By Peter AndersonLeave a Comment – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited June 30, 2008.
Instruct those who are rich in this present world not to be conceited or to fix their hope on the uncertainty of riches, but on God, who richly supplies us with all things to enjoy. Instruct them to do good, to be rich in good works, to be generous and ready to share, storing up for themselves the treasure of a good foundation for the future, so that they may take hold of that which is life indeed. 1 Timothy 6:17-19
This verse speaks to me about the importance of relying on God for all things, and not hoping to find happiness through things, money or people. When we fix our hopes on the “uncertainty of riches”, we’ll often be let down. Stock markets crash, real estate doesn’t always appreciate.
When we fix our hope on God, and are generous with what we’ve been given, we build up a treasure in heaven that no money can buy. Doing good works in itself won’t buy us a place in heaven, but it is an expression of our faith. As such we need to do our best to help those around us in as many ways as we can.
Last Updated on February 25, 2022 by Mark Ferguson
Finding a great rental property can be tough. In many markets, prices are increasing and being able to make money on a single-family house or multifamily building is difficult. One option is to buy the cheapest homes you can in your area and make them a rental. You can also buy a townhouse or condo and turn into a rental property since they are typically less expensive than a single-family detached home.
I think a townhouse or condo can be great investments, but you must look at the numbers closely. There are many costs associated with condos like HOA fees. The appreciation also may not be as much on condos and there are some very scary issues that can cause a great condo or townhouse investment to become a nightmare.
Why are condos and townhouses so much cheaper than houses?
Before I get into the pros and cons of condo and townhouse investments, I want to be clear on what a townhouse or condo is. A condo is a unit within a large complex of apartments or other condos. There may be units beside you, above or below you. You rarely have any yard except a shared space with other units.
A townhouse might have a small yard and may have neighbors beside the unit, but not above or below. Townhouses are typically worth more than condos because they have less connected neighbors and some land.
Both condos and townhouses are worth less than a single-family home that is otherwise similar.
How does an HOA work on a townhouse or condo?
Almost every townhouse and condo will have an HOA. The HOA takes care of the shared land in the complex and most HOAs take care of the exterior maintenance and landscaping. Many HOAs also pay for the water on a condo or townhouse and they may provide common amenities like a swimming pool, clubhouse or tennis courts. Some single-family neighborhoods have detached homes that are in an HOA as well. The HOA fees are usually much higher on a condo or townhouse because the HOA takes care of many more things. Here is a list of many things an HOA takes care of on a single-family detached home, patio home, and a condo or townhouse.
——————-Condo/Townhouse Patio Home Single-Family
Common Amen. Yes Yes Yes
Landscaping Yes Yes No
Water Yes No No
Exterior maintenance Yes No No
Exterior Insurance Yes No No
Clubhouse/pool Yes Maybe Maybe
Trash/snow removal Yes Maybe No
If you are wondering what a patio home is, that is usually a single-family detached home that has an HOA that maintains the lawn. The condo and townhouses have much more involved HOAs, which makes them much more expensive.
In my area in Northern Colorado, I see HOA fees for most single-family detached homes $400 or less a year (if they have an HOA). HOAs on condos or townhouses can are usually at least $100 a month and in some cases $400 a month. HOA fees can be even higher in larger cities with complexes that have security and many more amenities. Only one of my rental properties has an HOA and it is $300 a year.
Is it a bad thing to have an HOA on a rental property?
I have no problem with having an HOA on one of my rentals. The HOA takes care of the common amenities in the neighborhood and I have never had a problem with them. The only other job of this HOA is to make sure all the homes in the neighborhood are in compliance with the rules and regulations of the HOA. Many HOAs don’t allow work trucks to be parked outside, or excessive junk to be stored in the yard. For many people, this is a good thing and for others a bad thing. As a landlord, I think of it as another set of eyes on the property and I think it is a good thing to know if the tenants have junk everywhere or are not mowing the yard.
I don’t think having a small HOA with few responsibilities is a bad thing. A larger HOA will provide many benefits as well. Even though a larger HOA will be more expensive, it will lower many costs for a landlord. The HOA will pay for exterior insurance and maintenance, which will reduce the landlord’s expenses. The HOA will handle yard maintenance and snow removal, which can lower the landlord’s expenses as well. In my case, I invest in single-family homes and I have the tenants take care of the lawn and pay all utilities themselves so that does not save me much money.
HOA special assessments
The problem with a large HOA is they can create special assessments if they need more money for any major repairs or financial problems. I know of a couple of landlords who had their HOA fees increase greatly in a one-year span because the HOA had to repaint the exterior of the entire complex. The HOA fees went from just over $100 a month to $200 a month for every condo in the complex. Another HOA imposed a $30,000 special assessment on every single condo in a complex to pay for improvements. This particular landlord was planning on flipping the condo and all his profit disappeared with this assessment.
The HOA cannot impose a special assessment or raise the HOA fees without agreement from the HOA members, but in many cases, the members don’t show up to HOA meetings to oppose the changes. If you are buying a condo or a townhouse that has a fixed HOA fee, that does not mean it cannot be raised or a special assessment is levied upon the property.
Will the HOA allow rental properties?
Another problem that can come up with HOAs and rental properties is that some HOAs may not allow rental properties! My office recently had a home listed that was in an HOA and the HOA decided they would no longer allow rentals. The property was used as a rental property so the owners decided to sell it. Then the tenants decided to stop paying due to covid and it was a nightmare for the owners.
Be aware that HOAs can decide to ban rentals although it is rare.
Will condos or townhouses appreciate as much as detached homes?
Another factor to consider when buying a condo or a townhouse is the value of the property. Condos and townhouses are cheaper than detached homes because they are cheaper to build and demand is higher for single-family homes. You also own more land and have lower HOA fees with a single-family house. When you have an HOA fee that also reduces how much a borrower can qualify for when they get a loan. Usually, the condos and townhouses with the highest HOA fees will be worth less than similar condos or townhouses with lower HOA fees, because more buyers can afford them. A $100/month HOA fee could reduce the amount a buyer can qualify for by as much as $20,000.
I don’t invest for appreciation, I invest for cash flow when I buy rental properties. That does not mean I do not consider possible appreciation or depreciation on the properties I buy. There are some people who prefer a condo to a detached home, but most people want a detached house. In my area condos are the first to start losing value in a down market and the last to increase in value in an appreciating market. While condos and townhouses can appreciate and often do, single-family detached homes tend to appreciate more. It is the land that is causing the appreciation and detached homes have much more valuable land.
How can FHA rules affect condo prices?
FHA will loan on condos and townhouses, but they have very strict rules. FHA will not allow a buyer to use an FHA loan to purchase a condo in a complex if there are too many investors in that complex. If there are more than 50 percent investors in a particular complex FHA won’t lend to anyone in that complex. FHA is a very popular loan and it can greatly decrease values in a complex if the units cannot be sold using FHA. Here are some more requirements for FHA loans being used on condos. Even though conventional loans do not have to abide by FHA rules, some banks will also have guidelines similar to FHA to lend on a condo.
Is it smart to buy a condo or townhouse for a rental property?
As you can see there are many factors you must consider when investing in a condo or a townhouse. The number one factor should be cash flow and how much money you will make. You have to remember to factor in the HOA fees and the possibility that they may increase in the future. If you buy a condo in a complex that is older and will need work soon, you may see a huge increase in HOA fees or a special assessment. If many investors decide to buy units in a complex it could greatly lower the value of every unit due to FHA rules and don’t expect as much appreciation.
I think you can make money with condos, but given similar returns between a condo or townhouse and a single-family detached home, I will take the detached home every time.
My book, Build a Rental Property Empire, goes over my personal rental property strategy in depth. It covers how to find deals, finance rentals, manage them, and much more! It is available as a paperback and ebook on Amazon or as an audiobook on Audible.
Interior design goes beyond simply accessorizing a house with decorations. Anyone can decorate a home or property, but learning how to design an interior properly is a different skill set altogether.
Interior design enhances the beauty, functionality, and style of a property with the intent of making it instantly more appealing to guests and visitors.
For a real estate investor, interior design functions as a hook; a well-designed property entices visitors and makes it easier to picture themselves living in the property. It pulls potential buyers in, and makes them go, “Aha! I could live here!”
In this short article, we’ll look at four uses of interior design for the real estate investor. These are all ideas that you’ll be able to apply to your own investments. We’ll conclude with a short list of practical tips and tricks.
Add value
A simple real estate rule applies across the board: a well-designed interior adds value to your property.
Some of this may come in the form of actual furnishings with a tangible value that has been added to the residence; it may also come in an intangible form — your ability to sell the property for more because of the well-designed interior.
Apply beauty strategically
A beautiful interior can increase your home’s value, but it has to be a well-applied beauty. Interior design isn’t a matter of filling your property with all the pretty things you can find.
Apply the beauty strategically to gain the most benefit and have the most significant impact on potential buyers.
Think strategically. One interior designer recommends always repainting the front door of the property. A fresh, clean-looking door makes a great statement even before your clients have entered.
That is the key to understanding interior design; be selective in the beautiful elements you incorporate to receive the maximum benefit.
Enhance appeal
If you’ve added value by incorporating strategically beautiful elements into your home, you’ll succeed in increasing the immediate appeal of the property to any potential buyers.
From the pictures in advertisements to their first impressions on entering the property, potential clients will see a beautiful and well-thought-out interior.
Good design speaks not only to a well-kept property but to the quality of presentation that your clients will appreciate as well.
The above ideas are general, big-picture concepts to keep in mind with your interior design. Below are several specific tips and tricks that will help with interior designing.
Interior design tips and tricks
Balance “splurges” and “saves”
A “splurge” is a big-budget item such as a designer table in the dining room or a statement chandelier in the main hall. A well-chosen splurge draws the eye and ties the room together, serving as a natural focal point.
On the other hand, “saves” are the little design elements used to flesh out a room, from throw pillows to wall hangings, they can go a long way in interior decorating. You can go cheap on the saves and set aside more money for the splurges to maximize the “wow” factor without breaking your design budget.
Minimize clutter
Don’t decorate like someone who hoards everything. Often, more is not better when it comes to interior design, particularly for display properties; keep things simple and steer clear of countless small items which will just confuse the overall look of the room.
Feature upgrades
Two points here: first, when redesigning an old home, be sure to upgrade key fixtures and rooms, particularly the kitchen and bathroom. And second, capitalize on those upgrades by featuring those rooms more prominently. In the case of the kitchen especially, it may even be possible to draw attention to that room from other locations in the property, doubling-down on the benefits of your upgrades.
Avoid fads
Don’t decorate only according to the latest style; if you do, your interior design will soon look outdated. Go for time-tested, classic looks and design elements from mid-century modern influences, classic rustic farmhouse style, etc.
While not an exhaustive list, hopefully you find that the tips and principles listed above will help you increase the price and beauty of your property.
Keep reading
How to Successfully Integrate Smart Home Tech into a Home How to Properly Furnish a Small Bedroom to Fit a Large Bed How to Use Video Walls to Make Your Home More Entertainment-Friendly
Los Angeles is a beautiful place. It’s a dream vacation destination for many. And, for those that are even luckier, it’s here that they make a life for themselves. It becomes their address.
And one great thing to take advantage of is the fact that Los Angeles is a thriving city of investment possibilities. If you’ve got some money to spare in your savings, it’s high time that you put in your investment in the right place.
One of the best options is in real estate, with condominiums serving as an accessible point of entry. If that’s something that appeals to you, we’ve rounded up some of the benefits of investing in Los Angeles condos:
1. You’re investing in a tangible asset
When you’re investing in a condominium, you’re investing in a tangible asset. This, in itself, is already an advantage. When you’re buying a tangible asset, you’re investing in an income property. This means that you’re going to earn from it.
In the world of investments, no market is ever secure. Not even Los Angeles. There’s no one industry in this world that’s a hundred percent safe from a possible collapse.
If you don’t have a tangible asset, when the market collapses, you have nothing to bring with you. In this case, your takeaway is that you have a physical property to own.
Hence, you don’t stand to lose as much. You can sell this property, you can have it rented out, you can do anything with it. It’s one of the most secure investments that you’ll ever have in this lifetime.
2. You have a property that’s going to appreciate in value
When you invest in other things such as cars, for instance, they depreciate. Even when you re-sell it, later on, the resale value will always be lower than that of your purchase price. Hence, you’re losing money.
With real estate, you have an asset that’s appreciating. Particularly so with condominiums in Los Angeles. Because of its attractive location, it’s one asset that will constantly be in high demand. As a result, the value of said asset will also rise as properties in high-demand markets are likely to appreciate considerably over time.
3. You’re investing in a relatively stable market
As mentioned above, no market or industry is ever one hundred percent safe. Yet some are more reliable than others, one of them being the real estate industry.
That’s what makes it a good place to consider investing your hard-earned money in. In comparison, for instance, with stocks, real estate is less volatile.
There’s more stability because the demand for real estate is steady and rising. This means that by investing in a condominium unit in Los Angeles, you’re putting yourself (and your savings) at a lesser risk.
4. You’re protected against inflation
If you’re going to use your investments for business purposes, you don’t have to worry about inflation.
When inflation goes up, then the price of rent goes higher. You’re not directly affected by this. You’re earning more when you have a valid ground to raise the price of your condominium rental.
While this may mean that you have to market your property more to possible homeowners, this wouldn’t be that difficult in Los Angeles.
If you’re putting your unit up for short-term rental, know that tourists are regularly coming into Los Angeles. If you’re up for longer-term rental, then know there are also individuals coming into Los Angeles looking for that.
Think, students, and young professionals. Despite the rising price in rentals, you’re still going to have a steady market demand.
5. You have a chance to earn a regular income
Rentals will always be in demand. Because people are always looking for homes and apartments to live in. Especially in a hustling and bustling city like Los Angeles.
Whether you’ve only got one condominium, or ten, you have a chance to earn a regular income. And, this income is passive. Even when you’re out and about with your day job, you’re still earning rent. That’s extra income coming into your account. Without having to do much extra work physically on your part.
6. You’re leaving an investment legacy to the future generations
No one stays in this world forever. One day, when your time comes, what have you got to leave for your children?
Rather than leaving assets that don’t do the future generations any good, with a condominium, they can do something with it. It’s a gift to your children that can also help them earn an extra income on the side of their jobs.
Should they decide not to have it rented out, they have an asset to keep for themselves.
Investing in a condominium, or owning any other property in general, can be overwhelming. Especially if this is going to be your first time.
But it’s going to be a worthwhile effort. You can make no mistake in investing in real property, especially when you do it with care, study, and caution.
Los Angeles, for instance, is an excellent market to penetrate. Because houses and apartments are a commodity, investing in a condominium unit is set to bring advantages that make every dollar spent worth it.
More helpful tips
Should You Become a Landlord? Most Important Things to Consider Before Making the Jump A Step-by-Step Guide to Buying a Property for AirbnbThis Is How Real Estate Investors Use Interior Design to Make a Property More Appealing
Kanye West vs. Taylor Swift, Jimmy Kimmel, the CEO of Zappos and the entire world…
These are some of the best throwdowns in history! Well, at least to me. 🙂
Since I’m a financial planner and blogger, I don’t usually get many opportunities to throwdown.
That is until today….. Introducing The Grow Your Dough Showdown.
Boom!
Look how serious I am about this (Warning: the following picture may be scary to young children):
If you haven’t guessed it yet, investing is kinda my thing. I love investing and equally love encouraging others to invest for themselves.
The purpose for this throwdown is the following four reasons
Show you how easy it is to get started investing
Show you the plethora of online options available
Show you different strategies that you can try
Erase any doubts that you can’t do this on your own. Because you can.
Sound like fun?
The Players
There are a ton of online platforms that exist nowadays that you can invest with. In fact, a quick Google search for “online brokers” yielded over 62 million results.
Yowzers!
I don’t have time to use all of them (I wish!), so I had to weed it down to the 7 that I thought would be the most interesting and applicable to all of you.
Wanting a diverse selection I’m including a few traditional online brokers (like TD Ameritrade, Ally Invest), a few unique ones (Prosper).
Note: Motif announced it will be shutting down on May 2020 and transferring to Folio Investments. In turn, Folio announced it will be discountinuing their services on July 31, 2021. You can now sign up through Interactive Brokers as part of the final transition.
Related:
Here’s a brief rundown of each online platform:
TD Ameritrade
TD Ameritrade is another strong contender, and I’m excited to try out their platform myself. They’ve got 125 brick-and-mortar locations, but again the idea here is to be able to open and manage your account from the house. (In your pajamas. Eating cookies in bed. No excuses.)
They also brag about how you can open a Roth IRA in 15 minutes or less. And y’all know how I feel about Roth IRAs.
The company charges $0 per stock and ETF trade which is in line with where we want to be. (The $49.99 mutual fund trades are a no-no in my book, so I’ll stay away from these in this account.)
Even better? No minimum deposit is required to open an account and there are zero account maintenance fees.
TradeKing
If I had to pick two words to describe Ally Invest it would be… low… cost. Seriously low costs.
The company recently merged with Zecco, another online discount brokerage firm, in order to fight some of the bigger names listed here. Both companies made a name for themselves by driving costs down as low as possible. They actually kind of remind me of Southwest Airlines or JetBlue with their crazy low prices that undercut the competition.
In short, TradeKing offers stock and ETF trades for just $4.95. That’s 50% lower than TD Ameritrade. If I were going to trade a lot this is the brokerage I’d pick in order to keep my costs down.
Lending Club
This is where we start getting into some alternative investment ideas. We leave behind the relatively safe and understood realm of stocks, bonds, ETFs and mutual funds and enter the personal loan marketplace.
With Lending Club (and Prosper, below) you aren’t investing in ownership of a company. Instead you are buying ownership of a loan issued to a borrower through the website in what is called peer-to-peer lending.
Borrowers use the site to do one of my favorite things ever: pay off high interest debts like credit cards. They’ll get a loan for 11% and pay off debts at 22% which is what I call a major win.
Then those wonderful investors like you and me get to enjoy the interest from that loan.
Diversification is key here, but I’ll be sharing some strategies on how to minimize risk and maximize returns with Lending Club.
Prosper
Prosper was the first peer-to-peer lending website to really take off. Lending Club has given them a run for their money, and I kind of feel like Prosper has taken a bit of a reputation hit.
So I’ll open an account with both P2P websites with the exact same starting capital amount and the same investing principals, and we’ll see where everything turns out.
Motif
Motif Investing has a completely different take on investing. Instead of investing in mutual funds, ETFs, or individual stocks the company lets you invest in something called motifs.
Motif investing is a grouping of up to 30 stocks based around a macro economic idea. The company looks for macro trends like “people are fixing their homes” and then asks the question of which companies would benefit. The answer to that is home supply stores, home furniture stores, and the like.
They then seek out companies that fit that mold and weight them differently after doing an analysis on the firms. So you might end up with 25% with Home Depot, 1% with Pier One, and 7% in Bed Bath and Beyond.
That’s a motif.
A motif can be up to 30 stocks, and what’s even better is you can add and subtract from the motif to give you a completely customized investment. It’s like building your own personal ETF.
Once you have a motif or build one yourself you can trade in and out of that motif for a $9.95 trade cost. Instead of having to invest in each individual company and tailor your trades toward the allocation you want, you can instead just invest and trade in one motif.
The ability to create what is essentially my own ETF fascinates me, so I’m going to give this a try, too.
Note: On April 17, 2020, Motif announced the platform would be shutting down and passing over to Folio Investments on May 20th. In turn, Folio Investments announced in December of 2020 that it too, will be shutting its own doors around July 2021, after which it will transfer all accounts to Interactive Brokers.
Betterment
Betterment believes that investing is too complicated. Figuring out what asset allocation is, how and when to rebalance a portfolio, or just understanding which mutual fund to select can be overwhelming especially when you first start out.
Betterment Investing does away with that and instead offers you two investment buckets and a turn dial of risk. One bucket is index ETFs of stocks, the other is index ETFs of bonds. The risk dial let’s you determine what kind of a split you want between these two investments: 50/50, 75/25, or some other combination in between.
In short it is simple and really easy to get started with.
Tracking Progress
To make it easy to track the performance we’re using Personal Capital to track each outfit.
How It’s Going to Work
I’m funding each account with $1,000. Starting January 1st (or the 1st day the market opens), I’m going to invest the money using various strategies. We’ll then provide ongoing updates so you can see how I’m doing.
To make this more fun, I’ve solicited my wife to join me on this. Here’s how it’s going to breakdown:
TD Ameritrade: I’m going to pick some stock so you can see how awful awesome my stock picking isn’t is. Remember this is the same guy that lost $5,000 on a penny stock.
Ally Invest: Picking some blue chip dividend stocks and letting them ride
Motif: Selecting a “motiff” that I believe is a good one. I’m not even sure what Motiff means so this should be interesting.
Prosper: Going with the most aggressive portfolio with both. May the best P2P lender win!
Those are the online players that I’ll be utilizing for the year long experiment. We’ll be using the S&P500 as a relative benchmark. Timing wise this experiment might be the worse since we’re fluttering with all time highs in the market. To address that…..
A quick disclaimer: as a financial planner I need to say that investing should always be considered a long term strategy. This throwdown is meant to be both fun and education in nature. This throwdown is not and should not be treated as investment advice. Please see the bottom of the post for a more in depth disclaimer.
The Throwdown Just Got Serious
In true throwdown fashion, this wouldn’t be fun unless I had some other people throwdown with me, would it?
I’ve recruited some of my personal blogger friends to join in on the action with me. They have all agreed to open an account with a online broker of their choosing.
They will then begin investing the first day of the trading year and then write a post on why they invested the way they did.
They will also report back with performance results on how their $1,000 portfolio is doing.
The crew joining me for the ride:
We have some good diversity with the crew so I’m pumped to get this going.
Wanna Join?
If you’re interested in throwing down with you, you still have time. Here’s the rules that we have:
Open a new broker account of your choosing and deposit $1,000.
On January 1st (anytime around the 1st), you invest anyway you want (stocks, ETF’s, mutual funds, whatever). No margin allowed.
You can buy/sell as much as you want.
You cannot add any more than the original $1,000.
Write a blog post that publicly shares what you bought.
Track your return and report back to me so I can keep track of everyone that’s taking part.
Just contact me and I’ll get you added to the list.
Next Steps
At the beginning of the year, I’ll be publishing a mega post that outlines everything I’ve bought with each account. I’ll have screenshots showing you everything.
In fact, this will be probably be the most in depth post I’ve ever completed on the blog and I can’t wait!
Staty tuned…..
P.S.
In case I didn’t make this clear above: INVESTING SHOULD ALWAYS BE A LONG TERM STRATEGY.
Hope you caught that. 😉
****
Disclaimer:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Content posted by third parties on this site is screened in order to protect clients’ privacy and comply with regulatory requirements. Content containing sensitive personal information, inappropriate language, information about specific investments, misleading information, information about other companies or websites, or information related to litigation will be removed. Content posted by third-parties on this site remains the responsibility of the party posting the content and is not adopted or endorsed by GoodFinancialCents.com or Alliance Wealth Management, LLC. Any opinions or statements posted by third parties are their own and may not be representative of the experience of others and are not indicative of future performance or success. Third party content on this site does not reflect the views of GoodFinancialCents.com and have not been reviewed by the principal owner, Jeff Rose, as to accuracy or completeness.
Have you ever thought about doing a cash-out refinance on your home for investment?
A lot of people have.
I received exactly this question from a reader.
Reader Question
Hi Jeff,
Thanks for your videos and educational websites!
I know you are very busy and this may a simple answer so thank you if can take the time to answer!
Would you ever consider approving someone to taking a cash-out refi on the equity in their house to invest?
I have been approved for a VA 100% LTV cash-out refi at 4% and would give me 100k to play with.
With average ROI on peer to peer, Betterment, Fundrise, and S&P 500 index funds being 6-8%, it seems like this type of leveraging would work. However, this is my primary residence and there is an obvious risk. I could also use the 100k to help buy another property here in Las Vegas, using some of the 100k for a down and rent out the property.
BTW, I would be debt free other than the mortgage, have 50k available from a 401k loan if needed for an emergency, but with no savings. I have been told this is crazy, but some articles on leveraging seem otherwise as mortgages at low rates are good at fighting inflation, so I guess I am not sure how crazy this really is.
I would greatly appreciate a response and maybe an article or video covering this topic as I am sure there are others out there who may have the same questions.
My Thoughts
But rather than answering the question directly, I’m going to present the pros and cons of the strategy.
At the end, I’ll give my opinion.
The Pros of a Cash-Out Refinance on Your Home For Investment Purposes
The reader reports he’s been told the idea is crazy.
But it’s not without a few definite advantages.
Locking in a Very Low-Interest Rate
The 4% interest rate is certainly attractive.
It will be very difficult for the reader to borrow money at such a low rate from virtually any other source. And with rate inching up, he may be locking into the best rates for a very long time.
Even better, a home mortgage is very stable debt. He can lock in both the rate and the monthly payment for the length of the loan – presumably 30 years. A $100,000 loan at 4% would produce a payment of just $477 per month. That’s little more than a car payment. And it would give him access to $100,000 investment capital.
As long as he has both the income and job stability needed to carry the payment, the loan itself will be fairly low risk.
So far, so good!
The Leverage Factor
Let’s use an S&P 500 index fund as an example here.
The average annual rate of return on the index has been right around 10%.
Now that’s not the return year in, year out. But it is the average based on nearly 100 years.
If the reader can borrow $100,000 at 4%, and invest it and an average rate of return of 10%, he’ll have a net annual return of 6%.
(Actually, the spread is better than that, because as the loan amortizes, the interest being paid on it disappears.)
If the reader invests $100,000 in an S&P 500 index fund averaging 10% per year for the next 30 years, he’ll have $1,744,937.That gives the reader a better than 17 to 1 return on his borrowed investment.
If everything goes as planned, he’ll be a millionaire using the cash-out equity strategy.
That’s hard to argue against.
Rising Investment, Declining Debt
This adds an entire dimension to the strategy. Not only can the reader invest his way into millionaire status by doing a cash-out refinance for investment purposes, but at the end of 30 years, his mortgage is paid in full, and he’s once again in a debt-free home.
Not only does his investment grow to over $1 million, but over the 30 year term of the mortgage, the loan self-amortizes down to zero.
What could possibly go wrong?
That’s what we’re going to talk about next.
The Cons of a Cash-out Refinance on Your Home
This is where the prospect of doing a cash-out refinance on your home for investment purposes gets interesting.
Or more to the point, where it gets downright risky.
There are several risk factors the strategy creates.
Closing Costs and the VA Funding Fee
One of the major disadvantages with taking a new first mortgage are the closing costs involved.
Whenever you do a refinance, you’ll typically pay anywhere from 2% to 4% of the loan amount in closing costs.
This will include:
origination fees
application fee
attorney fee
appraisal
title search
title insurance
mortgage taxes
and about a dozen other expenses.
If the reader were to do a refinance for $100,000, he would only receive between $96,000 and $98,000 in cash.
Then there’s the VA Funding Fee.
This is a mortgage insurance premium charged on most VA loans at the time of closing. It’s usually added on top of the new loan amount.
The VA funding fee is between 2.15% to 3.30% of the new mortgage amount.
Were the reader to take a $100,000 mortgage, and the VA funding fee set at 2.5%, he’d owe $102,500.
Now… let’s combine the effects of both the closing costs in the VA funding fee. Let’s assume the closing costs are 3%.
The borrower will receive a net of $97,000 in cash. But he will owe $102,500. That is, he will pay $102,500 for the privilege of borrowing $97,000. That’s $5,500, which is nearly 5.7% of the cash proceeds!
Even if the reader gets a very low-interest rate on the new mortgage, he’s still paid a steep price for the loan.
From an investment standpoint, he’s starting out with a nearly 6% loss on his money!
I can’t recommend taking a guaranteed loss – upfront – for the purpose of pursuing uncertain returns.
It means you’re in a losing position from the very beginning.
The Interest on the Mortgage May No Longer be Tax Deductible
The Tax Cuts and Jobs Act was passed in December 2017, and applies to all activity from January 1, 2018, forward.
There are some changes in the tax law which were not favorable to real estate lending.
Under the previous tax law, a homeowner could deduct the interest paid on a mortgage of up to $1 million, if that money was used to build, acquire or renovate the home. They can also deduct interest on up to $100,000 of cash-out proceeds used for purposes unrelated to the home.
That could include paying off high interest credit card debts, paying for a child’s college education, investing, or even buying a new car.
But it looks like that’s changed under the new tax law.
Borrowing up $100,000 for purposes unrelated to your home, and deducting the interest looks to have been specifically eliminated by the new law.
It’s now widely assumed that cash-out equity on a new first mortgage is also no longer deductible.
Now the law is still brand-new and subject to both interpretation and even revision. But that’s where it stands right now.
There may be an even bigger obstacle that makes the cash-out interest deduction meaningless, anyway.
Under the new tax law, the standard deduction increases to $12,000 (from $6,350 under the previous law) for single taxpayers, and to $24,000 (up from $12,700 under the previous law) for married couples filing jointly. (Don’t get too excited – personal exemptions are eliminated, and combined with the standard deduction to create a higher limit.)
The long and short of it is with the higher standard deduction levels, it’s much less likely mortgage interest will be deductible anyway. Especially on the loan amount as low as $100,000, and no more than $4,000 in interest paid.
Using the Funds to Invest in Robo-advisors, the S&P 500 or Peer-to-Peer Investments (P2P)
The reader is correct that these investments have been providing steady returns, well in excess of the 4% he’ll be paying on a cash-out refinance.
In theory at least, if he can borrow at 4%, and invest at say, 10%, it’s a no-brainer. He’ll be getting a 6% annual return for doing virtually nothing. It sounds absolutely perfect.
But as the saying goes, if it looks too good to be true, it probably is.
I often recommend all of these investments, but not when debt is used to acquire them.
That changes the whole game.
Whenever you’re thinking about investing, you always must consider the risks involved.
The last nine years have somewhat distorted the traditional view of risk.
For example, the stock market has been up nine years in a row, without so much as a correction of greater than 10%. It’s easy to see why people might think the returns are automatic.
But they’re not.
Yes, it may have been, for the past nine years. But if you look back further, that certainly hasn’t been the case.
The market has gone up and down, and while it’s true that you come out ahead as long as you hold out for the long term, the debt situation changes the picture.
Matching a Certain Liability with Uncertain Investment Returns
Since he’ll be investing in the market with 100% borrowed funds, any losses will be magnified.
Something on the order of a 50% crash in stock prices, like what happened during the Dot.com Bust and the Financial Meltdown, could see the reader lose $50,000 in a similar crash.
But he’ll still owe $100,000 on his home.
This is where human emotion comes into the picture. Since he’s playing with borrowed money, there’s a good chance he’ll panic-sell his investments after taking that kind of loss.
If he does, his loss becomes permanent – and so does his debt.
The same will be true if he invests with a robo-advisor, or in P2P loans.
Robo-advisor returns are every bit as tied to the stock market as an S&P 500 index fund is. And P2P loan investments are not risk-free.
In fact, since most P2P investing and lending has taken place only since the Financial Meltdown, it’s not certain how they’ll perform should a similar crisis take place.
None of this is nearly as much a problem with straight-up investing based on saved capital.
But if your investment capital is coming from debt – especially 100% – it can’t be ignored.
It doesn’t make sense to match a certain liability with uncertain investment gains.
Using the Funds to Buy Investment Property in Las Vegas
In a lot of ways, this looks like the most risky investment play offered by the reader.
On the surface, it sounds almost logical – the reader will be borrowing against real estate, to buy more real estate. That seems to make a lot of sense.
But if we dig a little deeper, the Las Vegas market in particular was one of the worst hit in the last recession.
Peak-to-trough, property values fell on the order of 50%, between 2008 in 2012. Las Vegas was often referred to as the “foreclosure capital of America”.
I’m not implying the Las Vegas market is doomed to see this outcome again.
But the chart below from Zillow.com shows a potentially scary development:
The upside down U formation of the chart shows that current property values have once again reached peak levels.
That brings the question – which we cannot answer – what’s different this time? If prices collapsed after the last peak, there’s no guarantee it can’t happen again.
Once again, I’m not predicting that outcome.
But if you’re planning to invest in the Las Vegas market with 100% debt, it can’t be ignored either. In the last market crash, property values didn’t just decline – a lot of properties became downright unsalable at any price.
The nightmare scenario here would be a repeat of the 2009-2012 downturn, with the reader losing 100% of his investment. At the same time, he’ll still have the 100% loan on his home. Which at that point, might be more than the house is worth, creating a double jeopardy trap.
Once again, the idea sounds good in theory, and certainly makes sense against the recent run-up in prices.
But the “doomsday scenario” has to be considered, especially when you’re investing with that much leverage.
Putting Your Home at Risk
While I generally recommend against using debt for investment purposes, I have an even bigger problem when the source of the debt is the family homestead.
Borrowing money for investment purposes is always risky.
But when your home is the collateral for the loan, the risk is double. You not only have the risk that the investments you’re making may go sour, but also that you’ll put your home at risk in a losing venture.
Let’s say he invests the full $100,000. But due to leverage, the net value of that investment has declined to $25,000 in five years. That’s bad enough. But he’ll still owe $100,000 on his home.
And since it’s a 100% loan, his home is 100% at risk. The investment strategy didn’t pan out, but he’s still stuck with the liability.
It’ll be a double whammy if the money is used for the purchase of an investment property in your home market.
For example, should the Las Vegas market take a hit similar to what it did during the Financial Meltdown, he’ll not only lose equity in the investment property, but also in his home.
He could end up in a situation where he has negative equity in both the investment property and his home. That’s not just a bad investment – that’s a certified nightmare!
It could even lead him into bankruptcy court, or foreclosures on two properties – the primary residence and the investment property. The reader’s credit would pretty much be toast for the next 10 years.
Right now, he has zero risk on his home.
But if he does the 100% cash out, he’ll convert that zero risk to 100% risk. Given that the house is needed as a place to live, this is not a risk worth taking.
Final Thoughs
Can you tell that I don’t have a warm, fuzzy feeling about the strategy? I think you figure it out by the greater emphasis on Cons than on Pros where I come down on this question.
I think it’s an excellent idea in theory, but there’s just too much that can go wrong with it.
There are three other factors that lead me to believe this is probably not a good idea:
1. The Lack of Other Savings
The reader reports that he has “…50k available from a 401k loan if needed for emergency, but with no savings.”For me, that’s an instant red flag. Kudos to him for having no other debt, but the absence of savings – other than what he can borrow against his 401(k) plan – is setting off alarm bells.
To take on this kind of high risk investment scheme without a source of ready cash, exaggerates all of the risks.
Sure, he may be able to take a loan against his 401(k), but that creates yet another liability.
That that will need to be repaid, and it will become a lien against his only remaining unencumbered asset (the 401k).
If he has to borrow money to stay liquid during a crisis, it’s just a question of time before the strategy collapses.
2. The Reader’s Risk Tolerance
We have no idea what the reader’s risk tolerance is.
That’s important, especially when you’re constructing a complex investment strategy.
While it might seem the very fact he’s contemplating this is an indication he has a high risk tolerance, we can’t be certain. He’s basing his projections on optimistic outcomes – that the investments he makes with the borrowed money will produce positive returns.
What we don’t know, and what I ask the reader to consider, is how he would handle a big reversal.
For example, if he goes ahead with the loan, invests the money, and finds himself down 20% or 30% within the first couple of years, will he be able to sleep at night? Or will he instead contemplate an early exit strategy, that will leave him in a permanent weakened financial state?
These are real risks that investors face in the real world. At times, you will lose money. And how you react to that outcome can determine the success or failure of the strategy.
This is definitely a high risk/high reward plan. Unless he has the risk tolerance to handle it, it’s best not to even start.
On the flip side, just because you have the risk tolerance, doesn’t guarantee success.
3. Buying at a Market Peak
I don’t know who said it, but when asked where the market would go, his response was “The market will go up. And the market will go down”.
That’s a fact, and one that every investor has to accept.
This isn’t about market timing strategies, but about recognizing reality.
Here’s the problem: both the financial markets and real estate have been moving up steadily for the past nine years (but maybe a little bit less for real estate).
Sooner or later, all markets reverse. These markets will too.
I’m worried that the reader might be borrowing money to leverage investing at what could turn out to be the absolute worst time.
Ironically, a borrow-to-invest strategy is a lot less risky after market crashes.
But at that point, everyone’s too scared, and no one wants to do it. It’s only at market peaks, when people believe there’s no risk in the investment markets, that they think seriously about things like 100% home loans for investments.
In the end, the reader’s strategy could be a very good idea, but with very bad timing.
Worst Case Scenario: The Reader Loses His Home in Foreclosure
This is the one that seals the deal against for me. Doing a cash out refinance on your home for investment is definitely a high-risk strategy.
Heads you’re a millionaire, tails you’re homeless.
That’s not just risk, it’s serious risk. We don’t know if the reader also has a family.
I couldn’t recommend anyone with a family putting themselves in that position, even if the payoff were that high.
Based on the facts supplied by the reader, we’re looking at 100+% leverage – the 100% loan on his house, then additional (401k) debt if he runs into cash flow problems. That’s the kind of debt that will either make you rich, or lead you to the poor house.
Given that the reader has a debt-free home, no non-housing debt, and we can guess at least $100,000 in his 401(k), he’s in a pretty solid situation right now. Taking a 100% loan against his house, and relying on a 401(k) loan for emergencies, could change that situation in no more than a year or two.
This is a guest post from CJ at WiseMoneyMatters.com. This post represents CJ’s viewpoints, which are not necessarily my viewpoints. (Although I, too, hope to pay off my mortgage early.)
Note: This is embarrassing. I don’t think I’ve ever had a post with an error like this slip by me before. I apologize. I’ve removed the offending section, not out of any attempt at revisionism, but out of interest in accuracy. Please let me know if the piece is still mathematically unsound. (And a sincere “thank you” to those who caught the error!)
The other day, I was telling my wife’s grandmother that we had sold our house. We are downsizing in order to eliminate our mortgage more quickly. It looks like we will have our mortgage completely paid off in three to five years, depending on when kids enter the scene. She gave me a speech about how our house is one of the only tax deductions we have, and how most accountants recommend you keep a mortgage payment for that reason.
I think this logic is misguided. Let me show you why.
The Standard Deduction
The 2009 standard deduction for married couples will be $11,400. That means in order to gain any benefit from tax deductions, your interest paid must exceed this number. In other words, you would have to pay $950 per month in mortgage interest (not principal) in order to see any tax benefit from your mortgage payment.
If you had a mortgage on a $200,000 house at 6.25%, you would be barely exceeding the standard deduction for the first few years, assuming the deduction never increases (which it usually does). After that, you would be better off taking the standard deduction assuming you receive no other deductions.
So, in reality, such a tax deduction would only be helpful in house purchases in which your mortgage is $200,000 or more. Anything else and it’s almost pointless.
J.D.’s note: As I usually do with articles like this, I asked my accountant for feedback. His response was: “This article seems accurate, but the author makes the assumption that an individual will only have mortgage interest to deduct when comparing to the standard deduction. Other items that are deductible include state income taxes, property taxes, and charitable donations.”
He also added: “You should not look at the tax savings as the reason to purchase a home. It is only one component, and a minor one at that.” Basically, he agrees with CJ.
A Poor Trade
If you do itemize deductions, you’re still paying more in interest than you’ll save on taxes. This is the second thing that people overlook.
If you are paying over $11,400 in interest, that does not mean that you are paying $11,400 less in taxes. It means that $11,400 of your income is not counted as taxable income.
Let’s say you’re in the 25% tax bracket. If you pay $20,000 in mortgage interest, it will save you $5,000 in taxes. $20,000 of your income does not count towards taxes. Effectively, you are paying $15,000 to get your tax deduction. This is not the most financially sound advice I’ve ever heard. If you take such advice, I’ve got a really good deal. I will pay you $33 in exchange for $100. That’s the same type of financial advice as someone telling you that keeping a mortgage is a good thing for tax reasons.
The Risk Factor
The final benefit to paying off your mortgage is that it reduces financial risk to yourself.
Keeping a mortgage payment (and especially a high mortgage payment) is risky. In the unfortunate circumstance that you lose your primary source of income, your largest “asset” can quickly turn into your largest liability. This is a big reason why so many people are facing foreclosure these days. They got into a mortgage payment they couldn’t afford (or could barely afford) and all of a sudden when a small hiccup comes up in life, they are living on the street. Emergency funds are important to help offset these risks, but to truly eliminate the risk, you should pay off your mortgage.
I’ve heard of people who took out mortgages on their homes during the housing bubble so that they could invest the money in stocks. They argued that you get the tax benefit and stocks appreciate quicker than a house. As we can see now, this is an unwise financial decision. Sure, you could make lots of money. You could also make lots of money by winning the lottery, but that doesn’t make it a wise retirement plan.
When it comes down to it, I would rather have the safety of knowing that if the economy crashed and I had to work at McDonald’s for the rest of my life, I could still survive just fine with my current lifestyle.
Final Thoughts
While I know there are a lot of variables and other tax deductions I didn’t cover here, I think it’s safe to say that the old notion that keeping a mortgage simply for its tax benefits is not the best advice you can get. When it comes down to it, get the financial advice of a professional regarding your individual situation but don’t simply take their word for it. Have them show you the numbers before you start throwing your money away. I’d argue that even if the numbers are close, the risk factor puts paying off the mortgage in a slightly better position than not.
I’d love to hear some comments or scenarios where keeping a mortgage is better than taking the standard deduction.
I spent a couple hours this morning performing what ought to have been a simple home-maintenance task. The light fixture on our front porch had gone faulty, and I needed to replace it. I’ve done enough wiring projects now that the electrical aspect of the job didn’t bother me. But the woodworking? That was frustrating.
As I fumbled with the jigsaw (“Drat! Another blade bent!”), I wished again that I practiced woodworking more often. I have several friends who do so, and the skills they’ve learned help them to save money around the house. My incompetence this morning gave me plenty of time to reflect on the value of productive hobbies.
Productive hobbies When I was younger, I spent most of my spare time reading comic books and playing video games. There’s nothing wrong with a little self-indulgence, but the older I get, the more I appreciate hobbies that provide practical skills. Productive pastimes are not only fulfilling, but they can also help save money. (Sometimes they can even generate a little income!)
Here are a few hobbies and pastimes that can help to save (or make) money:
Gardening. Kris and I aren’t yet finished with our year-long garden project, but already we know that it has saved us money. (Find out just how much when we post an update this Saturday.) Even if it did cost a little more, it’s fantastic to have fresh food just feet from the front door. You don’t need a lot of space to start a garden. Consider square-foot gardening or container gardening.
Photography. Cameras can be a money sink, but photography doesn’t have to be expensive. You can have a lot of fun with a cheap point-and-shoot digital camera. With practice, you may even be able to make money selling digital photos online. I know several people who do this (and I’ve done it myself).
Woodworking. Carpentry is another hobby that can consume a lot of cash. But if you have the space and the time, you can also develop skills that yield big dividends in the long run. If I’d taken the time to learn woodworking, I wouldn’t have to pay a contractor to do some of our remodeling projects. (And I wouldn’t have cut a four-inch hole this morning when I only needed a three-inch hole.)
Knitting. As with many hobbies, knitting can be expensive, but there are ways to make it less so. Nell at Octopus Knits has pattern companies and yarn folks giving her product (yarns & patterns) to try. Some of my friends have taken commissioned projects. Kris is learning to knit adorable little stuffed animals; she could sell them for $20 a pop.
Computer repair. Because I’ve always been a computer hobbyist, I’m able to troubleshoot computer problems instead of paying somebody to do it for me. Before I turned Mac, I also saved money by building my own machines. In fact, for a couple years, I supplemented my regular salary by helping friends and family with their computer problems.
Art. Last week, I pointed to the work of lillyella, whose art generates enough income through her Etsy store that she now does it full time. In the past, I’ve also mentioned Ayla, a teenager who sells her art glass at the local farmers market. Kris has a friend who is learning how to work with stained glass, but just for fun.
Cooking. My friend Laura has a group of friends that love to cook. They recently organized a cooking evening to provide freezer meals for each of them. They decided on six menus, assigned the shopping, borrowed a church’s kitchen, divided duties like cutting, slicing, dicing, mixing, frying, cleaning, split the costs and each went home with six different items for future use. But even learning to cook for your own family can save you a lot of money.
Baking. Baking is fun for its own sake, but it can also save you money with gifts. Who wouldn’t rather have a couple dozen home-baked cookies than another useless mug? Some people can even turn this skill into a career. My aunt turned a baking hobby into a business, creating cakes and catering weddings. She provided jobs for several other family members, too!
Canning. Though Kris has always enjoyed canning, this summer has been amazing. She’s discovered it’s a hobby she truly loves. She derives immense satisfaction from preserving her own food. “It’s comforting to walk into the pantry and know that I made all of this,” she said recently. “I know where the food came from, and I know that we’ll be eating it all winter.” Though the start-up costs are a little high, they repay a hobbyist in time.
Making music. My friend Michael has a musician friend who plays the piano and has been paid to play at private events. He has another friend with a great voice. This man loves to sing, and he and his friends hire themselves out as a quartet around Valentines Day and to sing Christmas carols during the holidays. (I’m always jealous of my musical friends. I know it’s hard work to become proficient, but it looks like such a fun way to stay entertained.)
Vehicle maintenance. I know little about cars. I wish I knew more. Knowing even basic vehicle maintenance can save you big bucks. I once knew a guy who performed nearly all his own auto work. He could buy a junker car, fix it up, and resell it at a nice profit. He wasn’t going to get rich doing this, but he enjoyed the hobby, and it kept him in money for his own vehicle.
Physical fitness. You’ll never get rich running road races, but there’s no question that a healthy body can save you money. Find a physical activity you enjoy: biking, running, hiking, dancing, yoga, weightlifting. Play a team sport. Regular exercise can be fun, but it will also save you money in the long run.
The possibilities are limitless. There are countless fun and interesting hobbies that can either save you money, or maybe help you earn a little on the side.
Quick tips You’ll notice that none of these hobbies involve collecting. I’m an inveterate collector myself (comics, books, notebooks, movie serials, music of the 1920s, …), so I know first-hand how expensive it can be. Some would argue that it’s a form of compulsive spending, and I can’t really disagree. Since I’ve begun focusing on hobbies that involve doing rather than getting, I’ve spent much less money.
For some hobbies, equipment can be prohibitively expensive. In these cases, you may be able to find used stuff on Freecycle or Craigslist, or you may be able to begin with low-end gear. (This isn’t always a good option. If you think you’re going to be doing a lot of running, you should buy a quality running shoe from an expert, and not settle for cheap sneakers, for example.)
In many cases, it’s possible to jump-start a hobby by taking a course at a community college or community school. I spent a year taking photography classes, for example. The instruction and experience were invaluable, and helped me develop the skills necessary to actually sell a couple photos.
My friend Michael likes woodworking but can’t afford (and doesn’t have space for) all of the equipment. When he needs to build something, he signs up for a community college woodworking course so that he can use industrial woodworking tools at a reasonable cost.
Further reading I’m a big fan of productive hobbies, and I’m not the only one! Here are some articles on the subject from around the web:
Don’t forget that hobbies are an excellent way to make gifts for less than it costs to buy them. Kris sometimes knits gifts for special occasions. Most years she gives some sort of home-made food to our friends for Christmas. I sometimes give photographs. One of the best birthday gifts I ever received was a batch of homemade chocolate chip cookies.
Live your best luxurious life with these apartments that will help you chill out better than if you went to a spa.
Getting downtime is so crucial, especially in a city like Boston. Everyone who lives here knows things move at a fast pace. Finding a place where you can unwind is ideal, so why not look for a Boston apartment that offers plenty of quiet and comfy spots?
No matter what neighborhood in Boston appeals to you, there are places with great amenities that include somewhere to grab a tranquil moment.
Which one of these places spells out serenity to you? We’ll prove that the best spas in Boston can be found right in your new home.
Source: Rent. / West Square
Finding the perfect little bit of green space in Boston, away from the foot traffic in the public parks isn’t easy, but West Square has an oasis that works. A lovely square of green at the center of the community sits among bushes and flowers, creating a meditative spot.
This green community, located on the south side of D Street – West Broadway, is not only close to the water but includes off-street parking, an entertainment lounge with fireplace and pet spa.
Source: Rent. / AVA Theater District
Take a breather in the funky lounge in AVA Theater District. This cool, colorful community offers up a nice space to chill in, with plenty of seating and a paneled accent wall for a little bit of zen. Bright colors follow the decor throughout this community where you’ll find neon coffee tables in the Sky Pavilion’s chill lounge and bright orange seating in the game room.
In an ideal Boston location, AVA Theater District, in the Central neighborhood, is close to Boston Common as well as the MBTA. The community also provides garage parking and is pet friendly.
Source: Rent. / Piano Craft Guild
A large green space attached to an apartment building is an amazing find, and this terraced, grassy area is a great addition to Piano Craft Guild. There’s nothing more soothing than soaking up the sun on warm days in this city. Mature trees offer some shade in this enclosed courtyard and the space is large enough to even entertain friends.
Within the close-knit, highly walkable South End, Piano Craft Guild is only a few blocks from the city center and comes complete with an infinity pool, Zen garden, study and fitness space.
Source: Rent. / The West End Apartments
Snuggle into the plush perfection of a soft green chair and lose yourself in your favorite movie at The West End Apartments. The theater room will immediately take you out of your day’s stresses. With plenty of chairs, you can even invite some friends to decompress with you.
Close to shopping, restaurants and pubs, with amazing views of Boston Harbor and the Charles River, this West End gem has plenty of other amenities to explore.
Source: Rent. / Mbh Apartments
Really good windows. Not just a few small rectangles here and there, but double-decker stacks of glass that take up almost an entire wall. It’s not every day this amazing feature shows up in an apartment, but when you have them, the views are spectacular and the increased levels of natural light can transform any room into a serene getaway. At Mbh Apartments, these huge windows, framed in black, have a cool and modern look, giving you excellent city views both day and night.
Situated in the Fenway neighborhood, this is one of the most perfect locations in Boston. You’re close to everything, including the iconic Green Monster in Fenway Park.
Source: Rent. / Garrison Square
The many brick buildings in Boston help give the city its particular look, so finding a nice apartment courtyard that combines greenery with bricked pathways creates a special space. At Garrison Square, the center courtyard has plenty of bushes and potted plants among some hardscaping and brickwork. A comfy couch and some patio chairs in a few seating areas provide ample space to just relax.
Nestled beside the Charles River, in Back Bay, the best part of living here is the location. You’re close to Copley Square and Newbury Street, giving you plenty of options when it comes to restaurants, bars and shops.
Source: Rent. / Avalon North Station
Take a breather with amazing city views in the plush lounge at Avalon North Station. This Central neighborhood community offers up a nice, open space that’s full of light, and plenty of seating. A small TV area allows you to decompress with friends over your favorite show, movie or sporting event as well.
This LEED Silver-certified building has plenty of amenities, including the Sky Pavilion Lounge. You’ll also find garage parking, a WAG pet spa, and fitness studio with on-demand programming all within steps of both the orange line and green line of the T.
Source: Rent. / The Alyx at EchelonSeaport
When you think of an apartment being better than a spa, how often do you consider the bathroom? You’ll be in it every day, so finding one with a spa-like feel is a huge win. At The Alyx at EchelonSeaport, bathrooms feel serene in clean white, soft hues of gray and weathered browns. If just a shower, frameless glass adds depth, and the tubs are a perfect size. Soft vertical lighting around the vanity mirror also adds a little something extra to this calm space.
As another apartment in D-Street – West Broadway, you’ll also find a dog run and play area, resident lounge, pool, courtyard and fitness center.
Source: Rent. / The Greenhouse Apartments
Living up to its name, you’ll feel instant zen once you walk into The Greenhouse Apartments. The bright lobby has, at its center, the perfect array of plants and flowers, setting the tone for relaxation. Once you go outside, there’s a large outdoor dining area surrounded by tall bushes and manicured grass.
For anyone wanting to live in Back Bay, this idyllic spot also features a rooftop deck with heated pool, a state-of-the-art fitness center and valet garage parking. Living here puts you close to the T and gives you some great city views.
Source: Rent. / 62 On the Park
It’s not every day that you find an apartment with an in-unit fireplace. The ability to end your day in front of a warm fire, finding true relaxation, is a huge perk in a city that gets as cold as Boston. 62 On the Park has you covered though with a stylish fireplace tucked into the corner of the large living room.
There’s plenty of historical charm to this Central community that’s close to the green, orange and red MBTA lines. You’re also right beside Boston Common. It’s a fantastic Boston location to call home.
Find the best spas in Boston right at home
Thinking about it long and hard, what Boston apartment amenities are most important to you? Is it somewhere you can relax, the perfect fitness center or a huge, sparkling pool? Maybe it’s all three.
No matter what tops your list, always be on the lookout for extra space that shouts comfort. You’ll appreciate having a home to go to that’s more than just the actual apartment you live in.
Although inflation may be cooling, interest rates remain high. As a result, you may find yourself opting to rent rather than own, either by choice or by extenuating circumstances. The good news is that renters insurance is significantly cheaper than home insurance at around just $174 per year on average, according to the Insurance Information Institute (Triple-I). This is because renters insurance only provides coverage for the home’s contents along with the renter’s liability, rather than including coverage for the structure of the home. To help you identify which renters insurance company best meets your needs, Bankrate reviewed the largest renters insurance companies by market share based on a variety of key metrics.
Why renters insurance is important
Renters insurance is relatively inexpensive at around $15 per month on average, but its value can significantly outweigh its monthly cost in the event of a claim.
In addition to replacing your personal belongings, renters insurance also offers coverage for incidents that affect your guests. Perhaps a guest slips at your residence, sustaining an injury. In this case, renters insurance could help pay for their medical costs. If the injury results in legal action, renters insurance could also help pay legal fees. Insurers commonly offer coverage for relocation and food if your rental becomes temporarily uninhabitable due to a covered claim.
Add-ons are generally available for your renters insurance policy as well to help provide more robust coverage. For example, if you need extra coverage for your jewelry or other high-value items, you may be able to add additional coverage on top of your standard renters insurance.
Best renters insurance companies
Bankrate has researched more than a hundred companies offering renters insurance policies to narrow down some of the best renters insurance companies of 2023. The following companies have all been selected based on positive customer satisfaction ratings by J.D. Power, a leading third-party source for industry research, and have received “Excellent” or “Superior” credit ratings from AM Best. Having a positive rating from AM Best indicates that an insurance company has historically been able to meet ongoing financial obligations like operating costs and claims. Additionally, the companies below either include additional protections or offer them as add-ons for your renters policy, such as pet insurance and flood coverage.
*Not rated by AM Best, but rated A (Exceptional) by Demotech for financial stability
**Not officially ranked by J.D. Power due to eligibility restrictions
Allstate
Best for: Discount opportunities
Allstate tied with USAA for Best Home Insurance Company Overall in the 2023 Bankrate Awards. Although the Bankrate Awards focus on homeowners insurance rather than renters, many of the same homeowners features also translate to the company’s renters insurance product. For instance, Allstate won partly thanks to its highly-rated mobile app and wide network of brick-and-mortar agencies. Additionally, Allstate offers even more savings opportunities with its multiple policy discount, 55 and retired discount and Easy Pay discount for scheduled monthly payments. However, Allstate received a slightly below-average rank in the 2022 J.D. Power Home Insurance Study for renters insurance customer satisfaction. While the score is not significantly lower than the industry average, customers seeking exceptional customer service may want to carefully weigh how the carrier stacks against other options.
PROS
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Access to other policy types for a multiple policy discount
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Easy-to-use mobile app and online web portal for policy management
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Slightly lower J.D. Power score than the other companies on this list
Learn more: Allstate Insurance review
Erie
Best for: Regional coverage with robust options
Erie Insurance has a stellar reputation built upon affordable rates and an easy-to-navigate claims service. Erie offers considerable discounts on bundles, additional living expenses if you need to find a temporary place to live and the option for extra coverage for things like identity recovery and your more expensive personal items. Unfortunately, Erie only offers renters insurance in roughly a fifth of the U.S., but could be an excellent choice if you live in one of the areas it services. States covered are Illinois, Indiana, Kentucky, Maryland, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and Wisconsin. Erie also offers coverage in Washington, D.C.
PROS
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Ability to work with a local insurance agent
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If requesting a quote seven days from policy start date, renters insurance could qualify for an additional discount
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Limited state availability compared to other national carriers
Learn more: Erie Insurance review
Liberty Mutual
Best for: Renters on a budget
Liberty Mutual could be a great choice for renters on a tight budget. The company advertises that its policies start at just $5 per month. Although the coverage options available are fairly basic, you might be able to add replacement cost coverage for your belongings, as well as jewelry coverage or earthquake coverage. However, Liberty Mutual does have a higher-than-average complaint index score with the National Association of Insurance Commissioners (NAIC). A score of 1.00 represents a baseline number of complaints. Liberty Mutual’s overall score is 2.66, indicating that the NAIC receives more than two and a half times as many complaints for the company than average.
PROS
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Option to add replacement cost, meaning personal belongings will be replaced without factoring in depreciation
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With blanket jewelry protection, renters have one set amount to cover their jewelry with no need for appraisal or deductible after a covered loss
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High NAIC score indicates Liberty Mutual receives more complaints than other similar-sized carriers
Learn more: Liberty Mutual Insurance review
Lemonade
Best for: Digital policy management
Lemonade is another 2023 Bankrate Award winner for Best Digital Home Insurance Company. Lemonade terms itself as “insurance for the 21st century.” Its mobile app, powered by Maya, its artificial intelligence bot, helps renters get a quote, manage their policy and file a claim all in one place. Renters who want an insurance company focused on global causes will appreciate that leftover premium is donated to many different causes like the Malala Fund, the Trevor Project and March for Our Lives. However, the all-digital experience means renters won’t be able to have in-person customer service. Additionally, Lemonade renters insurance is only available in 28 states and Washington, D.C.
PROS
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Simple mobile app interface for all your insurance needs
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Policies can be started in 90 seconds and claims paid out in as little as three minutes
CONS
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Renters insurance is only available in 28 states and Washington, D.C.
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Lemonade car insurance is only available in a few states, making it difficult for renters to qualify for a multiple policy discount
Learn more: Lemonade Insurance review
Nationwide
Best for: Customer service experience
If you’re looking for world-class customer service, then Nationwide might be worth checking out. Out of all the renters insurance companies that J.D. Power officially ranked in 2022, Nationwide earned the top spot. Although Nationwide might be a little more expensive than average (the company states that its renters policies start at $20 a month), the added expense could be worth it to the right shopper. Additionally, Nationwide offers a Brand New Belongings endorsement, which could help you replace your items for their replacement value rather than actual cash value (which takes into consideration depreciation).
PROS
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May get a bundling discount for purchasing renters and auto
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Optional coverage-add on could help make for a robust renters policy
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May be more expensive than average
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Customer service is not 24/7
Learn more: Nationwide Insurance review
State Farm
Best for: Local offices
State Farm offers renters insurance in every state throughout the U.S., making it a great option for renters in underserved rural areas or areas. But it’s not just State Farm’s wide availability that may make it a good option. The company also has exceptional ratings from companies like J.D. Power and AM Best, which could make it a safe bet for your renters policy. Although State Farm doesn’t offer nearly as many discounts as some of the other providers we’ve chosen, you might lower your premium if you insure your car with State Farm or if you have security devices installed in your apartment.
PROS
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Excellent customer service and financial strength ratings from third-party agencies
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Knowledgeable local agents to help you with your insurance journey
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Fewer discount opportunities compared to other carriers
Learn more: State Farm Insurance review
The Hartford
Best for: Policyholder perks
To qualify for The Hartford, you must be a member of AARP — and to be a member of AARP, you must be 50 or older. However, AARP members get exclusive access to a long list of discounts and perks as well as access to The Hartford renters insurance. The Hartford policyholders could save on hotels, gas, plane tickets, cell phone plans and more. The carrier’s New for Old protection also comes standard in its renters policies, which offers replacement cost for your items if they are damaged or destroyed in a covered loss. Additionally, The Hartford may give you a discount on your renters policy simply for living in a gated community.
PROS
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Flood coverage is standard on renters insurance policy
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If moving or deployed overseas, personal belongings would be insured with overseas coverage
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Not available to the general public
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Can only do business over the phone or online, no local offices
Learn more: The Hartford Insurance review
USAA
Best for: Military-centric coverage
USAA tied for Best Home Insurance Company Overall in the 2023 Bankrate Awards, partly due to its high J.D. Power scores and nationwide availability. The company has a stellar reputation among consumers and the insurance industry, and it offers renters insurance policies particularly supportive for those in a military lifestyle. The basic policy includes coverage for personal property, personal liability, medical payments and additional living expenses. Flood coverage is also included in standard USAA renters insurance policies, which is notable considering that flood insurance typically has to be purchased separately.
However, USAA is not available for everyone, which could be considered a major drawback of the company. Only military members, veterans and immediate family members may be eligible for coverage. Unless you fit one of these categories, you will not be able to purchase a USAA policy.
PROS
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May get a bundling discount for purchasing renters and auto
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Optional coverage-add on could help make for a robust renters policy
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May be more expensive than average
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Customer service is not 24/7
How to compare renters insurance companies
With so many renters insurance companies on the market, how do you choose which provider is right for your needs? Finding the best renters insurance policy will depend largely on your particular living situation and coverage preferences. The first step to finding a provider who can best cover your unique circumstances is to take some time to consider what you may want from a company.
For example, if you run a business or keep business-related items in your home, you may find that an add-on for extended coverage or business personal property is necessary. This may cause you to look for a provider which specializes in renters insurance for business personal property.
Additionally, it may be helpful to review third-party reviews from companies like J.D. Power and AM Best. J.D. Power runs numerous studies each year, including evaluating renters insurance companies. Scores are out of 1,000 points and evaluate customer satisfaction based on a number of factors. AM Best rates the financial strength of insurance companies based on their historical ability to meet financial obligations and pay claims. This measure may be comforting when predicting how future claims are likely to be handled, especially if a company is inundated with numerous claims at once.
Once you have identified a handful of companies that could meet your needs, you can start requesting quotes. This can often be done online or by phone, or you could contact a local agency. Getting quotes from several different insurance carriers allows you to compare premiums, coverage options, discounts and policy features.
Additional considerations before choosing a renters insurance policy
Like any insurance policy, renters insurance is not one-size-fits-all. No two rental circumstances are the same, and neither will the insurance for them be. When choosing a renters insurance company and personalizing your policy, you may want to consider:
The value of your belongings. To help ensure you do not over- or under-insure your belongings, you could create a home inventory. This exercise could help you estimate the total value of your belongings so that you choose an appropriate personal property coverage amount.
If you have any high-value items. Possessions like fine jewelry, collectibles, fine art, guns or antiques often have set coverage limits included within a policy. For example, without alterations to a policy, you might only have $1,000 in coverage for jewelry, regardless of how much personal property you buy. Scheduling your high-value possessions can provide more accurate and broader coverage.
If you have a pet. You might not consider your pet when you buy renters insurance, but you should. While many pets are covered for liability, some dog breeds and exotic animals are often excluded. If you have one of these animals, you probably want to look for a company that will extend liability insurance to it. That way, if your pet injures someone, your insurance can step in to help pay for the bills.
How often friends and family visit. If you like to host events at your home, or often host large parties of people, having this in mind could help you determine the right amount of liability insurance for your needs.
What company insures your vehicle: Many car insurance companies also offer renters insurance. When you bundle your policies together, you could see significant savings. Plus, there’s the added convenience of having all your insurance policies in one place.
If you aren’t sure where to start in your search for renters insurance, sitting down with a licensed insurance agent can be helpful. An agent can listen to your needs, circumstances and concerns and help recommend companies, coverage types and policy features that fit your situation.