Property Management Agreement: Fill & Download for Free

Buy a real estate fundamentals book. Read it cover to cover.Join your local landlord association. RHA is one such association in Washington State. Ask your fellow landlords for tips and for referrals to good property management companies.Form a limited liability company (LLC). It will protect your personal assets in case your tenants sue you.Find a good real estate lawyer and accountant. Have them tell you what laws and tax requirements are relevant to your business.Get all required business licenses. That includes a state, city, and county license. There are some surprising taxes here. The county probably charges property tax at a higher rate for rental properties, and they also charge “business personal property tax” on the tools and assets you use for your business. Cities may charge landlords a special fee too.Hire a good property management company. For 8-10% of the monthly rent, they will handle your tenants for you. They have special agreements with plumbers, electricians, and other contractors that lower the cost of maintenance.Did you have a thorough home inspection done before you bought the property? If not, get one. Electrical wiring may not have been installed correctly, which could cause a fire. You will lose all of your properties and even your personal assets in court if your tenants get burned.Consider your target market. If you want short term tenants, then rent at market rate, but you'll have a lot of vacancies. Knock about 5 to 10% off market rate rent, and you'll have your pick of long term tenants like families.Consider offering a rent to own agreement for your tenants. If you rent single family homes, a rent to own agreement gives tenants an incentive to stay a long time and treat the home well. After five years, for example, a rent to own agreement gives your tenants the option to buy the property from you for a fixed price. You'll give tenants a chance to own a home that they might not otherwise have, and you'll be able to dump the property before the long term maintenance bills come due. Be careful, though: if property values rise, your tenants might exercise the option and then turn around, sell the property, and make a tidy profit that could have been yours.Get used to being the villain. If a tenant does not follow rules, you must enforce the rules or they won't respect any of your other rules. We live in a world where shelter is a commodity to be bought and sold, rather than a basic human right. This world insists on lavishly rewarding high performers at the expense of the poor, which makes heinous income inequality a fact of life. As a landlord, you'll be on the front line of the capitalist system: since you must pay the mortgage on this property, your tenants must pay rent and follow the laws. Your tenants are going to resent the fact that they have to consent to this arrangement, but you'll have to hold firm on enforcing the rules. Otherwise, you might lose the roof over your head.Good luck.

I broke down sobbing rather hysterically when the Xfinity automated help center looped me around to the wrong category for the fourth time in a row. Probably not the happy answer you were expecting :P For context, the last year has been rather hellish.Last August we renewed the lease on the condo we’d been renting from its owner. He came for a walk through to make sure there were no major issues - he then told me that before I moved in there had been a MAJOR leak, causing the floors in the entire condo to be replaced along with the entire bathroom redone - and deemed everything satisfactory, so the lease was renewed. Two weeks later I heard a leak in the wall behind the shower and immediately reported it. He blamed me for the leak, as there was extensive damage that had clearly taken place over months and I hadn’t reported it (I hadn’t seen any signs of damage nor heard anything until the morning I reported it, and I guess we’re ignoring the fact that he’d been specifically searching for evidence of a leak during the walk through, given the history of bad pipes at the condo). He then shut off all the water in my one bathroom home.. For two weeks. The leak was fixed and water finally restored, but the damage was apparently so extensive it required the entire bathroom to be ripped out. Okay, it happens, it’s a big inconvenience but it’s temporary. WRONG. As the absence of a bathroom on the premises deems the space unlivable under Washington State law, my landlord agreed to reimburse me the full rent for the time I had no working bathroom. This turned out to be over four months. FOUR. MONTHS. With no toilet, or shower, or sink. At the end of it all, he told me that his insurance wouldn’t reimburse him for the rent he owed me so he would not be reimbursing me. WHAT?! He threw our agreement out the window, claiming never to have made any such deal. It’s in writing, multiple times over, but he literally ignores that every time I bring it up. Needless to say, I consulted an attorney who advised me pointblank to take him to court on this. Thanks to Covid the court date was pushed back six months, so we just had mediation last week, wherein my landlord spent the entire hour and a half calling me a money hungry liar who was trying to take advantage of poor him. Having your character maligned so harshly like that for so long without being able to respond more than once was extremely stressful and emotionally draining.As we were obviously unable to reach an agreement in mediation (I was willing to negotiate just to get him out of my life, he continued to call me a lying mooch and “was unwilling to encourage my behavior” by giving me the money he owes me) I was informed that I would receive my court date within the next week, most likely some time in October. I received the court date a few hours after mediation - October 5th, with all material evidence being due at least 14 days prior to the trial.14 days prior to the trial is September 21st, which just so happens to be the day my boyfriend ships out for Marine Corps basic training. We’ve been living together for nearly three years and just signed a lease on a new apartment two days before he swore in and was given his ship date. Ship dates are typically more than a month away from the day you swear in, but because he is old for a poolee his recruiter wanted to get him down to San Diego as soon as possible. So on top of my boyfriend leaving for 15 weeks with no contact except letters via snail mail, then living in Southern California for the nine months after that, and then being shipped to who knows where in the world, I get to spend my last days with him worrying about the trial and making sure I get all relative material evidence submitted by the day he leaves.On Saturday, three days ago, we moved out of the repulsive condo were were living in (okay, the condo itself wasn’t terrible, just the owner and the extremely rude upstairs neighbor who loved to stomp around continually in work boots literally only between 10 PM and 7 AM, aka quiet hours, and ignore me every time I knocked on his door or left notes asking him to please keep it down). We moved very close by (the next building over, another condo but this time one run by a respectable property management company rather than the owner) and had a lot of people helping, so I really shouldn’t complain, but moving is always stressful to some degree. Add to that the fact that when I was going over the move-in checklist with a property manager I learned that the condo was previously rented out by my landlord’s mother, and now I can’t get that thought out of my head. Luckily the property management company knew of my landlord - he had tried to hire them to manage his condo but they denied him as he has a history of failing to fix things when told they need fixing (hmm, sounds familiar..) - and they told me that when they saw I had put up with him for two full years I got a huge leg up over the other applicants. Unluckily this was yet another reminder of this awful, terrible man, whom I have been trying to put out of my mind as much as possible, and now I am afraid I will associate this home, too, with his terrible presence.We have had Xfinity internet for two years now; to weeks before moving I scheduled the move, so that our internet at the old place would end the day we moved, and we would get new equipment to install and activate on the day we moved into the new place. It seemed a simple process until the day of the move, when I realized we had never received the new equipment (yes, my bad for not realizing sooner.. I was quite preoccupied with mediation and packing, but still stupid given the fact that I work from home at least once a week). I tried installing the old equipment, which of course didn’t work, but at least I can say I tried. So I tethered my phone to my laptop to try to get in touch with customer service (my phone call quality sucks unless I’m using wifi calling.. Which was obviously not an option), connected with someone after a 20 minute wait, explained my problem, then didn’t hear anything back after “give me a moment to look into it.” Waited around for half an hour.. Nothing. Ended the chat, tried again. Same result. Thought, “okay, it’s been an hour and a half and nothing, I’ll give calling a try.” Circled through the pre-recorded options, continuously getting sent to topics I didn’t select, and after 20 minutes got disconnected. Too frazzled, too much to unpack still, I’ll suffer through until tomorrow. Tomorrow (Sunday) comes: same pattern. Two pointless hours waiting to chat, not getting a response, then giving up and calling, only to be sent through the ringer again (no pun intended). At that point my boyfriend told me to give it up and he would take care of it. Of course, control freak that I am sometimes, I couldn’t let it go.. I tried again yesterday, and low and behold, same exact results. For whatever reason, this time put me over the edge and when the phone looped me around to the wrong department for the second time that day I completely lost it, dropped my phone straight on the ground and started bawling like a toddler throwing a tantrum.I should have prefaced all this: I have to be one of the unluckiest people in the world. Seriously, the weirdest, most random crap happens to me that just doesn’t happen to other people. And it’s all. The. Time. One time in high school my car got hit by a deer. I didn’t hit a deer with my car, the deer hit me. I wasn’t even in it, I was upstairs in my bedroom.. Opened the blinds one morning and it must’ve spooked the deer because it bolted.. Jumped over a hedge, and ran directly into the side of my car, leaving a big fat dent in it. Got the dent fixed after maybe two weeks. Two weeks later, boom. Same exact thing happened with an elk, except instead of hitting the side of my car it smashed into my headlight, shattering both the protective cover and the bulb inside and leaving clumps of hair caught in the wreckage (no blood was found, thank goodness, so I’m guessing the poor guy got a little bruised but no real harm done). You’d think I’d be used to crazy stuff happening to me by now, and for the most part I am, but this weekend seemed to be the perfect storm of negative emotions and I cracked. Thank goodness my boyfriend has a seemingly endless amount of patience!

Don’t buy a house to live in if you live in a primary market (Seattle, CA, Hawaii)., Instead buy rentals in secondary markets like Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other tertiary markets.Sophisticated investors focus on the numbers… which require the Rent-to-Value Ratio of more than 1% is needed to be able to cashflow after expenses. You find the Rent-to-Value Ratio by taking the monthly rent dividing by the purchase price. For example a $100,000 home that rents for 1,000 a month would have a Rent-to-Value Ratio of 1%.Home ownership is part of the American Dream. In the minds of many, psychologically and mentally, it represents security, stability, and financial independence. Renting has traditionally been seen as throwing money away, as many people also see homeownership as a financial investment in their future thanks to the popular belief that property will only ever rise in value, even if the recession of 2008 demonstrated otherwise.The reality is that allowing for inflation, house prices have increased by just 1% during the last century, representing an extremely poor return on investment, and one that has been easily outperformed by the stock markets and direct investment in businesses and hard assets. Research has shown that the net value of homeowners is, on average, 44 times greater than that of non-homeowners, however, it’s unclear whether this is a correlation or causation.So should you buy or rent? The truth is that there’s no ‘one size fits all’ answer to that question. Every individual has different circumstances that determine if buying or renting their home is best for their long-term financial prosperity. This guide is about you making the right financial decisions for you. It’ll examine the pros and cons of buying and renting, what you should take into account before making a decision, and the relative financial considerations of a mortgage versus rent.If you are a numbers guy here is the spreadsheet (Is a Home a Good Financial investment).Join the movement of high income earners who are renters (Rich and Renting: Understanding the Surge of High-Earning Renters - Rentonomics) cause they did the math and did what made sense.*I spent $300 dollars for an editor to get the grammar and spelling right on this article. I am sick and tired of seeing young families make this mistake.**What’s in this guide?**This guide will cover everything you need to consider about purchasing a home, renting, and purchasing a property to rent. This includes:* The advantages and disadvantages of renting* The advantages and disadvantages of buying* The costs associated with renting vs buying* Choosing a property* Taking on a home loan* Using your home to finance your future* Buying a property to rent* Useful resources**Financial freedom**Firstly, this guide is about helping you to achieve financial freedom. What the wealthy do to achieve security and optimize investment returns is not always conventional wisdom. When financial freedom is your goal, there are two simple principles to follow:1. Prioritize purchases/acquisitions that make you money2. If a purchase/acquisition doesn’t pay you and you are speculating on increasing home values, don’t do it.While this may seem black and white, sticking to these principles will again depend upon your individual circumstances. See the difference in how the poor, the middle-class, and the wealthy live financially:For some, buying will generate the most financial opportunities, for others it’ll be rentingHint: If you can’t save money to save your life then buying a home acts as a forced savings account, which will benefit you in the future.So let’s look at the case for each.Rent or buy? What to considerBefore going any further in this guide and considering whether buying or renting a home is the best option for you, there are a few important things you should bear in mind as you continue. These are:* Are you comfortable living with unknown and variable costs? Or prefer having your costs fixed?* Do you like to personalize your home, or are you happy to live with other people’s choices?* How much space do you really need? Do you really need 2,000 square feet and that 4th bedroom to raise a family or is that your ego’s need to *keep up with the Joneses* talking?* How much time and work are you prepared to put into the upkeep and maintenance?**Renting**Chances are that you’ve been told repeatedly that renting is like flushing water down the toilet. That you are paying money out each month and twenty years later you have nothing to show for.The wealthy do not believe this misnomer and see housing as just another line item in their personal finances.Our changing lifestyles mean that renting can be a sensible option for many people which can actually help you achieve your financial dreams.So what are the advantages of renting?**Flexibility and mobility**The biggest argument in favor of renting over buying is the flexibility and mobility it offers. If you have to – or want to – move regularly, then renting allows you to easily pick up and relocate. Equally, if you decide you don’t like the property/neighborhood after all, that your commute is too long, or that you want to get your kids into a better school district, you have the flexibility to do that. Remember, gone are the days where you stay a loyal employee for decades. Often many professionals need to be mobile to compete for the best positions and salaries. Many of my friends in IT and Tech report dusting off the resume after they have reached the 6-month employment milestone. Having geographical mobility is essential in competing for the best jobs.**Liquidity in difficult times**Renting can often be cheaper than buying. Some rents even include utilities, and when things break, it’s not your problem, call the landlord – it’s their problem! That means you have more available cash. Don’t forget that life is unpredictable and things change. Perhaps your income goes down, unexpected bills occur, your mom falls in the shower and can’t get up, or your deadbeat brother-in-law hears of the rental properties you are picking up and needs a place to hang out and join your family. The beauty of renting is that if your financial circumstances change, you have the option of moving to a cheaper property without too much difficulty instead of selling the home in a fire sale due out of distress.**Credit ratings**Not everyone has a perfect credit history. Experts estimate that around a third of all American adults have a credit score below 601 (How Many Americans Have Bad Credit?) and so are considered a poor or bad risk. This greatly reduces the likelihood of qualifying for a regular home loan, meaning that borrowers would have to pay higher interest rates on any borrowings. If you fall into this category, buying is unlikely to be worth the expense.Note: Don’t let real estate or lending brokers trick you into using the “scarcity tactic trick” where they say interest rates are at all-time lows! Buy now because it’s not getting any lower! Remember they get paid when you buy or originate a loan. Locking in a low-interest rate is a poor reason to go into a 30-year commitment for something you should not buy in the first place, even at a 0%.**Buyer’s remorse**A survey by *Trulia * (https://www.trulia.com/blog/trends/regrets-2017/)found that 44% of American homeowners had some form of buyer’s remorse, and around a fifth had actually been prevented from changing their situation because of making a mistake when purchasing a home. With renting, if you’re not happy, you’re free to move at the end of your lease. Paying a couple of dudes to move your stuff from time to time is pretty cheap in the grand scheme of things.**Local costs**If the area you live in has high property taxes, high insurance costs, or low rent-to-value ratios, then the math on renting makes sense. The rent on identical properties can vary hugely based simply because of their location, for example a $100,000 house might be leased for $500 a month in one town but $1,500 in another. Where rent to ratio values are low, renting is the savvier decision. Often primary markets such as San Francisco, Seattle, Los Angeles, New York, Washington DC, Honolulu, (are cool places to live but) have low rent to value ratios, as a result of too much wealth living there driving up the overall market. Investing in secondary and tertiary markets where the rent to value ratios are high means that the income more than supports the mortgage and expenses, for positive cashflow. Examples of these locations are Atlanta, San Antonio, Houston, Indianapolis, Birmingham, Memphis, or Kansas City. In these areas, it may make sense to buy a primary residence to live in.**The disadvantages of renting**Of course, while there are many advantages to renting, there are also drawbacks that can’t be ignored, and each individual needs to decide if the benefits outweigh the disadvantages.**Not feeling at home**Tenants are rarely allowed to decorate the property the way they would like. Decor is usually neutral and can feel clinical. Personalization is usually limited to putting up pictures and damage caused by doing so must be rectified before the tenant leaves. If personalization is important to you, then get over it… nah just kidding**Rent Increases**Rents usually rise annually. In some areas, rents increases are limited by local regulations. In most instances he landlord is free to increase it by as much as they like. In areas that are very popular, rent rises can be a significant increase to reflect increasing market demand.**Lack of security**While renting offers flexibility, it also lacks security. Your landlord might decide that they want to sell the property or have someone else live there. If you’re on a month to month lease, typically your landlord only needs to give 30-60 days’ notice.Moving residences costs money, and you’ll need to find a deposit plus up to two months’ rent in advance for a new property, alongside the fees listed below. And that’s all before your landlord returns your deposit.Tip: Building a relationship with your landlord could be invaluable. If you are renting a home in a primary market where the numbers don’t make sense, then chances are that you’re dealing with an amateur landlord. Often amateur landlords just want reliability and rent paid on time, as opposed to top dollar. You may be able to sign a longer rental agreement or just be given a further heads-up if the landlord is looking to make any moves with the property. They may need you more than you need them so try to negotiate a lower rent by signing a longer rent or a fair rent escalation factor.**Lack of tax breaks**Homeowners brag about claiming extra tax write offs on their mortgage interest against their tax bill. This is true that tenants can’t claim anything against their rent but this argument is a very weak one and likely dogma created by brokers to motivate you to create more transactional commissions.Spending 100 dollars’ interest to deduct it on your taxes is actually one of the dumbest pieces of financial advice I have ever heard. They’re basically telling you to incur expenses to save a fraction of it. The tax benefits that you get as a real estate investor will blow the mortgage interest tax deduction out of the water due to taking other expenses as and operational business, depreciation, and not to mention the overwhelming greater return on investment if you bought a rental property than buying a primary residence to live in. And if you have seen the 2018 new tax laws it’s just a matter of time until the tax deduction for the regular person is going to be phased out. The middle-class just can’t catch a break!**Additional costs**Taking out a new lease incurs a number of costs. These can vary with state and your circumstances, but typically include:* **Broker’s fee**: whether or not you need a broker will depend on where you want to live. In many big cities, landlords or property managers frequently won’t consider any applications that haven’t come through a broker. Typical fees vary between one month’s rent and 15% of the total annual rent. However, this is not the case in most circumstances but I’m just trying to be a good journalist here.* **Application fee**: this covers the cost for credit and criminal background checks. Usually cost between $35-75 per person.* **Security deposit**: we’ve already mentioned this, and it’s generally set at one or two months’ rent. However, some property types, especially condominiums, charge a move-in fee as well. This covers the charge of updating mailboxes, reprogramming buzzers, etc. This can range from $100-$200.Based on a $1,000 monthly rent:**Fee type****Minimum****Maximum**Broker’s fee$1000$1800Application fee$35$75Security deposit$1000$2000Move-in fee$100$200**Total****$2135****$4200****What about my furry friend?**Many rentals will charge a cleaning fee or surcharge for a pet. Due to people abusing the “service animal” loophole this is usually at the landlord’s discretion. However, more and more people are single or don’t have a roommate, landlords are becoming more accepting of our four legged friends. In fact, many landlords including myself see your pet ownership as a sign that you are more of a dependable long term tenant – minus the crazy cat lady/man with more than 3 cats.**But my spouse wants to buy our own home?**If you are in a Primary market the prevailing market rent to value ratios under 1% usually means that if you rent you will be able to live in a much nicer home than if you bought, assuming you had the same PITI mortgage payment.Say you are looking at a $1,600 mortgage on a $350,000 home (typical 20% down payment). Now consider taking that same $1,600 monthly payment you will be amazed that you would be able to live in a nicer home. This does not even take into account the hidden costs of homeownership that we will talk about in a bit – and you can dive into the numbers with the accompanying spreadsheet (Is a Home a Good Financial investment).And by the way, have you ever driven a rental car? It’s a lot more fun when you are not worried about a dent or paint chip here or there.**Purchasing a home**Now we’ve looked at the pros and cons of renting, we’ll do the same for purchasing a home or property, what to consider when taking out a mortgage, and how your home could be used to finance purchasing a property to rent.Supersize me “homeowner style”Average sizes of homes have increased according to the U.S. Census Bureau. In 1973 the average home was 1,525 sq. ft. Today that number approaches 2,500 sq. ft. That’s almost a 64% increase in square footage on the average home!Despite the average family size decreasing from 2.9 persons per household in 1973 to 2.5 persons today, kitchens have doubled in size in those 4 decades along with the average ceiling height in a home rising by more than a foot. But more space in a home ultimately means more space for “things” and the increase in maintenance costs. Add to the mix cheaper and faster construction methods and you have the beginnings of a bubble.The graph below illustrates Robert Shiller’s data. Shiller, a Yale University Economics Professor, shows how housing prices have changed over time using an arbitrary starting point of 100 adjusting for inflation.**Difference between a home and a property**This might seem like a strange concept, but there is a difference between a home and a property. Why? A home is somewhere you live, where you invest emotionally as well financially. It’s your anchor. A property can be anything from a piece of land to a luxury penthouse, but where you don’t intend to live and is purchased as an investment.Buying a home is a huge commitment. No-one can argue with that. While home ownership is usually associated with stability and security to many, that stability and security can be a double edge sword become if your circumstances change.When our parents and grandparents bought their homes, they probably expected to stay in the same area, near their families, working for the same employer for most of their life. If they wanted a new job, chances were that they’d find one in the same area. People didn’t often move away from their roots.Employment trends have changed where very few jobs are for life anymore. And many people – especially professionals – find themselves looking further afield for work. Perhaps the perfect job is on the other side of the country. What do you do? Being tied into owning a home can restrict where you can work and, therefore, your earning potential.Homeownership also ties up your cashflow, and the more expensive your property, the more that’s true.The biggest mistake I see young couples make is not having a personal balance sheet that has a net positive cashflow. This cashflow is the oxygen for investing and learning about investing. Along with just plain overspending, buying a house is the biggest cashflow suck in the middle-classes’ budget.For an analysis of the opportunity costs – check out the accompaniment spreadsheet that outlines the numbers.**The Big Questions**Before deciding to purchase your home, you need to understand what your priorities are. Without understanding these, you could easily make a costly mistake. Let’s call these The Big Questions, and they are:* What do you want your financial situation to be in five or ten years’ time? What would your desired savings be? Are those savings realistic and achievable if you purchase a home?* What space do you consider essential? How much do you own? Are you willing to downsize and declutter if necessary? Are you someone who likes to be able to get away from the other people in the house and have your own space? Would you be prepared put your ego aside to live with a smaller home if this gives you financial freedom?* How much time are you prepared to spend on renovation, repairs, and maintenance?* I know what you young parents are thinking… and I ask you do your kids really need a yard? They’re on their electronics all the time anyway. And with you taking that higher paid job to afford the mortgage they will never see you.**The advantages of homeowning*** Depending on the area, mortgage repayments *can *be lower than rent.* Unlike renting, where a landlord can decide not to renew your contract, you can live there as long as you like as long as you make your monthly payments and ever-increasing property taxes.* A fixed rate mortgage means that your costs are predictable.* The interest and property tax on the mortgage are tax deductible. Note: BS Flag!* For those who struggle to save, a home is a forced savings plan.* The value of the home *may** You have an asset you can sell or refinance if you need access to cash.**The disadvantages of home ownership*** It’s a very long-term financial commitment. How many of us can imagine where we’ll be in thirty years? 5 years even?* Mortgage payments may not be cheaper than renting. And purchasing a property requires a down payment plus considerable closing costs. Money today is more valuable than in the future especially if you can invest and make 10-20% per year.* Any maintenance and repairs are your responsibility. There’s no way to predict what might go wrong, and costs can add up.* Should you want or need to move, selling a home can take some time, making you less mobile.* The value of your home may fall, depending on the economy.* You can have terrible neighbors who start a side business selling Meth or, potentially more impactful, have the next door teenager start their own garage band.* If your life circumstances change, e.g. your wages fall and you can’t afford the mortgage, then you’re stuck in the situation until you’re able to sell.* Have you ever seen those scummy “buy your home for cash” ads? It works because everyday people run into problems and one day it might be you. (Sorry, that was a low-brow sales technique!)**The History of a Mortgage**Majority homeownership in the United States is mostly a recent phenomenon. Until the mid 1940’s, most Americans did not own their places of residence.Big banks and their activities could be argued to have been the catalyst for the “American Dream” of homeownership becoming the majority statistic post-1950. The National Bank Acts of the 1860’s kick-started this gradual change. US Treasury securities now backed the US National Currency and standardized practices of US national banks. And by the 1890’s, American banks saw the popularity of Mortgages rise.These early mortgages at the turn of the 1900s were in stark contrast to those that we see today. A typical homeowner in 1916 would pay up to 50% down with a 5-year interest-only-structure whereas a typical homeowner will save for 20% with the standard 30-year plan.Amortized interest front loads the fees and interest in the beginning of the terms and greatly advantages the bank instead of the homeowner. For more discussion on this phenomenon check out this webinar (https://simplepassivecashflow.com/home)on the topic to pay your mortgage off much faster with instead of simple interest.**What to consider when taking on a mortgage**The vast majority of people purchasing a property, whether it’s for their own use or to rent, will need a mortgage. A mortgage is a long-term commitment, typically thirty years in the USA. Fifteen years is the next most popular option. On average, most people now occupy the same home for around nine years (How Long Do Most Families Stay in Their Home?).Purchasing a home isn’t cheap. Lenders typically require a 20% down payment, which immediately reduces your available funds. You’re then tied into an ongoing financial commitment that reduces your cashflow for years to come. Even though the high level of competition in the mortgage market means that interest rates are generally competitive, mortgage payments are still a significant chunk of your income.If you are also a real estate investor looking for additional income be mindful that one of the biggest factor’s in getting a loan is the debt-to-income ratio. Having a large mortgage (loan) without the income coming in from your primary residence will greatly impact this ratio.**Fixed rate mortgages vs adjustable rate**We all know that interest rates vary. Most Americans opt for fixed interest mortgages, preferring to know what their costs will be for the foreseeable future. The downside is that any drop in rates can be taken advantage of only through refinancing, which incurs additional costs.While Adjustable Rate Mortgages (ARMs) are available, and often have lower interest rates initially, rates can rise dramatically if the economy changes, making them a higher risk. However, homeowners can always refinance.**Costs of taking out a mortgage**As mentioned above, there are a number of costs associated with securing a mortgage, which can become significant. Although they can vary depending on the state and municipality, these costs, typically are:* **Mortgage application fee**: around 1% of the total loan, payable on the application even if the loan isn’t approved. This is why it seems like everyone is trying to give you a loan because it’s really profitable to be a lending broker.* **Home appraisal charges**: even if you stay with the same lender, they may want to appraise your home to confirm the current market value. Charges vary between $225 and $700.* **Loan origination fees**: a charge applied by the lender for processing the loan, before the application is sent to the underwriter. Usually between 0.5% and 1%. The smaller the loan, the higher the percentage is likely to be as both require the same amount of work.* **Documents preparation fee**: a charge for preparing key documents, including the refinance mortgage, note, and truth-in-lending statements. Typically, $200-500.* **Title search fee**: before lending, the lender wants to check that the home’s title is free and clear of liens and encumbrances. It’s usually carried out by a separate company which will check court records, prior deeds, and property databases. Usually $700-900, which includes insurance to protect the borrower against any losses caused by legal issues relating to the search.* **Recording fee**: set by local or State government, these are the fees for recording the refinancing publicly. Varies between $25 and $250.* **Survey fee**: to ensure that the property boundaries are followed and are not being encroached on by adjacent properties. Usually between $175-300.* **Inspection fee**: not always necessary, but some lenders require an inspection of the home’s plumbing, electrical and HVAC systems and roofing, and check for potential infestation. $175-300.* **Attorney fees**: again, not always required, but some states require attorneys for both the borrower and lender to confirm that the closing documentation is correct. Typically, $500-1000* **Flood certification**: if a property is in a federally-designated flood zone, homeowners may be required to add flood or life of loan insurance coverage. Certification costs between $50-150.**Fess on a $100,000 mortgage:****Fee type****Minimum****Maximum**Application fee$1000$1000Home appraisal$225$700Loan origination fees$1000$1500Document preparation fee$200$500Title search fee$700$900Survey fee$150$400Inspection fees0$300Attorney fees0$1000Flood certification0$150**Total****$3275****$6450**These are all in addition to a 20% down payment.While these costs may be negotiable to an extent, they still add up. It may be possible to roll the costs into the loan, but will then attract interest alongside the capital amount, and may push up the interest rate.**Choosing a home**Part of the purpose of this guide is to help you achieve financial freedom. Choosing the right property will make a real difference to the possibility of doing this, so careful consideration needs to be given when purchasing a home. Remember you are competing with other emotional buyers. It’s a race to the bottom, and based on the “greater fools theory” where there will always be a greater fool paying more.**Property size**When buying a home, people often choose to buy the biggest and most expensive home they can afford. A logical fallacy is to think “this is my forever home where my 5 kids and grandchildren will hang out!”It’s not surprising as homeowners want the best for themselves and their family. But purchasing the best home on the market and being financially solvent is mutually exclusive. Instead, buyers should consider taking on a smaller, cheaper property. Not only will mortgage costs be lower, so will maintenance and taxes, and you’ll have better cash flow which can be the foundation of your financial freedom.**Apartments vs houses**Apartments offer a number of benefits. Again, they are usually cheaper than houses and are easier to maintain. Even better, emergency costs are shared by all the residents in the building, reducing the cost of repairs.As investors, we like investing in apartments as opposed to homes. Simply put tenants can only screw up 6 sides of the property in an apartment (ground, ceiling, and 4 walls) whereas a home has a total 10 sides and a yard at their disposal. Factor this into your decision as you evaluation the hidden maintenance cost.**Cheaper properties**A cheaper property means the down payment needed is smaller. If you have a large enough amount, the funds could be used as a down payment on two or more properties for an immediate investment. Alternatively, as lower costs free up cash, these savings can be used to purchase another rental property which is proven to snowball into more and more investments.**The problem with a fixer-upper**If you’re buying a home, you want it to increase in value. Taking on a fixer-upper can seem like a way of guaranteeing this, which is why it’s become a very popular option with people who can’t afford a decent house in a good area. But while taking on a fixer-upper can seem attractive there are a number of common mistakes that inexperienced buyers make which end up costing them money rather than making it. These are:* Rushing into a purchase without fully costing out the necessary work or considering all the holding and sales costs.* Buying an overpriced value home rather than a fixer-upper. A true fixer-upper should be around 10-20% under the local market value.* Not checking the floorplans and layout to ensure that they’re accurate and workable, leading to considerable expenditure to correct it.* Finding out that the property has foundational or structural issues.* Underestimating the cost of repairs.* Underestimating the work required.* Not considering whether it’s an area that people are likely to want to live in. This is especially true if adjacent properties are boarded up or also require extensive work.* The repairs are NOT financed, so require more funds out of your pocket, which again cripples your precious investment capital. In terms of the finances and return on your equity this is where you hurt the most.**Using your home to purchase other properties**Another way of purchasing other properties is to use the equity you’ve built up in your home. This can be done by a complete refinance of your home or you could consider taking out a HELOC (Hacking your debt with a HELOC - Simple Passive Cashflow).HELOC stands for ‘home equity line of credit’ or, more simply, ‘home equity line’. In some ways, it’s similar to a mortgage, as it is a debt secured against your property. It differs from a mortgage in two significant ways. These are:* A home equity *loan* (mortgage) is a lump sum, paid at once. A HELOC allows homeowners to borrow or draw money on multiple occasions usually over a period of 5-10 years, as the need arises, up to a maximum amount.* As mentioned above, a home equity loan usually has a fixed mortgage rate, while a HELOC normally has variable interest rates linked to Bank Prime.Typically, during the first 5-10 years, borrowers need to pay back only the interest on the sum(s) they have borrowed. Repayment periods begin after the borrowing period and are usually between 10-20 years. The repayment amount is calculated by dividing the capital accessed by the number of months in the repayment period. However, borrowers should be aware that some lenders require the capital to be repaid in its entirety at the end of the drawdown period.Some lenders won’t allow a second charge to be secured against properties, so borrowers should seek permission from their mortgage company first.**Advantages of HELOC*** HELOCs are a convenient way of funding one-off needs, such as a down payment on a second property, or renovation.* Interest is paid only on the sum borrowed, and during the drawdown period, borrowers can repay just the interest.* Upfront costs are very low. The cost for taking out a $150,000 HELOC loan is typically less than $1000 and may be paid by the lender without a rate adjustment.* Some HELOCs can be converted into fixed-rate loans when a drawdown is taken.**Disadvantages of a HELOC*** HELOCs are adjustable rate mortgages (ARM) but are much riskier than a standard ARM thanks to the way the interest is calculated. If the interest rate increases on 30 April, then the HELOC rate will rise on 1 May. There are also no interest rate caps.* Ensuring that the HELOC is repaid can require considerable financial discipline, especially if the capital must be repaid at the end of the drawdown period.**Buying a property to rent**As fewer people are buying their own home, there is a strong demand for rental properties across the country. This demand has been fueled by factors such as the 2008 economic crash, the high number of people with poor credit ratings, stagnant wages, rising house prices, and the increased mobility of the workforce.Owning one or more rental properties can be a good investment in your financial freedom. But it requires careful consideration. It’s not like buying a home. When you buy your home things like space, schools and amenities will be your primary focus, and you’re likely to spend more to get your perfect house.When choosing a rental, you need to look at the local market. Check with local real estate agents what type of properties are in demand and choose accordingly. It may be that single bed apartments are snapped up, or that there’s a shortage of family homes. Buying in the best locations with the best school districts will lead to more competition and overpaying for the asset and its income stream.If you do your homework, buying a property to rent can be profitable over time. It’s a way of generating a passive income, while also building up savings through increasing the equity in the property. In many cases, renting will cover the mortgage and the taxes, if not generate a small profit on top.**Renting out your home**Should you want to relocate or want to improve your cashflow, renting out your own home is a possibility. However, this option comes with a number of potential complications – both financial and emotional – that need to be considered.Financially, you’ll need to inform your mortgage company when your home stops being your residence. Different mortgage lenders have different rules for borrowers who convert their homes into rental properties. It’s common for them to require you to live in your home for at least two years. Typically, interest rates for buy to rent properties are higher because of the increased risk to the property, and you may need to refinance.When you purchase a home, you invest in it emotionally as well as financially. You decorate it in your preferred style. You make memories there. You have a connection. Then strangers live in your home. Perhaps they’ll be good renters and take care of it as if it were their own. But perhaps they won’t and seeing what was once your home damaged can be a devastating experience. Even if you find good tenants, seeing someone else in your home can be an emotional experience. With a property bought purely as an investment, it’s much easier to be dispassionate and deal calmly with any issues.**Factors to consider when buying a property to rent**Just as with deciding whether to rent or buy your home, deciding where – or even whether – to buy to rent needs to be carefully considered.**Rent to value ratios**The Rent-to-Value Ratio is a quick calculation real estate investors run to determine if a property will cashflow. Take a $100,000 home that rents for $1,000 a month, the Rent-to-Value Ratio would be 1% ($100,000/$1,000). One of the biggest factors to consider when buying a rental property is the rent to value ratio. In some areas, such as Seattle, Los Angeles and the East Coast, properties are expensive to buy, but rents are relatively low. In these areas, rent to value ratios (c:\Users\emmat\Downloads\Simple Passive Cashflow - Simple Passive Cashflow\rv) can be less than 0.75%, meaning that there is little chance of even covering the costs, making purchasing a property a poor decision. In areas where housing is cheaper to buy and rent to value ratios are much higher, then it makes sense to purchase a property and rent it out. Some markets you can find these Rent-to-Value Ratios over 1.5% in solid areas.**Type of property**As already mentioned, knowing the local market and which type of properties are in demand is important. A property sitting empty is costing you money, not generating it. However, even knowing that, there is still the decision as to whether it’s better to take on a more expensive property that will attract a higher rent, or two or more smaller ones that may have a higher rent to value ratio even though the rents are lower.**Location**In real estate, the mantra is ‘location, location, location’, and that’s just as true for rental properties. Getting the location of the property right is just as important as choosing the right property type. If the market wants apartments in the city and large houses in the suburbs, buying an apartment in the suburb could be a costly mistake.Location opens up other possibilities such as vacation properties. These can range from city apartments, beach or lake-front houses, to near big tourist attractions, anywhere that people are keen to visit. With the development of sites such as AirBnB, it’s easy to advertise properties for short-term rentals. While the property is likely to be empty at times this could easily be offset by the higher amounts that you can charge, and you can get to enjoy the property too.**Resources**Hopefully this guide has given you plenty to think about, and you now feel confident that you’re in a position to make decisions that will benefit your financial future. However, the right decision needs the right information, and so we’ve included these rent-vs-buy calculators from *Find Real Estate, Homes for Sale, Apartments & Houses for Rent | realtor.com®* (Rent Vs. Buy Calculator) and* Real Estate Listings, Homes For Sale, Housing Data* (Rent vs Buy Calculator - Is it cheaper to buy or rent) to provide a personalized breakdown to assess whether buying or renting in your neighborhood of choice is most financially beneficial option for you.**Closing**The wealthy (not necessarily the rich) believe that *home* is not a *place* or *house*. It is the people that make a *home*. All too often a big house (the dream) is paired with long commutes and stressful jobs which minimizes the time away from home and what really matters.The wealthy don’t attempt to keep up with the Joneses. They keep things simple and spend their resources (time and money) on the essentials and make sound financial decisions.On an emotional note, although buying a home goes against everything from an investment standpoint there is something to be said about the security of owning especially if you have a family with kids.