Tag: Rental property

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Homeowners Shell Out for Flood and Tornado Protection

Florida homes in flood water

Flood. Tornado. Wildfire. As a homeowner, none of these are words you want to hear. While home construction in areas prone to natural disasters has advanced in the past several decades to provide better protection, properties in these regions still come with significant risks. However, Americans are continuing to purchase and move to vacation homes in places like Cape Coral, North Port, and Tampa, Florida — likely due to the reasonable cost of living, low property taxes, and proximity to both water and outdoor attractions.

It’s likely that many of these buyers simply aren’t aware of the potential issues that come along with buying a home in these areas.

“…House hunters should be aware that purchasing in a disaster-prone area not only puts them and their home at risk, but their finances as well. Home values in climate-endangered places may fall in the coming years as consumers learn more about the risks to properties in these areas,” says Redfin Senior Economist Sheharyar Bokhari. In fact, nearly all second homes bought within the past two years (94%) are at high heat risk, while more than three quarters (78%) have high storm risk.

According to the results of an August 2022 Redfin survey, current homeowners in these locales are quite aware of and proactive about the threats: 71% of Florida homeowners have spent money to protect homes from climate risk, and more than half of all homeowners (58%) have. More than a third (33%) of all homeowners have also put more than $5,000 into climate-related house projects. The majority (26%) of improvements were to mitigate extreme heat, while 22% invested in steps to help minimize extreme cold, 16% took measures to prevent flooding, and 14% focused on guarding against hurricanes and other tropical storms. Among Florida homeowners, this percentage was nearly triple the national figure, at 40%. Overall, hurricane and major storm coverage actually saw the biggest increase among all homeowners since February 2021, growing from 19% to 29%.

Here are the most common types of disaster-specific coverage and how costs vary across the U.S.

Flood Insurance

Redfin’s survey found that 36% of homeowners have flood insurance, which comprises the highest portion of respondents. However, many of those with flood coverage are still underinsured overall; just 18.5% of homes located in the areas required to evacuate due to Hurricane Ian had coverage through FEMA’s National Flood Insurance program.

While the price of flood insurance is dependent on your location, the national average cost through the National Flood Insurance Program (NFIS) is $771 per year. States with the most expensive flood insurance include Vermont ($1,652/year), Connecticut ($1,504/year), Rhode Island ($1,458/year), Pennsylvania ($1,407/year), and West Virginia ($1,355/year).

Related: “How to Choose the Right Homeowners Insurance” 

Tornado Insurance

Standard homeowners insurance usually covers hail and wind damage, but not high winds or tornadoes specifically. If you live in an area that is at high risk, like the states that are part of “Tornado Alley” (generally Texas, Oklahoma, Kansas, Nebraska, Iowa, and parts of Louisiana and Colorado), you’ll want to consider purchasing windstorm insurance as part of your standard policy.

The cost of a windstorm insurance add-on depends on your particular geographic region, and has a deductible that’s a percentage of the total dwelling coverage amount, which usually ranges between one and five percent. However, in coastal areas, it can be up to ten percent. Alternatively, the deductible may be a fixed amount from around $500 to $5,000.
States with the highest premiums by windstorm deductible amount are Oklahoma, Kansas, Nebraska, and Colorado.

Fire Insurance

Most standard homeowners insurance policies have some level of coverage for fire and smoke damage, and the average cost of a policy that includes fire coverage is $1,899 per year. However, individuals in regions that are at higher risk of wildfires, like California, can pay much more than that — especially since many companies won’t provide sufficient coverage for damage in these areas. The percentage of homeowners who purchased wildfire coverage grew from 15% to 24% in the past 18 months, and homeowners insurance costs increased 10% in California alone.

It’s also important to note that there are a few different types of fire insurance: dwelling coverage, which pays to rebuild or replace the actual structure of the home, other structures coverage, which refers to buildings on the property like a shed or garage, and personal property coverage, which pays for one’s belongings inside the home like clothing and appliances. Those in fire-prone areas might want to consider purchasing an additional dwelling fire policy, which costs an average of $651 per year.

If you’re a homeowner who lives in or is planning to move to a region that’s at high risk for natural disasters and could use some extra cash to fund improvements that can help guard against potential damage to your property, take our five-minute quiz to see if a Hometap Investment might be a good fit for you.

YOU SHOULD KNOW…
We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

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Beginners’ Guide to BRRRR Real Estate Investing

tools in foreground, man nailing wall in background

It may be easy to confuse with a sound you make when the temperatures drop outside, but this slightly strange acronym has nothing to do with winter weather. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. This method has gained quite a bit of traction and popularity in the real estate community in recent years, and can be a smart way to earn passive income or build an extensive investment portfolio. 

While the BRRRR approach has several steps and has been refined over the years, the principles behind it — to buy a property at a low price and boost its value to build equity and increase cash flow — is nothing new. However, you’ll want to consider each step and understand the drawbacks of this approach before you dive in and commit to it.

Pros and Cons of BRRRR

Like any income stream, there are advantages and disadvantages to be aware of with the BRRRR method.

Pros:

Potential to make a significant amount of money 

Provided that you’re able to buy a property at a low enough price and that the value of the home increases after you rent it out, you can make back much more than you put into it. 

Ongoing, passive income source

The primary appeal of the BRRRR approach is that it can be a relatively passive source of income; aside from your responsibilities as a landlord (or outsourcing these duties to a property manager), you have the opportunity to bring in consistent monthly rental income for low effort.

Cons:

The risk of miscalculating ARV

When determining the after-repair value (ARV), make sure you’re taking into account the quality of the upgrades you’re making — it’s not uncommon for individuals to cut corners on bathroom or kitchen finishes because it will be a rental property, only to have the appraisal come in less than expected due to this.

Investing in a rental property can be more expensive than a primary residence

Rental property financing (and refinancing) often involves a larger down payment requirement and higher interest rates than an owner-occupied home. 

The time necessary to build up enough equity for a refinance

Growing equity takes time, and depending on current market conditions, it may take longer than you would like for the property to accrue enough to refinance it.

Responsibilities as a landlord

Unless you’re willing to hire and pay a property manager, you’ll need to handle any tenant issues that pop up yourself once you rent out the residence. If you plan to accrue many rental properties, outsourcing property management may make sense, but many landlords choose to manage the first few properties themselves to start. 

The BRRRR Method, Step by Step

Buying

For your first property, you’ll want to familiarize yourself with the characteristics that generally make for a good investment. Ultimately, you’ll want to seek out a property you can purchase at or below market value — as this will increase your likelihood of making money. But you’ll also want to make sure that you’re making a wise investment that makes sense in terms of the amount of work the property requires. 

There are a number of ways that you as a potential buyer can increase your odds of securing a home for as low of a price as possible. 

These include: 

  • Learning about any specific motivational factors the seller has in addition to price
  • Offering cash (if you need it, you can get a short-term, “hard-money” loan), then take out a loan after rehabbing the property
  • Renting the house back to the seller, which is common with the BRRRR method
  • Write a genuine letter to the buyer that explains your vision and goals for the property 
  • Waiving contingencies and buying the home “as is” for a faster closing
  • Get creative with your offer (for example, requesting to buy the furniture with the property)

Rehabbing

Before purchasing a home and rehabbing it, you should do some rough estimations of how much you’ll need to spend on the improvements — including a breakdown of what you can DIY versus what you’ll need to outsource. Make sure to consider whether this rehab will justify a higher monthly rent and whether the value added will exceed the cost of the project. 

Fortunately, there are some models that can help you calculate some of the expenses involved to make a more informed decision.

You can determine the ARV of the home by combining the purchase price with the estimated value added through rehab. One important thing to note is that the estimated value is not the same as the cost of repairs; it’s the value that you believe the repairs will add to the home overall. If you purchase a home for $150,000 and estimate that repairs will add approximately $50,000 in value, the ARV would be $200,000.

Once you land on the ARV, the next step is to determine the MAO (Maximum Allowable Offer). 

This equation is slightly more complicated:

MAO = (ARV x 70%) – cost of repairs

So, using the above example, if the After Repair Value of the home is $200,000 and the cost of repairs is estimated at $35,000, the MAO would be $105,000.

It’s worth nothing that there are certain renovations and updates, like landscaping, kitchen and bathroom remodels, deck additions, and basement finishing, that quickly add more value to a home than other fixes.

Renting

There are two important components when it comes to turning your investment property into a rental: determining fair market rent and securing suitable tenants. Websites like Zillow Rental Manager and Rentometer can help you set an appropriate rental amount. It’s also important to do due diligence when it comes to finding tenants. In addition to Zillow Rental Manager, Zumper and Avail can provide screening tools to help you vet potential applicants and perform background checks.

Refinancing 

Once the property gains enough equity, you’ll apply for a refinance. Keep in mind that while specific requirements depend on the lender, most will request a good credit score, a tenant who has lived in the unit for at least six months, and at least 25% equity left over after the refinance in order for you to get the most favorable rates and terms. 

Repeating

This part is pretty simple — once you pull out the cash from one property for a refinance, you can use it to put a down payment on your next investment property, while the refinanced home continues to bring in rental income.

Explore Real Estate Investing Resources

There are a number of resources that can help you learn more about and get started with the BRRRR method. For example, BiggerPockets provides valuable content and forums where you can connect with others in the financial and real estate spaces who are successfully using this approach. There is also a wealth of information on YouTube. 

Funding Your First Investment Property

If you’ve decided to pursue the BRRRR method for passive income, there are a handful of ways you can access the money you need for a down payment to purchase the property.

As a homeowner, you can take out a home equity loan to get a lump sum of cash. However, you’ll need to pay the loan back on top of your existing mortgage payment(s) and the application and approval process can be rigorous. A home equity line of credit (HELOC) provides a bit more flexibility, but monthly payments can fluctuate each month due to variable interest rates, and your lender can freeze your account at any time if your credit score drops too low. A cash-out refinance, which is part of the BRRRR process, is another possibility to access equity from your primary residence — and can allow you to lock in a lower interest rate. But since you’re taking out a new mortgage, you’ll have to pay closing costs and possibly an appraisal fee.

Finally, if you’ve built up equity in your home and need cash to cover the down payment or necessary renovations, a home equity investment may be a good solution. There’s no interest and no monthly payments, and you can use the money for anything you’d like without any restrictions. You can receive up to 30% of your home value in cash, and don’t have to make any payments for the life of the investment (10 years with a Hometap Investment).

It only takes five minutes to find out if a Hometap Investment might be a good fit for you and your BRRRR goals — take the quiz today.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

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10 Investment Property Loans and Financing Alternatives

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In a healthy housing market, investing in real estate can be a great decision if you’re looking to make some extra money. Not only is it a potentially lucrative source of passive income, but it also allows you to retain ownership of a property that may appreciate in the future. However, it’s wise to do your homework before investing in a property to avoid losing money. Below, we’ll cover different types of loans for financing investment properties, rental properties, and second homes so that you know what to look for in a property and a financing solution. 

Perhaps the most important thing to remember is that if you’re looking for quick cash, an investment property might not be your best bet; it can take years to see a positive return on your investment. Plus, if you don’t plan on maintaining the property yourself (experts also recommend setting aside 10–15% of the tenants’ annual rent amount for upkeep), you’ll also need to consider the costs of outsourcing property management, which ranges from $80–$100 on average per month. That’s in addition to your down payment and interest, property taxes, insurance, and utilities if you’re covering them for the tenant. 

For a $100,000 rental property, for example, you may need $30,000 or more just to close on the property and make necessary repairs before renting it out. A simple and common way to evaluate a potential rental property is known as the “one percent rule.” This states that if the gross monthly rent — prior to expenses — earned from the property is equivalent to at least one percent of the purchase price, it’s an opportunity worth exploring. 

Fortunately, if you’re wondering how to finance get a loan for an investment property, you have options. The following are some of  the best loans forptions for financing investment properties.

Types of Investment Property Loans

Conventional Bank Loans

While the specifics depend on the lender, standard loans can certainly be used as a rental property loan. There are some advantages that typically go hand in hand with using a conventional loan for an investment property, like low interest rates and costs. Traditional lenders also allow you to take out multiple mortgages, though most have a limit. However, there’s typically fairly high down payment requirements of at least 15-25% for investment properties, and your personal credit history and score factor into your ability to get approved for the loan.

FHA Multi-unit Financing

FHA loans for investment properties are backed by the Federal Housing Administration and can be used for new construction, purchases, and gut rehabs of existing properties. Unlike traditional loans, this financing option may only require a 3.5% down payment and may be a possibility for potential owners with a lower credit score than needed for a traditional loan. The catch? To qualify for an FHA loan for an investment property, you are required to reside in one of the units for at least a year.

VA Multi-unit Financing

If you’re an active-duty service member, veteran, or spouse, you may qualify for a VA loan for an investment property. It’s offered through both mortgage brokers and conventional lenders, and has no down payment, mortgage insurance, or firm credit score requirement. Like the FHA loan, you must reside in one of them to be eligible and may be required to have cash reserves to cover several months of expenses.

Portfolio Loans

Portfolio loans are mortgages that are not intended to be sold on the secondary market.  They are offered by private lenders, who may be community banks or credit unions, or mortgage brokers. They may be attractive due to their flexibility on term, down payment, and length, and interest rate along with their relatively lenient requirements. On the other hand, this lenient criteria often means that borrowers may have to stomach higher interest rates, higher fees, prepayment penalties, and even balloon payments; this means that you’ll be stuck paying the full balance at the end of the short-term loan.

LLC Loans

You may have heard of an LLC loan for an investment property, but it’s a bit different from other options, since it’s technically a loan to the LLC and not to you personally. Many real estate investors finance rental properties under an LLC in order to limit personal liability, establish business credit, and increase protection from lawsuits or disputes. While the process is fairly straightforward  — complete the easy steps to set up an LLC, and apply for a mortgage — you will first need to establish credit history for lenders to evaluate, which can be time consuming if you’re hoping to finance an investment property quickly.

“Fix and Flip” Loans

Also known as a “hard money” loan, these specialized fix-and-flip loans typically come with short terms (a few years or less), interest rates that average 10–15%, and points. One advantage is that there aren’t as many restrictions or hurdles to deal with as traditional loans; lenders also may determine the amount you can borrow by looking at the home’s after-repaired value.

Frequently Asked Questions About Investment Property Loans

Can I get a home equity loan on an investment property?

Yes, you can. While you’ll be paying interest on the loan, the rates are usually fixed — and often lower than a traditional personal loan.

Is it smart to use a HELOC for investment property?

While the right home financing solution for you depends on your own situation and goals, a home equity line of credit (HELOC) can be a good choice if you’re looking for flexibility in terms of how much money you can access and how often. However, the variable rate can present challenges if you’re seeking a predictable monthly payment.

How much can I borrow against my investment property?

The amount you can borrow against your investment property varies by lender, but a typical maximum is about 80% of your home’s value.

Can you have a HELOC on a rental property?

Yes, you can. This solution has the advantage of allowing you to borrow against your investment or rental property and pulling out cash as you need it.

Can you cash out on equity from an investment property?

Yes, you can, and the process works the same as a cash-out refinance on your primary residence. Like a refi on your own home, you may be able to lock in a lower interest rate on your investment property’s mortgage as well.

Learn how the BRRRR method of real estate investing uses refinancing to fund properties >>

Alternative Rental Property Financing

Home Equity Loan

A home equity loan allows you to tap into your equity to fund an investment property, and has the advantage of a fixed interest rate that is usually lower than that of a personal loan. By using a home equity loan for a second home, you’re essentially taking out a second mortgage, so it will have established, predictable rules for paying it back at the end of the term.

Cash-out refinance

A cash-out refinance of your current mortgage may give you the opportunity to fund an investment property and simultaneously secure a lower interest rate on your mortgage. Depending on the length of the mortgage you choose, however, you’re also possibly lengthening your payoff timeline.  You’re also still stuck with a lengthy application and approval process and closing, origination, and possibly even appraisal fees.

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HELOC

With a home equity line of credit (HELOC), you get flexibility when it comes to accessing funds, tax benefits, and the chance to improve your credit score. But it, too, has disadvantages, including unpredictable monthly payments due to the variability in interest rates. You also run the risk of your lender freezing your HELOC if your credit score or home value declines.

Home Equity Investments

Have you ever considered using the equity in your home to buy an investment property? Unlike a loan, a home equity investment from Hometap doesn’t come with any interest or monthly payments. You’ll need to settle the Investment within 10 years, through a refinance, buyout with savings, or sale of your home.

If you’re in the market for a rental property loan or financing alternative for a second home, start by determining what your funding needs are and what you might qualify for. Then start running the numbers to find the loan or investment solution that works for you. 

Take our five-minute quiz to see if a Hometap Investment might be a good investment property loan alternative for you.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

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2019 Hot Spots: Where to Invest in a Second Property

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As Forbes recently pointed out, interest rates are likely to rise in the coming months. If you’ve been considering a second property, whether as a vacation home, rental property, or both, the time to invest is now.

Second (or third or fourth) properties offer significant income-generating opportunities with short-term rentals only gaining in popularity. Airbnb, just one of the short-term rental platforms, earned $2.7 billion since 2008. There’s also opportunity with long-term rentals in areas that are perhaps less enticing for vacation rentals but have, for example, a significant student population.

But while interest rates are likely to rise, not all property values are set to rise. Here are five areas where we think homeowners have the greatest chance of seeing a return on their investment.

Orlando, FL

Real Wealth Network has noticed an increased demand for single-family homes in Florida with Orlando, in particular, seeing an increase in its population from a mix of job seekers, retirees, and students. The area’s warmer temperatures, beaches, and no state income tax are sure to continue being a lure to diverse groups. In fact, over the last seven years, the area’s population has grown 227% faster than the national average.

Low housing prices (you can find many homes under $200,000), property taxes, and insurance allow you to claim a stake in the market today while increasing rental rates promise continued opportunity.

Raleigh, NC

WalletHub named Raleigh #3 on its list of best state capitals based on its high affordability, economic well-being, and quality of education. The area benefits from several factors, not the least of which is being part of the Research Triangle along with Durham and Chapel Hill. The area is home to some 200 companies, including high-tech startups, information technology, and biotechnology, helping it rank high on Glassdoor’s 25 best cities for jobs list. It’s also projected to be the fastest-growing metropolitan area over the next five years.

Home prices are expected to continue rising, so the time to purchase is sooner rather than later. For those looking to rent, the area universities of Duke, University of North Carolina at Chapel Hill, as well as several other private colleges provide a steady stream of students.

New York, NY

Purchasing real estate in one of the world’s busiest cities may not seem affordable at first, but the opportunity for gain is so great that it’s still worth considering if you’re looking for a lucrative investment. The median property price is just over $1.1 million, but rental income amounts to more than $3,000. Boroughs like Queens may prove to be just as attractive as Manhattan or Brooklyn.

The Association of Foreign Investors in Real Estate named New York #2 on its list of top global cities for real estate investment. But if you’re looking to list a property as a short-term rental on sites like Airbnb, you may want to weigh the risks. The city has tried to enact laws to make it illegal to rent an apartment for less than 30 days, creating an ongoing legal battle.

Sacramento, CA

The one West Coast city on our list, California’s capital is poised for both population and job growth. The average home price of $389,117 may seem high, but it’s less than half of that of Los Angeles (which is more than $900,000). Plus, increased job growth comes new renters and DoughRoller reports that home prices are expected to increase 33% over the next three years.

WalletHub lists Sacramento in the middle of its best state capitals list, but what it lacks in affordability, it makes up for in quality of life. Just over an hour from the Bay Area, Sacramento is becoming more attractive to those who want the proximity to the coast with more affordability.

Jacksonville, FL

Some of the best places to invest are beach towns, particularly for those looking to rent out the property via short-term vacation rentals. While Jacksonville offers beaches in droves, it also has a rotating market of renters thanks to the area’s 34,000 military-affiliated personnel. As HomeUnion reports, Mayport Naval Station is set to bring eight new ships in the coming years, potentially increasing the number of personnel looking for housing.

The city has one of the country’s fastest-growing populations due in part to both the naval station and other area businesses like Anheuser-Busch and Vistakon. Forbes even included the city on its best places for business and careers list. And, as noted with Orlando, there are no state income taxes.

No matter if one of these places piques your investment interests or if you have your sights set on another destination for a second property, Hometap can help. As a homeowner, you can tap into the equity you’ve built in your home in exchange for a share of the future value of your home. In fact, purchasing a second home is one of the top three reasons homeowners apply for a Hometap Investment. Many use the investment to put a down payment on a second property. Learn more about using Hometap to fund a second property.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

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Are You Financially Prepared to Buy Your First Investment Property?

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On paper, buying an investment property seems like a no-brainer. Someone else pays off your mortgage while providing you with a steady monthly income. Over the years, the property’s value increases, and when it’s time to sell, you get to enjoy a big lump sum payout.

But investing in an income property is not without risks. Here are six questions to ask yourself to determine whether you’re financially ready to be a landlord.

Should You Pay Off Other Debt First?

Owning an investment or rental property may yield you a steady monthly income. But it also means higher monthly expenses. You’ll have a second mortgage as well as new insurance and tax bills. Then there’s the upkeep and maintenance that comes with any property purchase. (We’ll talk more about that in a minute.)

To ensure you’re ready to make such a big commitment, take an honest look at your current and future financial needs. Is it smarter to use the down payment you would make on an investment property to pay off high-interest credit card bills? According to Investopedia, that money may also be better spent paying off medical bills, starting a college fund for your teenage children, or paying off student loans.

Should you get a home equity loan to pay off your student loans?

How Much Down Payment Can You Afford?

In order to secure traditional financing for your investment property, you’ll need cash. Lots of cash. Why? Because traditional mortgage insurance isn’t available for investment properties.

Be prepared to put down at least 20% of the home’s value on signing day. To secure even better interest rates, aim for a 25% or higher down payment.

Is Your Credit Score in Check?

When it comes to borrowing money, the math is usually pretty simple: The higher your credit score, the lower your interest rates. Borrowers with a credit score of 800 or higher are generally offered the best financing.

If your score isn’t that high, don’t stress. But do be prepared to spend more if you go with a traditional loan to fund your investment property. Loan applicants with a credit score of 740 or lower will likely face higher interest rates and lender fees, which means a bigger down payment and higher monthly payments. You may find that a home equity investment is a smarter choice. Typically, you’ll need a 630 or greater credit score, but because it is an investment, you won’t have to worry about interest at all.

How much will improving your credit score save you each month? Find out more here.

How Big Is Your Emergency Fund?

Remember those upkeep and maintenance costs mentioned earlier? In addition to your 20% (minimum) down payment, you should also have thousands of dollars in cash ready to cover unexpected maintenance and repairs.

Investment properties also have additional risks beyond a leaky water heater or busted air conditioner. That emergency fund needs to cover the mortgage between tenants. You also want to be prepared for renters who can’t pay their bills as well as potentially higher property taxes. Some states only offer a tax exemption on your primary residence, and others charge increased rates for rental properties.

Are You Looking for a Quick Return?

If so, then you may want to invest elsewhere. Investment properties are all about the long game. HGTV estimates it will take at least five to 10 years to see a return on your investment.

Can You Handle Fluctuations in Income?

Tenants come and go. And when they go, you are still responsible for the home’s monthly mortgage, tax, and insurance payments. If the thought of pulling those funds from your bank account fills you with fear, you may want to put your landlord ambitions on hold while you build your savings.

In addition to having money on hand to cover repairs, you also want to be able to comfortably cover the home’s monthly expenses while the repairs are being made.

Funding Your Investment Property

Homeowners who are ready to take the leap have the option of tapping their largest asset—their home—to fund the purchase of an investment property.

When it comes to drawing from your home’s equity to grow and diversify your portfolio, you have plenty of options.

Download guide for tapping into your home's equity

However, remember that traditional options like home equity loans will come with monthly payments and interest. As an alternative to working with a lender, some homeowners have found Home Equity Investment products like Hometap a smart way to fund their investment property dreams.

With no debt, interest, or monthly payment, a Hometap Investment can offer you cash today in exchange for a share in your home’s future value. In 2018, homeowners saw their home equity increase an average of $15,000. Tapping into that equity today allows you to diversify your portfolio with additional real estate and reap the rewards of appreciation.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

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1 Question to Answer Before Financing Your Second Home

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With your first property, you navigated the ins and outs of securing a mortgage, so purchasing a second home should be easier, right? Believe it or not, how you intend to use your home—whether as a vacation house or investment property—directly impacts your financing options. Read on to understand how loans differ and what you need to know before buying your second home.

Define Your Second Home

Banks make a distinction between a house on a lake where you plan to vacation and a house you plan to rent out to generate revenue. Their definitions come down to how you plan to use the property.

Vacation Home: A vacation home is somewhere you intend to live in for part of a year in addition to your primary residence. As Nolo points out, timeshares and rentals don’t qualify as vacation homes. If you plan to list your property on Airbnb in the present or future, be sure to check with your lender first as mortgage rules may preclude short-term rentals of any kind.

Investment Property: An investment property, by contrast, is neither a place you live in nor a primary residence. Instead, its intended use is to make money for the buyer through rentals, appreciation, or via tax benefits. The common types of investment properties are residential or commercial rentals or flippers where the goal is to resell the real estate for profit.

Fund your Second Home

Once you’ve defined how you’ll use your second home, you can determine which financing options you qualify for and which one makes the most sense for you. Remember: Deceiving a lender about intended use is occupancy fraud and could send you to court.

Second Home Mortgage

If you want that beach house, mountain cottage, or other vacation property and can afford the associated costs, a second home mortgage may be your best bet. Mortgage underwriters will only look at expenses for principal, interest, taxes, insurance, and homeowners association (HOA), if applicable. If these check out, your loan is approved.

As a homeowner, however, you’re already familiar with the costs and have gotten a taste of the hidden expenses of home maintenance. With a second home, you’ll also want to factor in a budget for additional expenses, such as travel to and from your second home, utilities, furnishings, cookware, and linens.

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Investment Property Mortgage

You see the incredible potential of an income-producing property, whether via renting or flipping. In addition to a sizeable down payment, banks require a strong credit score to lock in a fixed rate. However, know that your lender may check in to verify who exactly is occupying your property either in-person or online.

Home Equity Loans

Using the equity you’ve built in your first home to fund your second means taking less cash from your pocket. Home equity loans can offer lower interest rates compared to a new mortgage.

However, as with your first mortgage, home equity loans require timely payments. Missing a bill puts both your primary and secondary homes at risk. In addition, be sure to understand what kind of rate you’ve signed up for. An adjustable rate is exactly what it sounds like: moveable. You may be paying more than you bargained—or budgeted—for at any given time.

Hometap Investment

Unlike a loan, a Hometap Investment has no monthly payments, interest, or restrictions on how you use those funds—whether it’s a vacation home or investment property. Essentially, you’re taking on another investor in your home’s appreciation rather than borrowing on what you’ve built with the obligation of paying it back.

By using your home’s equity to fund other investments, such as buying another property, you’re diversifying your wealth. Real estate offers an attractive diversification of your portfolio of stocks, mutual funds, and bonds, and a second home ensures you’re not keeping all your wealth in one basket, i.e., your first home.

Is a Second Home in Your Sights?

Buying your first home may have seemed scary but you did it. Along the way, you’ve lived the highs and lows of homeownership arming you with the experience needed to add a second property. Take a close look at your total financial picture and weigh your financing options before you leap. With the right preparation, your second home can help you achieve vacation bliss or financial returns.

Take our 5-minute quiz to see if a home equity investment could be your solution for funding your second home.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

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Should You Use Your Home Equity to Buy a Second Home?

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A sweet little seaside cottage just went on the market and you’re now daydreaming of a weekend home. You found a fixer-upper with great potential—you could buy it and flip it. Or you’d like a new income stream as a rental property owner, and a perfect bungalow down the street was recently listed.

In any of these scenarios, since you’re not planning to leave your current home, the proceeds from its sale aren’t an option for a down payment—but that may not necessarily be a deterrent. In many cases, taking on a second property can still align with both your personal and financial goals.

To make purchasing your second home a reality, it all depends on how you finance it. And in these types of cases, many homeowners consider using their current home’s equity to buy a second property. The market is certainly favorable: In 2017, according to CNBC, homeowners with a mortgage (representing approximately 63% of all properties) saw their home equity go up by 12% at an average of $15,000 per homeowner and more than $900 billion collectively. That extra value could be tapped to go toward another down payment.

Should you use your home equity to buy a second home? Here are a few things to consider.

How Much of Your Home Equity Would You Need to Tap?

Regardless of whether you own your home outright or currently have a mortgage, you’ll want to figure out the exact amount you’ll need to take on a second property. Many homeowners will seek to borrow only enough funds to cover the down payment for the second home. But if you’re considering a fixer-upper, it may make sense to take out an amount sufficient to cover not only the down payment but also anticipated repairs and renovations.

What’s Your Risk Tolerance?

Knowing how much risk you’re comfortable taking on is key when using your current home equity to buy a second home. If your second home will be an income property (either short- or long-term rentals), do you have enough cash on hand to cover expenses during lean times of year or periods when the property is vacant? If something breaks or unforeseen damage occurs to either your primary residence or second property, do you have enough money to cover these unexpected repairs? Finally, if a financial hardship were to strike (e.g., a medical emergency or job loss), could you potentially be on the hook for foreclosure on either or both of your properties?

What Will Your Debt-to-Income Ratio Be?

Again, knowledge is power. Consult a mortgage calculator and compare your home equity lending options to know exactly what your monthly payments will be once you’ve taken on a second home. Read all fine print thoroughly and consult with your potential lenders to ensure you’re getting the most advantageous financing plan for your goals (and no hidden surprises, like fees, down the line). In addition to your monthly payments, factor in any tax implications (both obligations and benefits) that may result from purchasing a second home. If you’re not sure how your taxes will be impacted, speak to your accountant or other trusted tax professional.

Ultimately, your current finances and the specifics of your potential second property will play an equal part in determining whether becoming a homeowner twice over is feasible (and worth your while). By making clear-eyed calculations and having honest conversations with your potential lending partners, you can decide whether it makes good financial sense to take on another property.

Ways to Use Your Equity to Fund a Second Property

Home Equity Loan

A home equity loan gives you a lump sum of cash that you can use for a down payment on another property, and the fixed interest rate means you’ll pay the same amount every month.

Cash-out Refinance

With a cash-out refinance, you take out another mortgage on top of your current one, and can often lock in a lower interest rate by doing so. However, since it is a brand new mortgage, a refinance comes with fees and closing costs — and may extend your payoff timeline.

Home Equity Line of Credit (HELOC)

A home equity line of credit lets you pull funds as needed, so it can be more flexible than other options. But with that flexibility comes unpredictability as well, since the variable interest rate can change every month.
Home Equity Investment

Finally, a home equity investment allows you to tap into your equity in the form of a lump sum of cash in exchange for a percentage of your home’s future value.

Frequently Asked Questions About Using Your Equity to Buy a Second Home

Is it smart to use a HELOC for investment property?

While the best financing option depends on your own situation and goals, a home equity line of credit can provide flexibility in terms of both the amount of funding you can access and the frequency with which you can access it. However, it might not be an ideal fit if you’re looking for predictable monthly payments, as the interest rates are variable.

How do you use your equity on a paid off home to buy a rental property?

There are more than a few different ways to tap into your equity to purchase a rental property, including a home equity loan, home equity line of credit, cash-out refinance, or home equity investment. All of the options have pros and cons, so it’s a good idea to weigh your options.

Can I use the equity in my house as collateral for a loan?

Yes — with a home equity loan you’re technically using your home as collateral, as the financing is being secured with its value.

Can you use money from a home equity loan for anything?

Typically, yes. You receive a percentage of your home equity in the form of a lump sum, so it can be helpful if you’re hoping to use the money for a down payment on a second property.

See if you prequalify for a Hometap investment in less than 30 seconds.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

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5 Questions to Ask before Renting a Room in Your Home

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Many homeowners, especially empty nesters, have mulled over turning their spare bedroom, in-law apartment, or room over the garage into a side income stream. But what does renting out that extra room actually entail—and does it make sense for you and your goals? In the interest of preserving both your home and your finances, here are five key questions to help you decide whether or not to rent out a room in your house.

1. Am I Legally Allowed to Rent out a Room?

First things first: Does your city allow you to rent out a room? According to Airbnb, some local jurisdictions require permits and/or licenses while others prohibit certain types of rentals altogether (e.g., short-term rentals). Speak with your local housing authority to gain clarity on what’s allowed for your specific municipality. Once you learn the legal requirements, follow all conditions to the letter to avoid fines or other penalties.

2. What Should I Charge for Rent?

Will your rentals be short-term stays or long-term leases? The type of room rental you select will impact what you charge for rent (and what you’ll spend on upkeep, which can impact your rental rates).

Short-term rentals will afford you higher per night rates while also requiring more hands-on property management on your part. Your short-term rental income will also be more erratic based on travel trends and seasonality. Long-term rentals will have a lower per night rate but with the trade-off of a longer guaranteed income stream and (most likely) less frequent maintenance. Consider each rental type’s specific overhead and time involvement when determining what to charge to rent your room.

Of course, you’ll want to make sure your rental rates fit the local market. For short-term rentals, look at per night rates for local properties similar to yours on vacation rental sites like Flipkey or HomeAway. For long-term rentals, Cozy, a property management software company, recommends doing pricing research on local listings from craigslist and Roommates.com.

3. How Should I Prep My Room for Rent?

Look at the room—and your overall property—as though you’re the potential renter. How can you make the space more attractive? Or one better: Which improvements and upgrades can result in a higher rental rate?

In preparing a space for rental, Zillow recommends first changing the locks then repairing any problem areas (such as holes in the walls or eroding caulk), adding a fresh coat of paint, and getting the space professionally cleaned (including carpets). If the room is part of common areas that overlap with your living space, Cozy’s experts advocate for individual smart locks on each bedroom as well as moving valuables from common areas to private and secured storage.

4. Do I Need a New Insurance Policy?

Depending on your current homeowner’s insurance policy, you may already be covered for losses, damages, and liabilities should you rent out a room in your home. Contact your homeowner’s insurance representative to go over your rental plans and how the coverage you currently have protects you, what gaps exist, and which services should be added to protect your home.

You may also want to ask your renter to look into renter’s insurance. According to Foundation Insurance Group, your homeowner’s insurance may not cover any damages to the renter’s belongings in case of fire, damage, or an accident. Renter’s insurance will also cover the renter should their actions cause damage to your home or belongings.

5. What Should I Put in the Listing and Lease?

For listings, go back to the sites where you researched your rental prices and use these listings as examples of what to include when you post your own rental. Necessary details include rental type, how many people the space can accommodate, pricing, neighborhood/location, photos, availability calendar, and amenities. The team at Guesty has a step-by-step tutorial of best practices for Airbnb listings, including ideal summary length (spoiler: 250 characters or less) and optimal photo sizes. Additionally, most room rental sites have a tips and resources section with recommendations for how to make your listing stand out from the pack.

Regarding leases, at minimum, the lease for your room rental (both short- and long-term) should cover both the owner’s and renter’s rights and responsibilities, including the amount of rent, the dates of the rental, security deposit policies, and lifestyle factors such as pets and guests, says the team at RocketLawyer. Many free lease templates are available online to get you started, and it’s always a good idea to have a legal professional review any final documents before you get your first tenant.

Done wisely, renting out your spare room can bring in much-needed funds to help you reach your goals. Know your local laws, vet your renters thoroughly, and foster good communication with your renters and you’ll protect the value of your home while also accessing its income potential.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.