Are you in a situation, where you just inherited a property and are not sure where to go from here? If you already own a home, you may be worried about having to keep up with the cost of both properties – from property taxes, to insurance, to maintenance. In areas like Orange County, San Diego, or Los Angeles, you may be faced with a particularly hefty tax bill year after year.
Usually, this is when people make the decision to convert that property into an income generating property. When it comes to passive income, and offsetting the costs of ownership – renting it out is usually the easiest way to accomplish your goals. If you did acquire a property in an area like Orange County, San Diego, or Los Angeles; you are also in a rather lucky position, as these are very coveted areas to rent in. It is not uncommon to see a 1 bedroom go for $1,800-2,500, a 2 bedroom for $2,500-3,500, and up to $4,000 for 3 bedroom homes. In setting a rental price, usually it is helpful to see what the area is going for, for similar properties. A quick Zillow or google search of your zip code should help you find properties for rent, and you can sort using filters to find the most similar comparable to your home.
Another thing to consider is the condition the home is in. Is it due for some big repairs, like a roof replacement or some plumbing upgrades? The last thing you want is having a tenant in the property, and a past-due repair goes bust – and now you are on the hook to take care of it ASAP. Or, is it a little dated, and in need of some remodels? A new bathroom, or an updated kitchen? Does it have working appliances? These things will need to be taken care of before you list it for rent, in order to draw in good, longstanding tenants – and to increase the value of the home, to make sure you are getting a fair rental price.
Remodeling and major repairs can be a really daunting process, so it’s helpful to get a quote from a contractor you trust (or maybe a few) to get an idea of what it will cost for everything. Sometimes these things can cost well over $50-100,000 or more, depending on the extensiveness of the work needed. And, in urban areas and cities such as Los Angeles, Orange County, and San Diego – the labor and materials are typically not cheap. Even though it may be tempting to make a few Home Depot runs and try to do it yourself, it may take a lot of time – which is time you are losing money, by not having a tenant to help offset the home’s expenses. Plus, if you are not experienced in home remodeling – it can be stressful, and you may end up spending more money if something goes wrong and you have to bring in a contractor to help fix it. As always, when it comes to using a contractor – make sure they are licensed and insured, to protect yourself.
Now, you may be thinking to yourself: How will I afford all of this? If you get the quotes from a contractor, and it is more than you can afford, many times people consider borrowing on the home’s value. When you have an investment property, you cannot use typical primary residence financing – you either have to get a conventional loan, or an investment property loan. Conventional loans require a minimum of 620 credit scores, and have a rigorous application process. It can take up to 45 days to close, before you receive funds as well. For people who may have credit or income issues, or are pressed on time to receive funds, it may be worth exploring different investment property loan options. Two examples of investment property loans would be:
- Private equity loans, which are temporary financing options. These loans are 2-5 years in term, with interest only (non-amortizing) payments and a balloon payment at the end. Typically, these are best for individuals who plan to refinance the home into permanent financing before the term ends. For people who may have credit or income issues, or may be pressed on time – this may also be a beneficial option. The typical close time for these loans is 2-3 weeks, and sometimes monthly payments can even be built into the loan (for a fixed period of time) by utilizing the equity available.
- DSCR loans (debt-service-coverage-ratio loans), are long term financing options. These are amortizing loans that utilize rental income to qualify for the loan payment, and can be more flexible on credit scores than a conventional loan. These loans can take a bit of time to close though, varying from 30-45 days on average.
When deciding how much cash to borrow from the equity in the home, it is important to make sure that you do not underestimate the costs you will need to cover. Any time you take on a mortgage, there are closing costs – such as an appraisal, title, and escrow fees, to name a few. If you end up needing more funds to finish your project, you don’t want to have to pay for those fees twice; and many times you have to wait for a certain period of time before refinancing the loan to pull more cash out. With the mortgage, you also do not want to have a monthly payment more than a renter would bring in – so it is helpful to work with your loan officer, to find a monthly payment that is comfortable and leaves room for you to have passive income.
Here at Independent Home Finance Inc., we work hard with our clients to figure out a long term game plan to meet their goals, and provide tailored services to each of our individual clients’ needs. Feel free to reach out today, to learn more about what financing options may be the right fit for you.