plus your other monthly debt payments (car loans, student loans, credit cards, etc.), divided by your gross monthly income. Where applicable, the back-end ratio also includes required child support or alimony payments.

Example: Add together the amount you and your spouse earn per month (before taxes) to determine your gross monthly income. Let’s say each of you earn $5,000.

Multiply your combined income by 0.28 to determine the maximum monthly housing costs (PITI) you can afford. In this example, you’d multiply $10,000 by 0.28 to get $2,800, which means you can afford up to $2,800 per month based on the front-end ratio.

Next, determine your and your spouse’s total monthly non-housing debt payments, such as car loans, student loans, credit cards, and alimony and child support. For this exercise, we’ll assume you and your spouse pay $1,000 in total monthly non-housing debt payments. Multiply your gross monthly income by 0.36 to determine the total monthly debt payments you can afford, including your mortgage payment and non-housing debt payments. Following the example, you’d multiply $10,000 by 0.36 to get $3,600, which means you can afford up to $3,600 per month in total debt payments.

Subtract your monthly non-housing debt payments from your result to determine the maximum monthly mortgage payment you can afford based on the back-end debt-to-income ratio. In this example, subtract $1,000 from $3,600 to get a $2,600 maximum monthly mortgage payment.

The $2,600 back-end ratio mortgage payment is the lower payment of your two ratios, which means you can afford up to $2,600 for a total monthly mortgage payment.

2.       Property Taxes

Counties in California collect an average of 0.74% of a property’s assessed fair market value as property tax per year. Based on the median price of $ 830,000 reported for the San Francisco Bay Area in March 2019, the annual property tax payment would be $6,142, or $511/month. (For county-specific average property taxes click here).

3.       Property Insurance

According to a 2018 study by Insurance.com, average home insurance costs vary widely from state to state. Generally, you can expect to pay roughly $3.50 for every $1,000 of property value. For a median home price of $830,000, insurance payments would total $242/month (for a comprehensive look at property insurance click here).

If you are purchasing a condo, property insurance is typically covered under a master policy which homeowners pay along with homeowner association (HOA) dues. It is essential you review the HOA’s financial documents and by-laws to ascertain coverage.

4.      Other Recurring Costs

    • Private Mortgage Insurance (PMI): If you put down less than 20%, your lender will most likely require you to buy insurance from a PMI company. PMI protects lenders from the risk of default and allows buyers who cannot make a significant down payment – or those who choose not to – to obtain mortgage financing at affordable rates. PMI typically costs between 0.5% to 1% of the loan amount on an annual basis.
    • Maintenance: According to the Harvard University Joint Center on Housing Studies, you should plan on paying 1% to 2% (annually) of the value of your home in maintenance and upkeep. If you’re purchasing a condo, general maintenance costs are usually covered by HOA dues. However, make sure your HOA has adequate reserves for large-scale maintenance projects such as roof replacement, exterior paint, access-road maintenance, and wood rot and siding repairs.

Julie understands purchasing a home might seem overwhelming. This is why we have a team of seasoned experts ready to help you navigate this complex process, developing a prudent financial plan to achieve your dream of homeownership.

We look forward to helping you with your real estate questions. Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Make Your Income Property A Success

Posted on by Julie Tsai

You’ve followed our guide on starting your real estate investment (Real Estate Investing: How To Get Started), developed a solid plan, prequalified for a loan (Buyers: How To Find The Best Mortgage & Get Prequalified), and located the income property that best matches your investment objectives. Now, it’s time to review the steps to make your income property maximize profitability and minimize headaches.

Treat It As A Business

We can’t stress this enough. Your rental property IS a business—and you need to treat it that way. This type of investment is not hands-off. It requires involvement, lots of time and attention, and the mindset of a business professional.

Limit Your Liability

Here’s every landlord’s nightmare: a tenant throws a big party, one of his guests has one drink too many, falls off the balcony, breaks his neck, and sues both tenant and landlord. The landlord discovers his/her liability insurance is inadequate and is now personally liable for hundreds of thousands in damages.

Real estate investors who rely solely on insurance as a means of protection from personal liability take a significant risk. Liability policies typically have limits, exceptions, and carve-outs. While the chance of a loss that exceeds policy limits may be remote, if it happens, the consequences can be devastating, says Jeff Weaver from legalzoom.com.

To better protect yourself and your personal assets, consider setting-up your real estate business as a Limited Liability Company (LLC).

LLCs have become one of the most preferred forms of business entities through which to hold title to investment real estate properties, according to legalzoom. The insulation from personal risk exposure coupled with the relative ease of administration and potential tax benefits makes ownership of investment property through an LLC a very desirable option in most instances.

Before you do, it is always good practice to seek legal and tax counsel.

To Manage—Or Not?

First-time investors are strongly advised not to hire a property management company in the early stages of their business. Not only will it save you money, but it will allow you to gain valuable knowledge and expertise. Once you thoroughly understand how to manage a property, you will know what to look for in a management company as you grow your portfolio. 

Regardless of whether you choose to hire a professional management company or not, knowing the seven most-common mistakes landlords make will save you money and headaches. 

Consider them the seven deadly sins of landlording.

Mistake # 1: Inadequate Tenant Screening

A vacant property is preferable to a property rented to the wrong person. Not only are bad tenants a cause for headaches, but they can quickly eat up profits. 

Screening tenants is about digging into a potential tenant’s background and discovering who they really are, says Brandon Turner at BiggerPockets.com. An application can only tell you so much and can be easily manipulated or falsified. Screening your tenant means looking into the information they provided, as well as analyzing outside information you can find on your own to get the whole picture.

When digging, however, make sure you adhere to Fair Housing and Discrimination Laws. Otherwise, you could be setting yourself up for a lawsuit.

To set up your tenant-screening process, start by reviewing this comprehensive guide. 

Mistake # 2: Assuming The Property Will Always Be Rented

You’ve run your numbers and they look great. But wait! Did you consider vacancy?

Vacancy rate is the percentage of a year that a property sits empty. The nationwide vacancy rate during Q1 of 2019 was 7%. 

To obtain the specific rate in your investment area, check the U.S. Census Bureau, contact local property management companies and large landlords, and/or ask a real estate agent like Julie to conduct a comparative market analysis on local rental property stats available on the MLS. 

Mistake # 3: Underestimating Repairs & Maintenance

According to a common rule of thumb, you should set aside at least 1% of the property’s value every year for home maintenance. For larger repairs, saving 10% (annually) of the total cost of your property taxes, mortgage costs, and insurance payments is recommended.

Mistake # 4: Having A Shoddy Lease Agreement

Take time to research and find the lease agreement which offers you the best protection and suits your particular needs. 

There are several online services offering standard and customizable lease agreements which could save you money in legal fees. To get you started, we’ve compiled a short list:

Once you’ve made your selection, it is always good practice to have your lawyer review it. 

Mistake # 5: Not Enforcing Lease Terms

Being a nice landlord is good practice. Neglecting tenants is not. But that doesn’t mean you should be lax when enforcing the terms of the lease, which, after all, were accepted by your tenants upon signing.

If you said late rent payments would incur a penalty, charge it. If you outlined that no pets are allowed and you later discover your tenant hiding a puppy, enforce the penalty—no matter how adorable the puppy.

If your tenants realize you are lax about the agreed terms, they will act in like manner.

Mistake # 6: Delaying An Eviction 

The most common reasons for tenant eviction are:

  • Non-payment of rent
  • Habitual late payment of rent
  • Damage to the property
  • Disrupting other tenants
  • Tenant refusing to move out after the lease has ended

Not starting eviction proceedings as soon as legally possible can be a very costly mistake. If you run into problems with a tenant and are unsure about your rights or how to proceed, contact an eviction attorney right away.

Mistake # 7: Not Conducting Thorough Move-In/Move-Out Inspections

Aside from normal wear and tear, tenants should return your property in the same condition it was when they first moved in.

To avoid misunderstandings, use this thorough guide provided by Zillow.  

 

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Julie and her team of experts are ready to help you achieve your investment goals, even advising you on the best methods of buying and managing income properties.

We look forward to helping you with any real estate investment questions you may have. Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Where Are The Best Local Places To Invest

Posted on by Julie Tsai

In a previous article (“Which Areas Will Have The Greatest Appreciation?”), we covered the factors you need to consider when investing in real estate for appreciation.

Now we’ll look at investing for cash flow, and how to discover the most promising areas in the Bay Area.

In real estate terms, cash flow is the byproduct of owning a property and leasing it to tenants for a monthly rental income. The higher the net cash return, the better the return on your investment. The rental income must cover your total expenses and reap a surplus of cash as extra income to deem a rental property profitable.

Cash-On-Cash (CoC) Return

The most popular metric used in real estate investing is the cash-on-cash return (CoC). Also called the equity dividend rate, the CoC return is calculated by dividing the cash flow (net operating rental income, before tax) by the amount of cash invested.

The CoC return is calculated in the following way:

Annual Pre-Tax Cash Flow

Total Cash Invested

Because pre-tax cash flow is used in the calculation, you should be aware of the tax treatment of your investment. If the CoC return is low, high taxes may erase any potential investment returns.

Capitalization (Cap) Rate

This calculation is also very important because it is the purest form of understanding a property’s returns. The cap rate reveals the investment return of a property independent of its financing. Therefore, this number indicates the return as if the property was already paid for.

The cap rate is calculated by dividing the net operating income by the property’s price.

(Click here for more on how to analyze an investment property and determine its quality and/or estimating its profitability through calculating the property’s cash flow.)

Mashadvisor offers an interactive investment property calculator that not only gives returns based on what is entered, but also provides insights by using predictive, comparative data and algorithms. The tool also gives investors an understanding of an overall neighborhood by providing data on the neighborhood’s average median home price, traditional rental income, and Airbnb rental income and occupancy rate.

Trends To Observes

Honing down on a good location and neighborhood for attracting the right tenants and maintaining high rental demand requires patience and meticulous analysis. While CoC returns and cap rates allow you to determine a property’s profitability in present terms, you also need to consider long-term trends which will sustain those returns during the lifetime of your investment.

  • Look for areas where properties are comparatively more affordable based on their price-to-rent ratio, a simple metric that measures the ratio between property prices in a particular area and annual rent. Zillow offers a searchable database for estimated median market rate rents by housing type across a given region.

As earlier reported, the 10 Bay Area cities with the fastest housing appreciation over the past five years aren’t traditionally the most sought-after communities and have seen housing prices grow by more than 15 percent over the time period. Cities like Richmond, Pittsburg, and Antioch have seen some of the highest increases regionally yet still have median home prices under $500,000.

  • Look for areas which are experiencing comparatively higher rates of population growth which will underpin rents in the future. Make sure the property is located in an area where the job market is robust. Job and income growth are key when deciding where to invest.

According to the US Census Bureau’s 2017 population growth estimates, the 10 fastest-growing cities and towns in the Bay Area between 2016 and 2017 were:

Jurisdiction

Percent Increase

Rio Vista

4.3%

Gilroy

4.1%

Newark

3.5%

Brentwood

2.9%

Oakley

2.4%

Dublin

2.1%

Dixon

2.0%

Albany

1.9%

San Carlos

1.8%

Pittsburg

1.8%
  • Look for areas which have future development plans likely to attract more residents, such as transport links to major job hubs, new schools, shopping centers, restaurants, amenities, etc.
  • As environmental consciousness continues to grow, especially among millennials, look for cities leading the pack in sustainable living. A recent nationwide study done by SmartAsset shows nine Bay Area’s cities among the top 25.

The highest-ranked city is Mountain View. Not too far behind, at #9, is San Francisco. The other cities which made it to the 25 Best Green Cities For Families are:

Sunnyvale

South San Francisco

Alameda

Berkeley

San Mateo

Palo Alto

Whether you are investing in real estate for appreciation or cash flow, hiring a professional real estate agent is key. A real estate agent has the right knowledge and expertise to identify the most promising income properties, help you conduct the proper analysis and assessment, and, most importantly, negotiating for the right price.

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Julie and her team of experts are ready to help you achieve your real estate investment goals. We will prepare you with all the necessary info, and even recommend the best places for investment.

We look forward to helping you with any real estate investment questions you may have. Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

JULIE TSAI LAW REALTY GROUP

JULIE TSAI LAW

650.799.8888

JULIE@JULIETSAILAW.COM

DRE #01339682

KRISTIN TSAI

408.605.80000

KRISTIN@JULIETSAILAW.COM

DRE #01294153

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