I know there is something about a mosquito, an albino, and “feeling stupid” but, to be honest, I have no idea what the lyrics in “Smells Like Teen Spirit” even mean.
However, the nonsensical lyrics and simplistic melody didn’t stop Kurt Cobain and his grunge band Nirvana from creating one of the most memorable songs of the century, dominating the airwaves when it was released in 1991 and only increasing in popularity over the past twenty years. Wikipedia even calls the song “one of the greatest rock songs of all time.”
While I don’t understand the meaning of the song, every time I hear it I think of one thing: my retirement.
Let me explain.
Living Like A Rock Star
Immediately after marrying the girl of my dreams, I began looking to buy a home. Neither my wife nor I made a lot of money but we had decided that it would be cheaper for us to buy a home than to rent (and far better than living with family.) We began to look at our options and discovered a small duplex that was in our price range. This property consisted of two separate homes crammed onto one small lot. We bought the property, cleaned up both homes, moved into the small one-bedroom home in the back, and put a renter in the home in the front.
Soon after our tenants complained of “flashes of light” coming through their front windows. I thought nothing of it.
Several years went by and various tenants moved in and out. I heard the same story several times and assumed the flashes were the county or the city doing some kind of analysis. Finally one day the tenants got a knock at the door and opened it to several tall, blonde Swedish tourists.
They wanted a tour of Kurt Cobain’s house.
I knew Kurt Cobain was originally from my city (Aberdeen, Wa) but little did I know – my duplex was actually his first home. I discovered later that Cobain had actually lived in both homes, moving from one house to the other during the first year of his life. His parents moved again to a new location before Cobain was even two years old – but his brief residency at the two homes was enough to put my little duplex on the tourist route of those looking for a glimpse of Cobain’s past.
Despite the cool background story- the “Cobain connection” is not my favorite part about that duplex.
It get’s better.
“What could be better than a rock star living at your home?” you ask!
…well, a lot of things.
Jesus
A new Star Wars movie
“DoubleStuf” Oreos
Kittens
You get the point. It’s not that great compared to a lot of things.
However, what I’m talking about is the freedom that duplex provided.
Starting Out Is Hard
Life is expensive and your first few jobs probably don’t pay a lot. Sure, there are a lot of great tips for saving money, but most tips don’t make rent any cheaper or help you earn much more money.
However, buying that duplex did both.
The total cost of the duplex was $80,000.00. With a 3.5% down payment through the FHA loan program (well, it was 3% at the time) the total down payment was just under $3,000 and our monthly payment (including all expenses) was just $600.00 per month. The front home rented for $600.00 per month.
Free living!
My wife and I now lived in our own home for absolutely free. Granted, I needed to fix things when they broke and I had to learn the ins and outs of being a landlord – but we were living for free.
A year later we moved again to a different home (purchased a larger home just one block away) but we still owned the duplex. We simply rented the back house out for $500 per month and now that duplex creates positive income each and every month. Sure, there are maintenance issues that come up every so often (which I usually hire out) and I’m not going to say I always love being a landlord – but starting out with a duplex was one of the best decisions I have ever made.
The Benefits Of A Duplex
I’m not one of those gurus who is going to tell you buying a house is the best thing for you to do.
In reality – buying a home is not right for everyone.
I’ve purchased a lot of properties over the past several years (including single-family homes, multifamily properties, and even an apartment complex) and I spend a lot of time teaching people how to invest in real estate and buy their first home – I recognize that this isn’t the right path for all. I love real estate and especially in the financial leverage real estate has for investments – but others might hate the idea of investing in any type of real estate.
However, if you’ve weighed the options and believe that home ownership is a path you want to pursue, buying a duplex is an excellent option for your consideration. Let me explain a few reasons why:
Easy to Qualify For: Qualifying for a small multifamily property (duplex, triplex, and 4-plex) is exactly the same as trying to qualify for a single family home. You can often times get into a property like this for as little as 3.5% down payment using the FHA loan program. The FHA even has programs that will allow you include “rehab” money into the loan so you can fix it up nice. Additionally, some banks allow you to use the income you’ll be receiving from rent to help you qualify for the loan.
More Money: Obviously, if you “buy smart” – your duplex can provide extra cash to help pay the mortgage, cover you during hard times, or even live for free. This is also an excellent way to pay down your mortgage faster (by applying the rent payment toward paying down your loan.)
Less Risk: One of the most significant benefits of having multiple units is the decreased risk you have of losing your home if something bad happens to your income situation. This benefit increases if you buy a triplex or a four-plex, as the risk is more diversified.
On the Job Training: If you are considering using real estate as part of your future investment strategy, a duplex that you live in can be a great way to learn how to effectively manage rental property. Being a landlord is not always fun, but 80% of the hassle can be eliminated by simply buying smart and managing effectively. Most “burned out” landlords I know became so by treating their rentals as a relaxed hobby rather than a business. By starting small, you will learn how to grow your investment portfolio in a smart, scalable way that won’t make you hate your life as an investor.
Jump Start for your Financial Future: Chances are you don’t want to live in a duplex for very long. However, your first home is seldom the home you stay in. By purchasing a duplex with a long term, fixed rate mortgage (the only type of mortgage you should ever get) you are able to control that property for the rest of your life. Because the property is your personal home, you get to take advantage of the incredibly low interest rates for your primary residence – which translates to low monthly payments that stay the same while rent climbs higher year after year. Purchasing a duplex can be an excellent jump-start to your retirement planning, even if that event is years away.
You Don’t Need To Be A Rock Star To Buy A Duplex
As I said before, owning property is not for everyone. However, making your first home a duplex (or other small multifamily property) can be extremely advantageous for you and your financial future. Not every duplex (or even most) are worth buying, but finding a good deal using math that makes sense is the key to success in real estate. I highly encourage you to take a look at some duplexes if you are itching to buy a home. It might be the difference between success and just wishing for a home. The “Cobain Duplex” is not my favorite investment property because of it’s unique history – it’s my favorite because of the financial helping hand this home gave me when starting out and continues to give me every month.
Have you considered buying a duplex? I’d love to hear your thoughts (positive or negative) on making a duplex your first property or any other real estate questions or comments you might have. Please leave me a comment below and let’s talk about it!
Brandon Turner is an active Real Estate Investor, Entrepreneur, World Traveler, Guitar Player, and Husband. He is located in Grays Harbor, Washington and enjoys finding killer Real Estate deals, leading worship at his local Calvary Chapel, bonfires on the beach, backpacking Europe, and speaking in third person. If you’d like to get a free copy of “7 Years to 7 Figure Wealth,” Brandon’s first eBook and personal manifesto regarding the quickest and most stable way to financial freedom through real estate, please visit his website at www.RealEstateInYourTwenties.com.
Inside: This guide will teach you about the different factors you need to consider when purchasing a home with a 70k salary.
There are a lot of factors to consider when you’re trying to figure out how much house you can afford. Your income, your debts, your down payment, and the interest rate on your mortgage all play a role in determining how much house you can afford.
Your situation will be different than the person next-door or your co-coworker.
Making 70000 a year is a great salary. You are making the median salary in the United States.
It’s enough to comfortably afford most homes and gives you plenty of room to save money each month.
But how much house can you actually afford?
It depends on several factors, including your down payment, interest rate, income, and credit score.
In this ultimate guide, we’ll walk you through everything you need to know about how much house you can afford making 70000 a year.
how much house can i afford on 70k
In general, you can expect to spend 28-36% of your income on housing.
Generally speaking, if you make $70,000 a year, you can afford a house between $226,000 and $380,000.
How much mortgage on 70k salary?
In general, you should expect to spend no more than 28% of your monthly income on a mortgage payment.
Thus, you can spend approximately$1633-2100 a month on a mortgage.
Just remember this is relative to the interest rate, term length of the loan, down payment, and other factors.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
28/36 Rule
But there’s one factor that trumps all the others: The 28/36 rule.
Also known as the debt-to-income (DTI) ratio.
The 28/36 rule is a guideline that says that your housing costs (mortgage payments, property taxes, homeowners insurance, and HOA fees) should not exceed 28% of your gross monthly income.
And your total debt (housing costs plus any other debts you have, like car payments or credit card bills) should not exceed 36% of your gross monthly income.
You must follow the 28/36 rule.
How to calculate how much mortgage you can afford?
If you’re like most people, you probably don’t know how to calculate how much mortgage you can afford.
This is actually a really important question that you need to ask yourself before beginning the home-buying process.
The answer will help determine the price range of homes you should be looking at. Plus know how much money you’ll need to save for a down payment.
Step #1: Check Interest Rates
Research current mortgage rates to get an accurate estimate. You can also check your credit score and search for average mortgage rates based on your credit score.
Right now, with sky-high inflation, you are unable to afford a bigger house when interest rates are hovering around 6% compared to ultra-low interest rates of 2.5%.
With a 70k salary, this can be the difference between $50-100k on the total mortgage amount you can afford.
Step #2: Use a Mortgage Calculator
Use a mortgage calculator to get an estimate of the home price you can afford based on your income, debt profile, and down payment.
Generally, lenders cap the maximum amount of monthly gross income you can use toward the loan’s principal and interest payment to not more than 28% of your gross monthly income (called the “Front-End” or “Housing Expense” ratio). Then, limit your total allowable debt-to-income ratio (called the “Back-End” ratio) to not more than 36%.
You can use a mortgage calculator to a ballpark range of what house you can afford.
Step #3: Taxes, Insurance, and PMI
When planning for a home purchase, it’s important to factor in all of your monthly expenses, including taxes, insurance, and PMI.
This will ensure that you get an accurate estimate of your home-buying budget based on your household annual income.
Don’t forget to include these payments to get a realistic understanding of your monthly budget.
Step #4: Remember your Living Expenses
When considering how much house you can afford based on your $70,000 salary, you must consider your lifestyle and current expenses.
It is important to factor in other monthly expenses such as cell phone and internet bills, utilities, insurance costs, and other bills.
More than likely, you will be approved for a higher mortgage amount than you would feel comfortable with. This is 100% what lenders will do.
They want to provide you with the most you can afford – not what you should afford.
Step #5: Get prequalified
Prequalifying for a mortgage is an important first step to take when estimating how much house you can afford.
It gives you a more precise figure to work with and helps you make a more informed decision based on your personal situation.
Remember that your final amount will vary depending on a number of factors, especially your interest rate, which will be based on your credit score.
Taking the time to research current mortgage rates helps you secure a better mortgage rate, giving you more buying power.
Home Buying by Down Payment
How much house can you afford?
It’s a common question among home buyers — especially first-time home buyers. Use this table to figure out how much house you can reasonably afford given your salary and other monthly obligations.
The assumption is 30 year fixed mortgage, good credit (690-719), no monthly debt, and a 4% interest rate.
Annual Income
Downpayment
Monthly Payment
How Much House Can I Afford?
$70,000
$9,552 (3%)
$1,750
$318,412
$70,000
$16,215 (5%)
$1,750
$324,316
$70,000
$34,058 (10%)
$1,750
$340,581
$70,000
$53,573 (15%)
$1,750
$357,152
$70,000
$75,094 (20%)
$1,750
$375,468
$70,000
$98,933 (25%)
$1,750
$395,731
**Your own interest rate, monthly payment, and how much house you can afford will vary on your personal circumstances.
Mortgage on 70k Salary Based on Monthly Payment and Interest Rate
How much house can you afford on a $70,000 salary?
This largely depends on the current interest rate of the mortgage loan you’re considering. When interest rates are high, people aren’t actively buying as when interest rates are low.
By understanding these factors, you can better gauge how much house you can afford on a $70,000 salary.
The assumption is 30 year fixed mortgage, good credit (690-719), no monthly debt, and a 20% downpayment.
Annual Income
Monthly Payment
Interest Rate
How Much House Can I Afford?
$70,000
$1,750
3.25%
$406,796
$70,000
$1,750
3.5%
$396,231
$70,000
$1,750
3.75%
$386,101
$70,000
$1,750
4%
$375,994
$70,000
$1,750
4.5%
$357,554
$70,000
$1,750
5%
$339,954
**Your own interest rate, monthly payment, and how much house you can afford will vary on your personal circumstances.
Home Affordability Calculator by Debt-to-Income Ratio
Around here at Money Bliss, we always stress that debt will hold you back.
In the case of buying a house, debt increases your DTI ratio.
Here is a glimpse at what monthly debt can cause your debt-to-income (DTI) ratio to increase. Thus, making the house you want to buy to be more difficult.
Annual Income
Monthly Payment
Monthly Debt
How Much House Can I Afford?
$70,000
$2,100
$0
$440,085
$70,000
$1,900
$200
$404,584
$70,000
$1,800
$300
$382,334
$70,000
$1,600
$500
$337,883
$70,000
$1,350
$750
$282,208
$70,000
$1,100
$1000
$226,582
**Your own interest rate, monthly payment, and how much house you can afford will vary on your personal circumstances.
Increase your Home Buying Budget
Here are a few ways you can increase your home buying budget when buying a house on a $70k annual income.
By following these steps, you can increase your home buying budget and find a more suitable house for your income.
1. Pick a Cheaper Home
Home prices vary significantly in different parts of the country.
Moving out of a major metropolitan area with notoriously high housing costs can help you find more affordable homes.
There are plenty of ways to find a home that is cheaper than you would normally expect.
Look for homes that are for sale in less desirable neighborhoods.
Find homes that are for sale by owner or have not been listed yet.
Check for homes that are for sale outside of your usual price range and haven’t sold as they may drop their price.
Move to a lower cost of living area.
2. Increase Your Down Payment Savings
A larger down payment can reduce the amount you have to finance, which lowers your monthly payment.
Plus help you get a lower interest rate and avoid paying PMI.
Putting down at least 10-20 percent of the home sale price can help boost your home buying power. You can also take advantage of down payment assistance programs in your area.
3. Pay Down Your Existing Debt
Paying down your debts such as credit card debts or auto loans can help raise your maximum home loan.
Paying down your debts can help you qualify for a higher loan amount.
This is because when you have lower amounts of debt, your credit score is higher and your debt-to-income ratio is less. This means you are less likely to be rejected for a home loan.
4. Improve Your Credit Score
A higher credit score can lead to lower rates and more affordable payments.
You can improve your credit score by:
Paying your bills on time
Paying down your credit card balances
Avoiding opening new credit before applying for a mortgage
Disputing any errors on your credit report
This is very true! We had an unfortunate debt that wasn’t ours added to our credit report right before closing. While the debt was an error, it still cost us a higher interest rate and forced us to refinance once the credit report was fixed.
5. Increase Your Income
Asking for a raise, seeking a higher-paid position, or starting a side gig can help you increase the amount of home you can afford.
While you need two years of income from a side gig or your own online business to count as income, the extra cash earned helps you to increase the size of your downpayment. Plus it lowers your debt-to-income ratio with the savings you are setting aside.
What factors should you consider when deciding how much you can afford for a mortgage?
How much house can you afford on your current salary and with your current monthly debts?
This is a question that we are often asked, and it’s one that we love to answer.
We’ll walk you through all the different factors that go into this decision so that you can make an informed choice.
1. Loan amount
The loan amount is a key factor that affects the total cost of a mortgage.
If you have no outstanding debt, a 20% down payment, a high credit score, and a 3.5% interest rate from an FHA loan, you could be able to afford up to $508,000.
However, if you have debt, a smaller down payment, or a lower credit score, the loan amount you can qualify for will be lower.
Similarly, if you choose a 15-year fixed-rate loan, your monthly payments will be higher, but you will end up paying less in interest over the life of the loan than with a 30-year fixed-rate loan.
Ultimately, your loan amount will affect the total cost of your mortgage, so it’s important to consider all the factors when making your decision.
2. Mortgage Interest rate
Mortgage interest rates can have a significant impact on the cost of a mortgage. The higher the interest rate, the more expensive the loan will be.
For example, a difference between a 3% and 4% interest rate on a $300,000 mortgage is more than $150 on the monthly payment.
Remember, in the first few years of a mortgage, the majority of the payment goes toward interest rather than trying to reduce the principal amount.
3. Type of Mortgage
The primary difference between a fixed and variable mortgage is the interest rate and the amount of your payment
Fixed-rate mortgages offer the stability of having the same interest rate for the life of the loan.
Adjustable-rate mortgages (ARMs) come with lower interest rates to start, but those rates can change over the life of the loan. ARMs are often a riskier choice, as if the economy falters, the interest rate can go up.
Fixed-rate loans are typically the most popular choice, as the monthly payment amount is more predictable and easier to budget for. The terms of a fixed-rate loan can range from 10 to 30 years, depending on the lender.
Adjustable-rate mortgages (ARMs) have interest rates that can increase or decrease annually based on an index plus a margin. ARMs are typically more attractive to borrowers who plan on staying in the home for a shorter period of time, as the lower initial interest rate can make the payments more manageable.
The Money Bliss recommendation is to choose a 15-year fixed-rate mortgage.
4. Property value
Property value can have a direct effect on how much you can afford for a mortgage.
As the value of the property increases, so does the amount of money you will need to borrow to purchase it. This, in turn, affects the monthly payments and the amount of interest you will pay over the life of the loan.
This is especially important as many people have been priced out of the market with the rising home prices.
Additionally, higher property values can mean higher taxes, which will add to the amount you need to budget for your mortgage payments.
5. Homeowner insurance
Homeowner’s insurance is a requirement when securing a loan and it can vary depending on the value and location of the home.
Additionally, certain areas that are prone to natural disasters or are located in densely populated areas may have higher premiums than other locations and may require additional insurance like flood insurance.
As a result, lenders typically require that you purchase homeowners insurance in order to secure a loan, and may have specific requirements for the type or amount of coverage that you need to purchase.
Before committing to a mortgage, it is important to consider the cost of homeowner’s insurance and make sure it fits into your budget.
This is something you do not want to skimp on as the cost to replace a home is very expensive.
6. Property taxes
Property taxes are calculated based on the value of a home and the tax rate of the city or county where the property resides.
The higher the property taxes, the more you will have to pay in your monthly mortgage payment.
In states with high property taxes, the property tax bill can be a large sum of the mortgage payment.
It is important to consider these costs when comparing different homes and locations to ensure you can afford the home without stretching your budget too thin.
7. Home repairs and maintenance
It’s important to also consider other factors such as the age of the house, since some properties may require renovation and repairs that can cost more than the house price itself.
Beyond the cost of purchasing a home, homeowners will likely have other expenses related to owning and maintaining the property.
Also, many homeowners prefer to do significant upgrades to the home before moving in, which comes at an additional expense.
These can include ordinary expenses such as painting, taking care of a lawn, fixing appliances, and cleaning living spaces, which can add up.
Additionally, it’s advisable to buy a home that falls in the middle of your price range to ensure you have some extra money for unexpected costs, such as repairs and maintenance.
8. HOA or Homeowners Association Maintenance
This is often an overlooked factor by many new homebuyers, but extremely important as some HOAs add $500-800 per month to the total housing budget.
The purpose of a homeowners association (HOA) is to establish a set of rules and regulations for residents to follow as well as maintain the community or building.
These fees are typically used to pay for maintenance, amenities, landscaping, and concierge services.
HOA fees are used to finance community upkeep, including landscaping and joint space development, and can range from $100 to over $1,000 per month, depending on the amenities in the association.
9. Utility bills
When switching from renting to buying a home, you will have to factor in the costs of your monthly utility bills such as electricity, natural gas, water, garbage and recycling, cable TV, internet, and cell phone when calculating how much mortgage you can afford.
In addition, the larger the home, the higher the costs to heat and cool your new home.
Make sure to ask your realtor for previous utility bills on the property you are interested in.
10. Private Mortgage Insurance
The purpose of private mortgage insurance (PMI) is to protect the lender in the event of foreclosure. It is typically required when a borrower is unable to make a 20% down payment on a home purchase.
PMI allows borrowers to purchase a home with less upfront capital, but also comes with additional monthly costs that are added to the mortgage payment. These fees range from 0.5% to 2.5% of the loan’s value annually and are based on the amount of money put down.
PMI can also be canceled or refinanced once the borrower has achieved 20% equity in the home or when the outstanding loan amount reaches 80% of the home’s purchase price.
11. Moving costs
Moving is expensive, but also a pain to do. So, consider the moving costs associated with relocating from one location to another.
Typically fees for packing, transportation, and possibly storage, and can vary depending on the size of the move and the distance the move needs to cover.
Also, consider if by buying a home, you will stop having moving costs associated with moving from rental to rental.
FAQ
When determining how much house you can afford, it’s important to consider several factors.
These include your income, existing debts, interest rates, credit history, credit score, monthly debt, monthly expenses, utilities, groceries, down payment, loan options (such as FHA or VA loans), and location (which affects the interest rate and property tax). Also, think about the costs of maintaining or renovating a home.
Additionally, you should also evaluate your own budget and assess whether now is the right time to purchase a home. Taking all of these factors into account can help you set the maximum limit on what you can realistically afford.
A mortgage calculator can help you determine your home affordability by providing an estimate of the home price you can afford based on your income, debt profile, and down payment.
It works by inputting your annual income and estimated mortgage rate, which then calculates the maximum amount of money you’re able to spend on a house and the expected monthly payment.
Additionally, different methods are available to factor in your debt-to-income ratio or your proposed housing budget, allowing you to get a more accurate estimate of your home buying budget.
The debt-to-income ratio or DTI is used by lenders to assess a borrower’s ability to make mortgage payments.
This ratio is calculated by taking the total of all of a borrower’s monthly recurring debts (including mortgage payments) and dividing it by the borrower’s monthly pre-tax household income.
A high DTI ratio indicates that the borrower’s debt is high relative to income, and could reduce the amount of loan they are qualified to receive.
Generally, lenders prefer a DTI of 36% or less, which allows borrowers to qualify for better interest rates on their mortgages.
To calculate their DTI, borrowers should include debt such as credit card payments, car loans, student and other loans, along with housing expenses. It is important to note that the DTI does not include other monthly expenses such as groceries, gas, or current rent payments.
Closing costs can have an enormous impact on how much home you’re able to afford.
From application fees and down payments to attorney costs and credit report fees, these costs can add up quickly and affect your overall budget. Unfortunately, most of these closing costs are non-negotiable, but you can ask the seller to pay them.
When buying a house, it is important to research the different mortgage options available to you.
You can typically choose between a conventional loan that is guaranteed by a private lender or banking institution, or a government-backed loan. Depending on your monthly payment and down payment availability, you may be able to select between a 15-year or a 30-year loan.
A conventional loan typically offers better interest rates and payment flexibility.
While a government-backed loan may be more lenient with its credit and down payment requirements.
For veterans or first-time home buyers, there may be special mortgage options available to them.
Ultimately, it is important to talk to a lender to see which loan type is best for your personal circumstances.
When it comes to saving for a down payment, it’s important to understand how much you’ll need and how much it will affect your budget.
Generally, you’ll need 20% of the cost of the home for a conventional mortgage and 25% for an investment property. When you put down more money, it gives you more buying power and may help you negotiate a lower interest rate.
For example, if you’re buying a $300,000 house, you’ll need a down payment of $60,000 for a conventional mortgage. On the other hand, if you put down 10%, you can still afford a $395,557 house. But, you will have to pay for private mortgage insurance.
In addition, there are other ways to help you cover these upfront costs. You can look into down payment assistance programs.
Ultimately, the size of your down payment will depend on your budget and financial goals. You should never deplete your savings account just to make a larger down payment. It’s important to factor in emergency funds and other expenses when deciding on the best option.
Eligibility requirements for loan lenders can vary, but in general, lenders are looking for borrowers with a good credit score, a reliable income, and a history of employment or income stability.
For most loan types, borrowers will need to show a history of two consecutive years of employment in order to qualify. However, lenders may be more flexible if the borrower is just beginning their career or if they are self-employed and do not have W2 forms and official pay stubs.
Income verification also needs to be done “on paper”, meaning that cash tips that do not appear on pay stubs or W2s can not be used as income. The lender will look at the household’s average pre-tax income over a two-year period before determining the amount that can be borrowed.
In order to make sure that the borrower is financially secure, lenders will also pull the borrower’s credit report and base their pre-approval on the credit score and debt-to-income ratio. Employment verification may also be done.
For certain government-backed loan types, such as FHA, VA, and USDA loans, there may be additional or different requirements for eligibility. For instance, for FHA loans, the borrower must intend to use the home as a primary residence and live in it within two months after closing. VA loans are more lenient, and may not require a down payment.
The qualifications for VA loans vary based on the period and amount of time the borrower has served. There are many ways to qualify, whether the borrower is a veteran, active duty service member, reservist, or member of the National Guard. For more information on eligibility requirements for VA loans, borrowers can visit the U.S. Department of Veteran Affairs.
A good credit score will mean you have access to more lending options, better interest rates, and more purchasing power.
On the other hand, a poor credit score could mean you are approved for a loan, but at a higher interest rate and with a smaller house.
This means your budget will be more limited and you may not be able to buy as much home as you had hoped for. Additionally, lenders will also look at other factors, such as your debt-to-income ratio, employment history, and loan term, in order to determine your overall affordability.
What House Can I Afford on 70k a year?
As a borrower, you need to consider the interest rate, down payment, credit score, debt-to-income ratio, employment history, and loan term when determining how much house you can afford.
A higher credit score can often mean a lower interest rate, and a larger down payment can bring down the monthly payments.
All of these factors can have an effect on the amount of money you can borrow and the home you can afford.
Ultimately, understanding the impact of different factors can help borrowers make the best decisions when it comes to getting a mortgage.
Now that you know how much house you can afford, it’s time to start saving for a down payment.
The sooner you start saving, the sooner you’ll be able to move into your dream home. But you may have to wait if you are considering a mansion.
By taking into consideration this guide into account, you can make a more informed decision about the cost of a mortgage for your new home.
Know someone else that needs this, too? Then, please share!!
The lack of housing inventory – a major pain point for real estate agents and loan officers – is an issue that Mark Cohen, principal owner of Cohen Financial Group, also sees in the upper end of the Southern California market.
The $1 million to $4 million homes market is very competitive, and qualified borrowers are having a hard time finding homes. However, there’s an oversupply of Inventory for homes priced $5 million plus, Cohen said in an interview with HousingWire.
“It’s a two-story housing market in Southern California,” Cohen said.
Cohen funded $751.4 million in loan volume in 2022, which led to him being the second-ranked loan originator of the year, Scotsman Guide’s rankings showed. Cohen trailed behind Guaranteed Rate‘s Shant Banosian, who originated $925 million during the same period. He was the number one mortgage broker and the loan officer with the most non-QM origination volume, according to Scotsman Guide.
Among mortgage brokers, Cohen ranked first.
While there are fewer move-up buyers now compared to the pandemic years, Cohen noted the uniqueness of the Southern California housing market, in that people tend to move more frequently compared to other states as they accumulate wealth.
“Here in LA, if you make money, you have your starter home, and if you make more money in the next few years, three, four or five years, you go to a bigger house. It’s not like in the Midwest or in other areas where you are in the house for the next 30 years. (…) There’s a lot of upward movement in LA. That’s why the market is so brisk,” Cohen said.
Read on to learn more about the two sides of the Southern California housing market and how Cohen stays competitive.
This interview has been condensed and lightly edited for clarity.
Connie Kim:California – as well as the rest of the country – is experiencing issues from a serious lack of inventory. I’m curious what the situation has been for the high-end markets you target.
Mark Cohen: I think inventories are improving a little bit just from what I’ve seen the last four, five, six days. But there are many clients, who are well qualified, trying to buy houses. For the most part, it’s the $3 million and under category. Anywhere from about $1 million to $4 million, the market is very, very competitive.
It’s a two-sided market here. Once you get over the $5 million threshold, there’s this oversupply, and the psychology of property tax is having a real negative effect on the market. I think there were only two or three sales last month in LA County over $5 million.
However, you’ll see isolated sales too. Beyonce and Jay Z bought a $200 million house in Malibu recently, so you’re going to see things like that. But as a general rule, the $5 million to $10 million market is off.
Kim: You also do a lot of non-QM loans. Who are your main borrowers?
Cohen: Executives, it’s probably a mix of 50/50. There’s a whole bevy of people here in Los Angeles that are self employed, who have good jobs, good businesses, but they don’t show everything they make on their tax returns. That’s where non-QM comes into play. The rates for those loans are pretty aggressively priced in comparison to the bank rates like JP Morgan Chase and Bank of America.
The rates – depending on the loan-to-value and credit score – are only about half to three-quarter points higher, which is really tangible. So it opens up a whole new avenue for people who fall within that category.
Half the clients go to the traditional banks where we can show tax returns.
Kim: If you have a lot of so-called wealthy borrowers, I would assume a lot would be interested in investment properties. How much of your sales is investment properties versus first-time homebuyers?
Cohen: I also do heavy work in the entertainment business in Southern California. I have several dozen business managers, money managers that I do work with. I would say maybe 10 to 15% of the deals are investment property deals.
A lot of first time buyers [actually], which is good because they’re not used to having 3% mortgages. They’re not going to be sensitive to the rate differentials.
Here in LA, if you make money, you have your starter home, and if you make more money in the next few years — three, four or five years — you go to a bigger house.
It’s not like in the Midwest or in other areas where you are in the house for the next 30 years. It doesn’t really work that way. In most situations, especially with young couples, they get married, have a kid and they need more rooms, assuming they’re doing well. So there’s a lot of upward movement in LA. That’s why the market is so brisk.
Kim: That’s really interesting. It’s quite the opposite from other areas, where people in different states are not moving, thus creating an inventory lock-down.
Cohen: It’s held back to a degree. I’m not saying it’s overly buoyant, but a lot of people really need more rooms when you have a kid. A lot of people I work with make money and there’s a lot of money in upward mobility.
Kim: So are they less impacted by the higher rates compared to about three years ago?
Cohen: Everybody is impacted. But we get the best deliverable rates – rates are in the 5s. So yeah, they’re less impacted. They’d rather pay more with the idea that at some point in time, which will occur in the next six to 12 months, rates will be lower. We’ll have the window to refinance the house.
Kim:What does your product mix look like?
Cohen: With the yield curve where it is, if you’re going to do a bank loan, it’s pretty much all 30-year fixed rate loans or 10-year adjustable-rate mortgages (ARMs).I’m doing a lot of HELOCs. Refinances are maybe 10% of business here from where it used to be at around 40, 50%.
I do have one brokerage house that if you have a million dollars net worth with them, rates are in the high 4s or low 5s. Lower loan-to-value, so I do have some good rates, but that’s going to be for more affluent people.
Kim: What helped you become the top producing broker in 2022? Does Cohen Financial Group have proprietary tech or are sales mostly coming from referrals?
Cohen: I’ve been in the business for 36 years, and it helps obviously knowing people and constantly following through. It’s the same thing in any business: doing the right things.
I’ve got very strong resources in banks and private banks, and on the non-QMs. I’m very picky with who I work with in terms of banks, because the worst thing to do is to get in situations where you don’t have control over the deals.
Kim: There’s a forecast that the 30-year fixed rates will drop lower in the second half of the year. Do you think it will be a better year for you compared to 2022?
Cohen: To maintain this to the best I can and hopefully achieve the same numbers. Obviously the more the better, but I’ve got no control. Just to do the right thing, get good execution and keep my relationships going with people, which I always work on.
In Best Low-Risk Investments for 2023, I provided a comprehensive list of low-risk investments with predictable returns. But it’s precisely because those returns are low-risk that they also provide relatively low returns.
In this article, we’re going to look at high-yield investments, many of which involve a higher degree of risk but are also likely to provide higher returns.
True enough, low-risk investments are the right investment solution for anyone who’s looking to preserve capital and still earn some income.
But if you’re more interested in the income side of an investment, accepting a bit of risk can produce significantly higher returns. And at the same time, these investments will generally be less risky than growth stocks and other high-risk/high-reward investments.
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Determine How Much Risk You’re Willing to Take On
The risk we’re talking about with these high-yield investments is the potential for you to lose money. As is true when investing in any asset, you need to begin by determining how much you’re willing to risk in the pursuit of higher returns.
Chasing “high-yield returns” will make you broke if you don’t have clear financial goals you’re working towards.
I’m going to present a large number of high-yield investments, each with its own degree of risk. The purpose is to help you evaluate the risk/reward potential of these investments when selecting the ones that will be right for you.
If you’re looking for investments that are completely safe, you should favor one or more of the highly liquid, low-yield vehicles covered in Best Low-Risk Investments for 2023. In this article, we’re going to be going for something a little bit different. As such, please note that this is not in any way a blanket recommendation of any particular investment.
Best High-Yield Investments for 2023
Table of Contents
Below is my list of the 18 best high-yield investments for 2023. They’re not ranked or listed in order of importance. That’s because each is a unique investment class that you will need to carefully evaluate for suitability within your own portfolio.
Be sure that any investment you do choose will be likely to provide the return you expect at an acceptable risk level for your own personal risk tolerance.
1. Treasury Inflation-Protected Securities (TIPS)
Let’s start with this one, if only because it’s on just about every list of high-yield investments, especially in the current environment of rising inflation. It may not actually be the best high-yield investment, but it does have its virtues and shouldn’t be overlooked.
Basically, TIPS are securities issued by the U.S. Treasury that are designed to accommodate inflation. They do pay regular interest, though it’s typically lower than the rate paid on ordinary Treasury securities of similar terms. The bonds are available with a minimum investment of $100, in terms of five, 10, and 30 years. And since they’re fully backed by the U.S. government, you are assured of receiving the full principal value if you hold a security until maturity.
But the real benefit—and the primary advantage—of these securities is the inflation principal additions. Each year, the Treasury will add an amount to the bond principal that’s commensurate with changes in the Consumer Price Index (CPI).
Fortunately, while the principal will be added when the CPI rises (as it nearly always does), none will be deducted if the index goes negative.
You can purchase TIPS through the U.S. Treasury’s investment portal, Treasury Direct. You can also hold the securities as well as redeem them on the same platform. There are no commissions or fees when buying securities.
On the downside, TIPS are purely a play on inflation since the base rates are fairly low. And while the principal additions will keep you even with inflation, you should know that they are taxable in the year received.
Still, TIPS are an excellent low-risk, high-yield investment during times of rising inflation—like now.
2. I Bonds
If you’re looking for a true low-risk, high-yield investment, look no further than Series I bonds. With the current surge in inflation, these bonds have become incredibly popular, though they are limited.
I bonds are currently paying 6.89%. They can be purchased electronically in denominations as little as $25. However, you are limited to purchasing no more than $10,000 in I bonds per calendar year. Since they are issued by the U.S. Treasury, they’re fully protected by the U.S. government. You can purchase them through the Treasury Department’s investment portal, TreasuryDirect.gov.
“The cash in my savings account is on fire,” groans Scott Lieberman, Founder of Touchdown Money. “Inflation has my money in flames, each month incinerating more and more. To defend against this, I purchased an I bond. When I decide to get my money back, the I bond will have been protected against inflation by being worth more than what I bought it for. I highly recommend getting yourself a super safe Series I bond with money you can stash away for at least one year.”
You may not be able to put your entire bond portfolio into Series I bonds. But just a small investment, at nearly 10%, can increase the overall return on your bond allocation.
3. Corporate Bonds
The average rate of return on a bank savings account is 0.33%. The average rate on a money market account is 0.09%, and 0.25% on a 12-month CD.
Now, there are some banks paying higher rates, but generally only in the 1%-plus range.
If you want higher returns on your fixed income portfolio, and you’re willing to accept a moderate level of risk, you can invest in corporate bonds. Not only do they pay higher rates than banks, but you can lock in those higher rates for many years.
For example, the average current yield on a AAA-rated corporate bond is 4.55%. Now that’s the rate for AAA bonds, which are the highest-rated securities. You can get even higher rates on bonds with lower ratings, which we will cover in the next section.
Corporate bonds sell in face amounts of $1,000, though the price may be higher or lower depending on where interest rates are. If you choose to buy individual corporate bonds, expect to buy them in lots of ten. That means you’ll likely need to invest $10,000 in a single issue. Brokers will typically charge a small per-bond fee on purchase and sale.
An alternative may be to take advantage of corporate bond funds. That will give you an opportunity to invest in a portfolio of bonds for as little as the price of one share of an ETF. And because they are ETFs, they can usually be bought and sold commission free.
You can typically purchase corporate bonds and bond funds through popular stock brokers, like Zacks Trade, TD Ameritrade.
Corporate Bond Risk
Be aware that the value of corporate bonds, particularly those with maturities greater than 10 years, can fall if interest rates rise. Conversely, the value of the bonds can rise if interest rates fall.
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4. High-Yield Bonds
In the previous section we talked about how interest rates on corporate bonds vary based on each bond issue’s rating. A AAA bond, being the safest, has the lowest yield. But a riskier bond, such as one rated BBB, will provide a higher rate of return.
If you’re looking to earn higher interest than you can with investment-grade corporate bonds, you can get those returns with so-called high-yield bonds. Because they have a lower rating, they pay higher interest, sometimes much higher.
The average yield on high-yield bonds is 8.29%. But that’s just an average. The yield on a bond rated B will be higher than one rated BB.
You should also be aware that, in addition to potential market value declines due to rising interest rates, high-yield bonds are more likely to default than investment-grade bonds. That’s why they pay higher interest rates. (They used to call these bonds “junk bonds,” but that kind of description is a marketing disaster.) Because of those twin risks, junk bonds should occupy only a small corner of your fixed-income portfolio.
High Yield Bond Risk
In a rapidly rising interest rate environment, high-yield bonds are more likely to default.
High-yield bonds can be purchased under similar terms and in the same places where you can trade corporate bonds. There are also ETFs that specialize in high-yield bonds and will be a better choice for most investors, since they will include diversification across many different bond issues.
5. Municipal Bonds
Just as corporations and the U.S. Treasury issue bonds, so do state and local governments. These are referred to as municipal bonds. They work much like other bond types, particularly corporates. They can be purchased in similar denominations through online brokers.
The main advantage enjoyed by municipal bonds is their tax-exempt status for federal income tax purposes. And if you purchase a municipal bond issued by your home state, or a municipality within that state, the interest will also be tax-exempt for state income tax purposes.
That makes municipal bonds an excellent source of tax-exempt income in a nonretirement account. (Because retirement accounts are tax-sheltered, it makes little sense to include municipal bonds in those accounts.)
Municipal bond rates are currently hovering just above 3% for AAA-rated bonds. And while that’s an impressive return by itself, it masks an even higher yield.
Because of their tax-exempt status, the effective yield on municipal bonds will be higher than the note rate. For example, if your combined federal and state marginal income tax rates are 25%, the effective yield on a municipal bond paying 3% will be 4%. That gives an effective rate comparable with AAA-rated corporate bonds.
Municipal bonds, like other bonds, are subject to market value fluctuations due to interest rate changes. And while it’s rare, there have been occasional defaults on these bonds.
Like corporate bonds, municipal bonds carry ratings that affect the interest rates they pay. You can investigate bond ratings through sources like Standard & Poor’s, Moody’s, and Fitch.
Fund
Symbol
Type
Current Yield
5 Average Annual Return
Vanguard Inflation-Protected Securities Fund
VIPSX
TIPS
0.06%
3.02%
SPDR® Portfolio Interm Term Corp Bond ETF
SPIB
Corporate
4.38%
1.44%
iShares Interest Rate Hedged High Yield Bond ETF
HYGH
High-Yield
5.19%
2.02%
Invesco VRDO Tax-Free ETF (PVI)
PVI
Municipal
0.53%
0.56%
6. Longer Term Certificates of Deposit (CDs)
This is another investment that falls under the low risk/relatively high return classification. As interest rates have risen in recent months, rates have crept up on certificates of deposit. Unlike just one year ago, CDs now merit consideration.
But the key is to invest in certificates with longer terms.
“Another lower-risk option is to consider a Certificate of Deposit (CD),” advises Lance C. Steiner, CFP at Buckingham Advisors. “Banks, credit unions, and many other financial institutions offer CDs with maturities ranging from 6 months to 60 months. Currently, a 6-month CD may pay between 0.75% and 1.25% where a 24-month CD may pay between 2.20% and 3.00%. We suggest considering a short-term ladder since interest rates are expected to continue rising.” (Stated interest rates for the high-yield savings and CDs were obtained at bankrate.com.)
Most banks offer certificates of deposit with terms as long as five years. Those typically have the highest yields.
But the longer term does involve at least a moderate level of risk. If you invest in a CD for five years that’s currently paying 3%, the risk is that interest rates will continue rising. If they do, you’ll miss out on the higher returns available on newer certificates. But the risk is still low overall since the bank guarantees to repay 100% of your principle upon certificate maturity.
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7. Peer-to-Peer (P2P) Lending
Do you know how banks borrow from you—at 1% interest—then loan the same money to your neighbor at rates sometimes as high as 20%? It’s quite a racket, and a profitable one at that.
But do you also know that you have the same opportunity as a bank? It’s an investing process known as peer-to-peer lending, or P2P for short.
P2P lending essentially eliminates the bank. As an investor, you’ll provide the funds for borrowers on a P2P platform. Most of these loans will be in the form of personal loans for a variety of purposes. But some can also be business loans, medical loans, and for other more specific purposes.
As an investor/lender, you get to keep more of the interest rate return on those loans. You can invest easily through online P2P platforms.
One popular example is Prosper. They offer primarily personal loans in amounts ranging between $2,000 and $40,000. You can invest in small slivers of these loans, referred to as “notes.” Notes can be purchased for as little as $25.
That small denomination will make it possible to diversify your investment across many different loans. You can even choose the loans you will invest in based on borrower credit scores, income, loan terms, and purposes.
Prosper, which has managed $20 billion in P2P loans since 2005, claims a historical average return of 5.7%. That’s a high rate of return on what is essentially a fixed-income investment. But that’s because there exists the possibility of loss due to borrower default.
However, you can minimize the likelihood of default by carefully choosing borrower loan quality. That means focusing on borrowers with higher credit scores, incomes, and more conservative loan purposes (like debt consolidation).
8. Real Estate Investment Trusts (REITs)
REITs are an excellent way to participate in real estate investment, and the return it provides, without large amounts of capital or the need to manage properties. They’re publicly traded, closed-end investment funds that can be bought and sold on major stock exchanges. They invest primarily in commercial real estate, like office buildings, retail space, and large apartment complexes.
If you’re planning to invest in a REIT, you should be aware that there are three different types.
“Equity REITs purchase commercial, industrial, or residential real estate properties,” reports Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University and co-author of several books, including The Tools and Techniques Of Investment Planning, Strategic Value Investing and Investment Banking for Dummies. “Income is derived primarily from the rental on the properties, as well as from the sale of properties that have increased in value. Mortgage REITs invest in property mortgages. The income is primarily from the interest they earn on the mortgage loans. Hybrid REITs invest both directly in property and in mortgages on properties.”
Johnson also cautions:
“Investors should understand that equity REITs are more like stocks and mortgage REITs are more like bonds. Hybrid REITs are like a mix of stocks and bonds.”
Mortgage REITs, in particular, are an excellent way to earn steady dividend income without being closely tied to the stock market.
Examples of specific REITs are listed in the table below (source: Kiplinger):
REIT
Equity or Mortgage
Property Type
Dividend Yield
12 Month Return
Rexford Industrial Realty
REXR
Industrial warehouse space
2.02%
2.21%
Sun Communities
SUI
Manufactured housing, RVs, resorts, marinas
2.19%
-14.71%
American Tower
AMT
Multi-tenant cell towers
2.13%
-9.00%
Prologis
PLD
Industrial real estate
2.49%
-0.77%
Camden Property Trust
CPT
Apartment complexes
2.77%
-7.74%
Alexandria Real Estate Equities
ARE
Research Properties
3.14%
-23.72%
Digital Realty Trust
DLR
Data centers
3.83%
-17.72%
9. Real Estate Crowdfunding
If you prefer direct investment in a property of your choice, rather than a portfolio, you can invest in real estate crowdfunding. You invest your money, but management of the property will be handled by professionals. With real estate crowdfunding, you can pick out individual properties, or invest in nonpublic REITs that invest in very specific portfolios.
One of the best examples of real estate crowdfunding is Fundrise. That’s because you can invest with as little as $500 or create a customized portfolio with no more than $1,000. Not only does Fundrise charge low fees, but they also have multiple investment options. You can start small in managed investments, and eventually trade up to investing in individual deals.
One thing to be aware of with real estate crowdfunding is that many require accredited investor status. That means being high income, high net worth, or both. If you are an accredited investor, you’ll have many more choices in the real estate crowdfunding space.
If you are not an accredited investor, that doesn’t mean you’ll be prevented from investing in this asset class. Part of the reason why Fundrise is so popular is that they don’t require accredited investor status. There are other real estate crowdfunding platforms that do the same.
Just be careful if you want to invest in real estate through real estate crowdfunding platforms. You will be expected to tie your money up for several years, and early redemption is often not possible. And like most investments, there is the possibility of losing some or all your investment principal.
Low minimum investment – $10
Diversified real estate portfolio
Portfolio Transparency
10. Physical Real Estate
We’ve talked about investing in real estate through REITs and real estate crowdfunding. But you can also invest directly in physical property, including residential property or even commercial.
Owning real estate outright means you have complete control over the investment. And since real estate is a large-dollar investment, the potential returns are also large.
For starters, average annual returns on real estate are impressive. They’re even comparable to stocks. Residential real estate has generated average returns of 10.6%, while commercial property has returned an average of 9.5%.
Next, real estate has the potential to generate income from two directions, from rental income and capital gains. But because of high property values in many markets around the country, it will be difficult to purchase real estate that will produce a positive cash flow, at least in the first few years.
Generally speaking, capital gains are where the richest returns come from. Property purchased today could double or even triple in 20 years, creating a huge windfall. And this will be a long-term capital gain, to get the benefit of a lower tax bite.
Finally, there’s the leverage factor. You can typically purchase an investment property with a 20% down payment. That means you can purchase a $500,000 property with $100,000 out-of-pocket.
By calculating your capital gains on your upfront investment, the returns are truly staggering. If the $500,000 property doubles to $1 million in 20 years, the $500,000 profit generated will produce a 500% gain on your $100,000 investment.
On the negative side, real estate is certainly a very long-term investment. It also comes with high transaction fees, often as high as 10% of the sale price. And not only will it require a large down payment up front, but also substantial investment of time managing the property.
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11. High Dividend Stocks
“The best high-yield investment is dividend stocks,” declares Harry Turner, Founder at The Sovereign Investor. “While there is no guaranteed return with stocks, over the long term stocks have outperformed other investments such as bonds and real estate. Among stocks, dividend-paying stocks have outperformed non-dividend paying stocks by more than 2 percentage points per year on average over the last century. In addition, dividend stocks tend to be less volatile than non-dividend paying stocks, meaning they are less likely to lose value in downturns.”
You can certainly invest in individual stocks that pay high dividends. But a less risky way to do it, and one that will avoid individual stock selection, is to invest through a fund.
One of the most popular is the ProShares S&P 500 Dividend Aristocrat ETF (NOBL). It has provided a return of 1.67% in the 12 months ending May 31, and an average of 12.33% per year since the fund began in October 2013. The fund currently has a 1.92% dividend yield.
The so-called Dividend Aristocrats are popular because they represent 60+ S&P 500 companies, with a history of increasing their dividends for at least the past 25 years.
“Dividend Stocks are an excellent way to earn some quality yield on your investments while simultaneously keeping inflation at bay,” advises Lyle Solomon, Principal Attorney at Oak View Law Group, one of the largest law firms in America. “Dividends are usually paid out by well-established and successful companies that no longer need to reinvest all of the profits back into the business.”
It gets better. “These companies and their stocks are safer to invest in owing to their stature, large customer base, and hold over the markets,” adds Solomon. “The best part about dividend stocks is that many of these companies increase dividends year on year.”
The table below shows some popular dividend-paying stocks. Each is a so-called “Dividend Aristocrat”, which means it’s part of the S&P 500 and has increased its dividend in each of at least the past 25 years.
Company
Symbol
Dividend
Dividend Yield
AbbVie
ABBV
$5.64
3.80%
Armcor PLC
AMCR
$0.48
3.81%
Chevron
CVX
$5.68
3.94%
ExxonMobil
XOM
$3.52
4.04%
IBM
IBM
$6.60
5.15%
Realty Income Corp
O
$2.97
4.16%
Walgreen Boots Alliance
WBA
$1.92
4.97%
12. Preferred Stocks
Preferred stocks are a very specific type of dividend stock. Just like common stock, preferred stock represents an interest in a publicly traded company. They’re often thought of as something of a hybrid between stocks and bonds because they contain elements of both.
Though common stocks can pay dividends, they don’t always. Preferred stocks on the other hand, always pay dividends. Those dividends can be either a fixed amount or based on a variable dividend formula. For example, a company can base the dividend payout on a recognized index, like the LIBOR (London Inter-Bank Offered Rate). The percentage of dividend payout will then change as the index rate does.
Preferred stocks have two major advantages over common stock. First, as “preferred” securities, they have a priority on dividend payments. A company is required to pay their preferred shareholders dividends ahead of common stockholders. Second, preferred stocks have higher dividend yields than common stocks in the same company.
You can purchase preferred stock through online brokers, some of which are listed under “Growth Stocks” below.
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Preferred Stock Caveats
The disadvantage of preferred stocks is that they don’t entitle the holder to vote in corporate elections. But some preferred stocks offer a conversion option. You can exchange your preferred shares for a specific number of common stock shares in the company. Since the conversion will likely be exercised when the price of the common shares takes a big jump, there’s the potential for large capital gains—in addition to the higher dividend.
Be aware that preferred stocks can also be callable. That means the company can authorize the repurchase of the stock at its discretion. Most will likely do that at a time when interest rates are falling, and they no longer want to pay a higher dividend on the preferred stock.
Preferred stock may also have a maturity date, which is typically 30–40 years after its original issuance. The company will typically redeem the shares at the original issue price, eliminating the possibility of capital gains.
Not all companies issue preferred stock. If you choose this investment, be sure it’s with a company that’s well-established and has strong financials. You should also pay close attention to the details of the issuance, including and especially any callability provisions, dividend formulas, and maturity dates.
13. Growth Stocks
This sector is likely the highest risk investment on this list. But it also may be the one with the highest yield, at least over the long term. That’s why we’re including it on this list.
Based on the S&P 500 index, stocks have returned an average of 10% per year for the past 50 years. But it is important to realize that’s only an average. The market may rise 40% one year, then fall 20% the next. To be successful with this investment, you must be committed for the long haul, up to and including several decades.
And because of the potential wide swings, growth stocks are not recommended for funds that will be needed within the next few years. In general, growth stocks work best for retirement plans. That’s where they’ll have the necessary decades to build and compound.
Since most of the return on growth stocks is from capital gains, you’ll get the benefit of lower long-term capital gains tax rates, at least with securities held in a taxable account. (The better news is capital gains on investments held in retirement accounts are tax-deferred until retirement.)
You can choose to invest in individual stocks, but that’s a fairly high-maintenance undertaking. A better way may be to simply invest in ETFs tied to popular indexes. For example, ETFs based on the S&P 500 are very popular among investors.
You can purchase growth stocks and growth stock ETFs commission free with brokers like M1 Finance, Zacks Trade, Wealthsimple.
14. Annuities
Annuities are something like creating your own private pension. It’s an investment contract you take with an insurance company, in which you invest a certain amount of money in exchange for a specific income stream. They can be an excellent source of high yields because the return is locked in by the contract.
Annuities come in many different varieties. Two major classifications are immediate and deferred annuities. As the name implies, immediate annuities begin paying an income stream shortly after the contract begins.
Deferred annuities work something like retirement plans. You may deposit a fixed amount of money with the insurance company upfront or make regular installments. In either case, income payments will begin at a specified point in the future.
With deferred annuities, the income earned within the plan is tax-deferred and paid upon withdrawal. But unlike retirement accounts, annuity contributions are not tax-deductible. Investment returns can either be fixed-rate or variable-rate, depending on the specific annuity setup.
While annuities are an excellent idea and concept, the wide variety of plans as well as the many insurance companies and agents offering them, make them a potential minefield. For example, many annuities are riddled with high fees and are subject to limited withdrawal options.
Because they contain so many moving parts, any annuity contracts you plan to enter into should be carefully reviewed. Pay close attention to all the details, including the small ones. It is, after all, a contract, and therefore legally binding. For that reason, you may want to have a potential annuity reviewed by an attorney before finalizing the deal.
15. Alternative Investments
Alternative investments cover a lot of territory. Examples include precious metals, commodities, private equity, art and collectibles, and digital assets. These fall more in the category of high risk/potential high reward, and you should proceed very carefully and with only the smallest slice of your portfolio.
To simplify the process of selecting alternative assets, you can invest through platforms such as Yieldstreet. With a single cash investment, you can invest in multiple alternatives.
“Investors can purchase real estate directly on Yieldstreet, through fractionalized investments in single deals,” offers Milind Mehere, Founder & Chief Executive Officer at Yieldstreet. “Investors can access private equity and private credit at high minimums by investing in a private market fund (think Blackstone or KKR, for instance). On Yieldstreet, they can have access to third-party funds at a fraction of the previously required minimums. Yieldstreet also offers venture capital (fractionalized) exposure directly. Buying a piece of blue-chip art can be expensive, and prohibitive for most investors, which is why Yieldstreet offers fractionalized assets to diversified art portfolios.”
Yieldstreet also provides access to digital asset investments, with the benefit of allocating to established professional funds, such as Pantera or Osprey Fund. The platform does not currently offer commodities but plans to do so in the future.
Access to wide array of alternative asset classes
Access to ultra-wealthy investments
Can invest for income or growth
Learn More Now
Alternative investments largely require thinking out-of-the-box. Some of the best investment opportunities are also the most unusual.
“The price of meat continues to rise, while agriculture remains a recession-proof investment as consumer demand for food is largely inelastic,” reports Chris Rawley, CEO of Harvest Returns, a platform for investing in private agriculture companies. “Consequently, investors are seeing solid returns from high-yield, grass-fed cattle notes.”
16. Interest Bearing Crypto Accounts
Though the primary appeal of investing in cryptocurrency has been the meteoric rises in price, now that the trend seems to be in reverse, the better play may be in interest-bearing crypto accounts. A select group of crypto exchanges pays high interest on your crypto balance.
One example is Gemini. Not only do they provide an opportunity to buy, sell, and store more than 100 cryptocurrencies—plus non-fungible tokens (NFTs)—but they are currently paying 8.05% APY on your crypto balance through Gemini Earn.
In another variation of being able to earn money on crypto, Crypto.com pays rewards of up to 14.5% on crypto held on the platform. That’s the maximum rate, as rewards vary by crypto. For example, rewards on Bitcoin and Ethereum are paid at 6%, while stablecoins can earn 8.5%.
It’s important to be aware that when investing in cryptocurrency, you will not enjoy the benefit of FDIC insurance. That means you can lose money on your investment. But that’s why crypto exchanges pay such high rates of return, whether it’s in the form of interest or rewards.
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17. Crypto Staking
Another way to play cryptocurrency is a process known as crypto staking. This is where the crypto exchange pays you a certain percentage as compensation or rewards for monitoring a specific cryptocurrency. This is not like crypto mining, which brings crypto into existence. Instead, you’ll participate in writing that particular blockchain and monitoring its security.
“Crypto staking is a concept wherein you can buy and lock a cryptocurrency in a protocol, and you will earn rewards for the amount and time you have locked the cryptocurrency,” reports Oak View Law Group’s Lyle Solomon.
“The big downside to staking crypto is the value of cryptocurrencies, in general, is extremely volatile, and the value of your staked crypto may reduce drastically,” Solomon continues, “However, you can stake stable currencies like USDC, which have their value pegged to the U.S. dollar, and would imply you earn staked rewards without a massive decrease in the value of your investment.”
Much like earning interest and rewards on crypto, staking takes place on crypto exchanges. Two exchanges that feature staking include Coinbase and Kraken. These are two of the largest crypto exchanges in the industry, and they provide a wide range of crypto opportunities, in addition to staking.
Invest in Startup Businesses and Companies
Have you ever heard the term “angel investor”? That’s a private investor, usually, a high net worth individual, who provides capital to small businesses, often startups. That capital is in the form of equity. The angel investor invests money in a small business, becomes a part owner of the company, and is entitled to a share of the company’s earnings.
In most cases, the angel investor acts as a silent partner. That means he or she receives dividend distributions on the equity invested but doesn’t actually get involved in the management of the company.
It’s a potentially lucrative investment opportunity because small businesses have a way of becoming big businesses. As they grow, both your equity and your income from the business also grow. And if the business ever goes public, you could be looking at a life-changing windfall!
Easy Ways to Invest in Startup Businesses
Mainvest is a simple, easy way to invest in small businesses. It’s an online investment platform where you can get access to returns as high as 25%, with an investment of just $100. Mainvest offers vetted businesses (the acceptance rate is just 5% of business that apply) for you to invest in.
It collects revenue, which will be paid to you quarterly. And because the minimum required investment is so small, you can invest in several small businesses at the same time. One of the big advantages with Mainvest is that you are not required to be an accredited investor.
Still another opportunity is through Fundrise Innovation Fund. I’ve already covered how Fundrise is an excellent real estate crowdfunding platform. But through their recently launched Innovaton Fund, you’ll have opportunity to invest in high-growth private technology companies. As a fund, you’ll invest in a portfolio of late-stage tech companies, as well as some public equities.
The purpose of the fund is to provide high growth, and the fund is currently offering shares with a net asset value of $10. These are long-term investments, so you should expect to remain invested for at least five years. But you may receive dividends in the meantime.
Like Mainvest, the Fundrise Innovation Fund does not require you to be an accredited investor.
Low minimum investment – $10
Diversified real estate portfolio
Portfolio Transparency
Final Thoughts on High Yield Investing
Notice that I’ve included a mix of investments based on a combination of risk and return. The greater the risk associated with the investment, the higher the stated or expected return will be.
It’s important when choosing any of these investments that you thoroughly assess the risk involved with each, and not focus primarily on return. These are not 100% safe investments, like short-term CDs, short-term Treasury securities, savings accounts, or bank money market accounts.
Because there is risk associated with each, most are not suitable as short-term investments. They make most sense for long-term investment accounts, particularly retirement accounts.
For example, growth stocks—and most stocks, for that matter—should generally be in a retirement account. While there will be years when you will suffer losses in your position, you’ll have enough years to offset those losses between now and retirement.
Also, if you don’t understand any of the above investments, it will be best to avoid making them. And for more complicated investments, like annuities, you should consult with a professional to evaluate the suitability and all the provisions it contains.
FAQ’s on High Yield Investment Options
What investment has the highest yield?
The investment with the highest yield will vary depending on a number of factors, including current market conditions and the amount of risk an investor is willing to take on. Generally speaking, investments with the potential for high yields also come with a higher level of risk, so it’s important for investors to carefully consider their options and choose investments that align with their financial goals and risk tolerance.
Some examples of high-yield investments include:
1. Stocks: Some stocks may offer high dividend yields, which is the annual dividend payment a company makes to its shareholders, expressed as a percentage of the stock’s current market price.
2. Real estate: Investing in real estate, either directly by purchasing property or indirectly through a real estate investment trust (REIT), can potentially generate high returns in the form of rental income and appreciation of the property value.
3. High-yield bonds: High-yield bonds, also known as junk bonds, are bonds that are issued by companies with lower credit ratings and thus offer higher yields to compensate for the added risk.
4. Private lending: Investing in private loans, such as through peer-to-peer lending platforms, can potentially offer high yields, but it also carries a higher level of risk.
5. Commodities: Investing in commodities, such as precious metals or oil, can potentially generate high returns if the prices of those commodities rise. However, the prices of commodities can also be volatile and subject to market fluctuations.
It’s important to note that these are just examples and not recommendations. As with any investment, it’s crucial to carefully research and consider all the potential risks and rewards before making a decision.
Where can I invest my money to get high returns?
There are a number of places you can invest your money to get high returns. One option is to invest in stocks, which typically offer higher returns than other investment options. Another option is to invest in bonds, which are considered a relatively safe investment option.
You could also invest in real estate, which has the potential to provide high returns if done correctly. Finally, you could also invest in commodities, such as gold or silver, which can be a risky investment but can also offer high returns.
What investments can I make a 10% return?
It’s difficult to predict exactly what investments will generate a 10% return, as investment returns can vary depending on a number of factors, including market conditions and the performance of the specific investment. Some investments, such as stocks and real estate, have the potential to generate returns in excess of 10%, but they also come with a higher level of risk. It’s important to remember that past performance is not necessarily indicative of future results, and that all investments carry some degree of risk
If you’re buying a home in need of some work, you can get the financing for both the purchase and renovation through an FHA 203(k) loan, also known as a rehab loan. This type of FHA loan keeps things simple with one loan, one set of closing costs and one monthly mortgage payment. Here is Bankrate’s guide to the best 203(k) rehab mortgage lenders in 2023.
Best FHA 203(k) rehab mortgage lenders
LowRates.com
LowRates.com mortgage review
Availability
Available in 48 U.S. states (not available in GA or MA)
Loans offered
Conventional, jumbo, FHA, VA, USDA
Credit requirements
620 for conventional loans; 700 for jumbo loans; 500 for FHA and VA loans
Down payment minimum
3% for conventional loans; 3.5% for FHA loans; none for VA and USDA loans
Where to find
Online
No fees
Can close as fast as 20 days
Offers HELOCs and home equity loans
New American Funding
New American Funding mortgage review
Availability
Available in all U.S. states
Loans offered
Conventional, jumbo, FHA, VA, USDA, fixed-rate, adjustable-rate; rate-and-term, cash-out and streamline refinancing; home equity line of credit (HELOC); investment property; flex-term; non-QM; reverse mortgages
Credit requirements
620 for conventional loans
Down payment minimum
Undisclosed
Where to find
Online and in-person
Offers initiatives for borrowers of color
Diverse set of loan offerings
Guaranteed Rate
Guaranteed Rate mortgage review
Availability
Nationwide
Loans offered
Purchase and refinance, conventional, jumbo, FHA, VA, USDA, renovation loans, interest-only
Credit requirements
620 for conventional and FHA loans; 580 for VA loans
Down payment minimum
Undisclosed
Where to find
Online and in-person
Over 350 locations nationwide for in-person support
Interest rates listed online and updated daily
Rated as a top 3 retail mortgage lender by Scotsman Guide
Flagstar Bank
Flagstar Bank mortgage review
Availability
Available in more than two dozen states
Loans offered
Purchase and refinance; conventional, jumbo, FHA, VA, USDA, home equity loan, construction and renovation loans
Credit requirements
620 for conventional loans; 700 for jumbo loans; 580 for FHA loans
Down payment minimum
Unclear for conventional loans; 3.5% for FHA loans
Where to find
Online and in-person
Offers several government-backed loan products with competitive rates
“Destination Home” Mortgage with no down payment and flexible eligibility criteria
Get up to $5,000 towards closing costs or your down payment with the Flagstar Gift Program
LoanDepot
LoanDepot mortgage review
Availability
Available in all U.S. states
Loans offered
Purchase and refinance; conventional, jumbo, FHA, VA, construction and renovation loans
Credit requirements
620 for conventional loans and VA loans; 700 for jumbo loans; 580 for FHA loans
Down payment minimum
Unclear for conventional loans; 3.5% for FHA loans
Where to find
Online and in-person
More than 1,700 licensed lending officers nationwide for customer support
Accredited by the Better Business Bureau (BBB) with an A+ rating
Fairway Independent Mortgage Corporation
Fairway Independent Mortgage Corporation review
Availability
Available in all U.S. states
Loans offered
Purchase and refinance; conventional, jumbo, FHA, VA, USDA; construction and renovation loans, reverse mortgage, physician loan
Credit requirements
Unavailable
Down payment minimum
5% for conventional loans; 3.5% for FHA loans
Where to find
Online and in-person
Summary: Best FHA 203(k) mortgage lenders
Lender
Credit requirements
Down payment minimum
Bankrate review
LowRates.com
620 for conventional loans; 700 for jumbo loans; 500 for FHA and VA loans
3% for conventional loans; 3.5% for FHA loans; none for VA and USDA loans
LowRates.com mortgage review
New American Funding
620 for conventional loans
Undisclosed
New American Funding mortgage review
Guaranteed Rate
620 for conventional and FHA loans; 580 for VA loans
Undisclosed
Guaranteed Rate mortgage review
Flagstar Bank
620 for conventional and FHA loans; 580 for VA loans
Unclear for conventional loans; 3.5% for FHA loans
Flagstar Bank mortgage review
LoanDepot
620 for conventional loans and VA loans; 700 for jumbo loans; 580 for FHA loans
Unclear for conventional loans; 3.5% for FHA loans
LoanDepot mortgage review
Fairway Independent Mortgage Corporation
Unavailable
5% for conventional loans; 3.5% for FHA loans
Fairway Independent Mortgage review
What is an FHA 203(k) rehab loan?
The FHA 203(k) loan is a type of mortgage backed by the Federal Housing Administration (FHA) for homebuyers looking to renovate the home they’re purchasing. 203(k) loans tend to come with more competitive rates, and require a smaller down payment and lower credit score compared to other kinds of loans. Like other FHA mortgages, 203(k) loans require you to pay a mortgage insurance premium with your monthly loan payment.
How does a 203(k) loan work?
A 203(k) loan bundles your mortgage and renovation funds into one loan. Once you close on the loan, a portion of the loan proceeds is paid to the seller of the home, and the remaining balance goes toward the renovations.
To be eligible for a 203(k) loan, the home needs to be at least one year old and renovation costs need to be a minimum of $5,000. In addition, the amount borrowed can’t be more than the area’s FHA loan limit, the home’s value after the renovation or its value before renovation, whichever is lowest.
You also can’t use a 203(k) loan for just any project. You’ll need to comply with the requirements for eligible renovations, which include replacing the roof and floors, enhancing the home for accessibility reasons or making energy efficiency improvements.
Who qualifies for a 203(k) loan?
If you’re interested in a 203(k) loan, you’ll need to meet the same requirements for a standard FHA loan:
A minimum credit score of 580
A debt-to-income (DTI) ratio of 50 percent or less (individual lenders may have higher or lower requirements)
The home is your primary residence and passes inspection once renovations are completed
Methodology
To determine the best FHA 203(k) rehab mortgage lenders, Bankrate evaluated lenders based on several criteria, including affordability (APR, discounts and/or incentives); scope of loan offerings; customer reviews; and online capabilities.
Michelle’s quick note: Today, I have a great blog post on how to save money for a large deposit from Rachael, who is a long-time reader of Making Sense of Cents. Rachael purchased her first investment property at the age of 20 by saving for a deposit and found many great ways to save for the 20% deposit. Below is her blog post. Enjoy!
I bought my first investment property with a 20% deposit when I was 20 years old (admittedly I was 2 weeks shy of turning 21!). I accomplished saving for a deposit with my own money, my parents never gave me a cent. So how did I do it?
1. The first thing I did was start applying for jobs as soon as I turned old enough to get a job. I started working when I was 15 as a checkout chick at Woolworths. Not very glamorous, a bit boring and repetitive but I was earning money! I worked about 10 hours a week during my last 2 years of high school, and worked around 20 hours per week during the school holidays. I worked at Woolworths for 3 and a half years and saved a good chunk of the money I earned.
Related:
2. When I worked during high school the only time I would ever say no to a shift is if I was sick or had an exam the next day. It didn’t matter if I didn’t want to go to work (does anyone ever actually want to go to work?) I hated that job but I wanted a property so I went to work.
Sometimes I’d get home from school, get changed into my work uniform then go straight to work until 9:30 then come home and study until midnight to get homework and assignments done, then go to school the next day. I know some people don’t agree with kids working while studying but it was really helpful for time management as it didn’t leave me with any time to procrastinate!
3. The main contributor to earning enough money for the deposit was opening an Etsy shopI’d been designing printables to help keep me organized for a while and decided to start an Etsy shop to save up some money for a trip to the USA (I live in Australia). I ended up making enough money to cover most of the cost of the holiday. The intention when I got back from vacation was to close up shop and focus on my university studies. But I came back to tons of messages from people asking when my shop would be reopening because they wanted to buy my printables. I thought I may as well leave the shop open and make some extra money to supplement the income I was earning as a checkout chick (which was not much!)
About 6 months later my sales kept growing even though I wasn’t creating many new printables – I was earning more than I was scanning groceries (and having a lot more fun!) so I decided to turn my Etsy shop into a business. It also made me realise that I’ll never earn an above-average or life changing money working for someone else.
When I started my 3rd year of my university course, I got a job in my field. For 3 months I worked 10 hours a week scanning groceries, 25 hours a week at my day job, juggled my 2 Etsy shops, a blog, and maintained a high GPA at my university studies. I say this not to brag, but to point out that the money wasn’t just handed to me on a silver platter – if you want something you have to work for it. Needless to say I was burnt out. I quit being a checkout chick (that was a wonderful day!) and sought other ways to save the money I was no longer making from working those 10 hours a week. If you’re looking for ways to make extra money, Michelle has dozens of posts with side hustle ideas.
My biggest advice when it comes to saving money is not to increase your standard of living when you start earning a higher wage.
Aside from starting an online business, I saved money in numerous other ways:
4. I don’t have a car. When I did the math it was cheaper for me to pay higher rent and live closer to the city and use public transport (plus it’s more convenient). I share an apartment with my sister which also helped me save money as bills are split in 2, and it’s cheaper to rent an apartment with someone than it is to live by yourself
5. I buy stuff when it’s on sale & stock up. Yep, I’m one of those crazy people that buys 30 rolls of toilet paper when they’re on sale. When a sale does come around, I’m organized and have a list of everything I need to buy – the key is that you only buy what you need not just stuff that you want.
6. I bring my own lunch. I see so many of my work colleagues wasting their money on donuts, coffee and buying lunch every day. Then they whinge and seem confused that they don’t have any money by the end of the month when they’re screaming out for payday. One of the reasons I work as much as I do is because I never want to live paycheck to paycheck
7. When I was saving up I put most of my money into a term deposit. Not only did this prevent me from spending it, it also earned a higher interest rate than an everyday savings account. When the term deposit expired and I still didn’t have enough for the deposit, I went to my bank every couple of months and opened a new savings account so I could get their 3 month introductory bonus interest rate (by the 3rd time of doing it the bank knew me by name and just reset the interest rate rather than making me open a new account!)
8. I track where all of my money is spent using my budget binder printables – no joke, every single dollar gets accounted for. I do the same with my business income and expenses using these spreadsheets.
9. I set a maximum amount I would pay per piece of clothing and stuck to it (still stick to it!) no matter what ($20 for shirts, $40 for a pair of shorts in case you were wondering – keeping in mind that clothes are more expensive here in Australia). If I find a piece of clothing that I like I also buy it in multiples when it’s on sale. I have an ‘around the house’ wardrobe which consists of cheap clothes I wouldn’t wear in public but are perfect for blogging!
10. I utilise credit cards. A lot of people have a misconception that credit cards are bad but they’re not if you use them to correctly i.e. not to buy stuff you couldn’t otherwise afford. Not only do I not have to carry cash but when I makes purchases on my credit card I accumulate points that can be converted to cash.
Plus most credit cards will give you a signup bonus (such as cash or frequent flyer points) – just make sure you check that the bonus is more than the annual fee. You can always cancel the card before the end of the year then sign up for a new card the next year to get a new signup bonus.
By purchasing on credit card, you can keep money in your savings account for longer meaning YOUearn interest on your money, not your bank. I use my budget plannerto keep track of when money needs to be transferred so I’m not hit with a late fee.
Related: How To Take A 10 Day Trip To Hawaii For $22.40
11. I’m on the lowest phone plan with the smallest amount of data and I still never reach the limit because I utilise free wifi. I always make sure my phone is set to wifi when at home, and if I need directions somewhere I’ll look it up and take screenshots before I go so it doesn’t use up data.
12. I try and travel during off-peak season. And if I do travel during peak season I travel with others so the cost of accommodation and airport transfers can be split.
13. Comparison shopping research. I always compare the cost of basically everything before purchasing. Each week I go through the grocery catalogues and see which shops have the same item for the cheapest price. If I’m buying electronics I make sure I take advantage of price matching.
14. Before I buy anything I ask myself: ‘do I really NEED this?’ We all have that one thing that we can’t resist. For me, it’s stationery. I’m a massive stationery addict and the number of times I’ve had to tell myself no when I see a cute notebook or another pen sucks, but if I don’t actually need it then I don’t need to buy it.
15. I use ATM’s that don’t charge me transaction fees. Make sure you check with your bank if there are any banks they partner with i.e. won’t charge you fees, or at least look at which ATM’s charge the lowest fees if you withdraw money and aren’t a customer with that bank.
16.I never buy stuff from convenience stores – they charge double the price for a chocolate bar, a bottle of water etc. as the supermarket. I was with a work collage at lunch and she spend 4x the cost on 2 items that she could’ve got for way cheap if she walked 100m up the road to the supermarket. She didn’t even bat an eyelid and all I could think was you just spend a third of your hourly wage on stuff that’s going to be consumed in 5 minutes!
17. I’ve never ordered dessert at a restaurant. Ever. Why pay $12 for a bowl of ice cream when I can buy 3 tubs for the same price?!
18.I never buy scatchies, lottery tickets or participate in sweepstakes at work. I believe you’ve got to make your own luck!
19.When I catch up with friends I do so over lunch or afternoon tea rather than dinner as meals are usually cheaper.
20. I walk around my neighbourhood rather than paying for an expensive gym membership.
Related: The Busy Person’s Guide On How To Be Healthy
The 20% deposit on my first investment property
All in all it took me about 5 years to save the deposit. I’m not going to sugar coat it. It was hard. Really hard. ‘Training’ myself to say no, to really ask myself if I actually need something as opposed to just wanting it was not fun.
And just because I have the property now, doesn’t mean I’m going to suddenly stop being ruthless about saving money. My mentality is now ‘I could buy this for $100, or I could put that towards an extra mortgage repayment.’ I tracked my savings and spending (no joke, I account for where every dollar goes) using my budget binder printables(which I still use to track my spending).
Related: Home Buying Tips You Need To Know Before You Buy
As for whether I’d buy a property at 20 again, I’ll admit there have been times when I’ve regretted my decision. I could’ve done a LOT of travelling with the money I’ve poured into my mortgage (as well as all the other ongoing costs such as property management fees, body corporate, maintenance etc.).
I’ll admit I do get jealous of my carefree 20-something friends’ holiday photos, and that they have no qualms about dropping a couple of hundred dollars on a concert ticket. I also wouldn’t have to awkwardly ask friends to pick me up if we go out since I can’t afford a car (I do pay them money for fuel!) If interest rates weren’t at historically low rates at the time, then I also probably wouldn’t have been able to purchase the property.
But whenever I feel ‘depressed’ looking at how much money I’ve poured into the mortgage and how much interest is added to the balance each month, I remind myself that I’m on track to paying off my mortgage by the time I turn 30 and I feel a whole lot better! ☺
What have you done so that you can save a large amount of money such as saving for a deposit?
An investment property is real estate purchased with the intention of earning returns through rental income or profit at resale. Just over 70 percent of single-family rental properties are owned by individual investors, according to the latest Census data. If you’re looking to take the plunge and buy an investment property, here are some initial considerations to make.
Considerations when investing in rental property
Here are a few considerations to think through before you get serious about an investment or rental property.
Location matters
Remember, it’s easier to look in on a property across town rather than one that’s two or more hours away. True, you can always hire a local property manager to keep the home in tip-top shape, but that’ll eat into the passive income you hope to gain.
It’s also important to consider the location with an investor’s eye for what’ll net you the most return. When evaluating locations, it’s often best to avoid areas with lots of vacancies and instead look to neighborhoods close to amenities such as parks and shopping, as well as transit, says Trent Ellingford, an investor and co-founder of the Real Estate Knowledge Institute.
After researching promising neighborhoods, connect with a real estate agent experienced in the local rental property market.
“Don’t use just a real estate agent,” says Kathy Fettke, CEO of Real Wealth Network, host of “The Real Wealth Show” and “Real Estate News for Investors” podcasts and author of “Retire Rich with Rentals.” “It’s best to look for an agent who specializes in real estate investments. Ideally, look for someone who owns them nearby. Oftentimes, property managers have brokers in-office to help.”
Types of rental properties
The kind of property you buy is equally important. The three main types are:
Single-family homes: These are one-unit properties, typically for either long-term tenants or on a short-term basis through platforms like Airbnb or VRBO. If it appreciates in value, you might be able to make additional profit down the line when you sell. With a single-family home, your cash return will be lower than if you had purchased a rental property that can house multiple tenants. Compared to a condo, you’ll also be responsible for all the maintenance.
Condos: Condos are generally more affordable upfront than single-family homes, and you could be spared many maintenance hassles thanks to the presence of an HOA. Keep in mind, however, some condo associations significantly restrict what you can do with the property, including renting it out, and mortgage lenders will factor in the monthly HOA fee when determining what size loan to extend to you.
Multifamily homes: Multifamily homes include duplexes (two units), triplexes (three units) and properties with four units or more. These allow you to rent to more tenants, generating more income, but also cost more than a single-family home or condo. You might have many more responsibilities as far as being a landlord, as well.
“Single-family homes are the most popular,” says Bruce Ailion, an attorney and Realtor with RE/MAX Town and Country in Georgia. “Some areas have a tradition of two- to four-family homes, while others do not. Multifamily properties of less than 100 units tend to be owned by individual owners or owner groups. Apartments over 100 units tend to be owned by institutions and professional real estate investors, and retail office and warehouse spaces tend to attract higher-income and more sophisticated investors.”
Consider the full financial commitment
How much money do you have on hand to make a down payment, or potentially pay for the home in full? Calculate your approximate return on investment (ROI) before you purchase a property. Estimate how much income you’ll get from the property and what your expenses will be. Subtract your expenses from your income to find your net operating income. A rental property’s expenses generally include:
Rental property insurance: Varies based on location; about 25 percent higher than standard homeowners insurance
Rental property taxes: Varies based on location; the average nationally for a single-family home was $3,785 in 2021, according to ATTOM
Utilities: Includes electric, gas, heating and water, some of which tenants might pay, but you’ll be on the hook for during vacant periods
Home maintenance and repairs: Varies; the average nationally was $3,018 for maintenance and $2,321 for “emergency spending” in 2021, according to Angi
Advertising costs: Includes real estate agent commission, typically 5 percent to 6 percent of the property’s purchase price; or vacation rental site service fees, typically 3 percent to 5 percent based on rent amount
Property management and other fees: Includes property management setup, management and maintenance fees, as well as tenant screening, eviction or other expenses; property managers typically charge between 6 percent and 10 percent of the rent for ongoing service, says Ailion
HOA fees (if applicable): Averages several hundred dollars
Rental income taxes: “Income taxes must be paid for all money made on the property,” says Ellingford. “Of course, everyone thinks of the monthly rent; however, income also includes any other money you collect, such as late fees, pet fees or even work by the tenant in lieu of rent.”
Keep in mind, while you’ll need to report all of your rental income to the IRS, you can typically deduct most or all of your expenses, along with depreciation and mortgage interest. Review IRS Publication 527 or consult with a trusted tax professional for more specifics pertaining to your rental property situation.
Understand differences between investment properties and second homes
A second or vacation home is different in many ways from an investment or rental property, and not just because of how it’s used. For one, your mortgage interest rate will likely be higher for a rental property because it’s not your primary residence, meaning the lender is taking on more risk. With mortgage rates going up, it’ll cost even more than it would have say last year.
Know the laws
Do you know what to do when your tenants won’t pay up? For example, certain states require a grace period when your tenant is behind on rent. In other words, you can’t evict a tenant until the grace period is over, but you can still charge late fees. Know the laws in your state before you rent out your property, including what constitutes a compliant lease agreement (including security deposit requirements), discriminatory practices and tenants’ right to privacy.
Determine your vacancy plan
You’re not always going to be able to rent out your property. You might have trouble finding renters, have to rip up carpet and patch drywall or provide a rent-free place for a family member to temporarily stay. There could be any number of reasons why income from your rental property might dry up. How will that impact your financial situation, and how will you cope?
Financing your rental property
A mortgage for a rental property isn’t the same as a home loan for a primary residence, or even a second or vacation home. Keep the following in mind:
Make a sizable down payment: You’ll typically need to put down at least 20 percent for a rental property, but if you want to look more attractive to a mortgage lender, you might want to put down more than that.
Be a strong borrower: You’ll also need a credit score of at least 640 and a debt-to-income (DTI) ratio of no more than 45 percent, based on Fannie Mae standards. The DTI ratio is your monthly debt payments divided by gross monthly income. (Need to improve your credit score? Learn some tips.)
Go outside of big banks: Big banks might not readily loan to you compared to a small bank, or offer you as desirable of loan terms. Compare options from both big and small banks, including community lenders, to find the best combination of rate, fees and customer service. It might help if you already have a relationship with the bank or lender.
Ask for owner financing: Owner financing means that the seller agrees to accept payments directly from you instead of requiring you to get a mortgage. This can benefit both you and the seller, but there are risks involved, so tread carefully; this arrangement isn’t for everyone.
Bottom line
A rental property could be a sound investment, particularly if the rent you collect offers you some extra income. Weigh all the aspects of purchasing a rental home, including financial implications, taxes you’ll have to pay, laws involved and how much extra time you have on your hands.
Multi-family homes can be a great way for novice real estate investors to get started buying properties that will generate passive income. However, these properties, which contain multiple units for more than one household, have some challenges that single-family homes don’t have. If you’re considering buying a multi-family home, here’s what you need to know before jumping in.
What is a multi-family home?
A multi-family home is a single building that’s divided to accommodate more than one family living separately. They can range from a duplex, which has two dwellings within a single building, to homes or small apartment buildings with up to four individual units. (Buildings with more than four units are typically considered commercial properties.)
The owner of a multi-family home can either live in one of the units and rent out the others, or live elsewhere and rent them all out. The rules for financing a multi-family property are different depending on whether the owner will live there or not: If you don’t plan to live in your property, you’re considered an investor. You may be able to use the projected rental income from the property to help you qualify for a mortgage, and you may also qualify for a higher loan amount.
“When you’re looking at a single-family home, you’re thinking about your own needs only,” says Charlotte Winckowski, a Realtor with iKey Realty in Toledo, Ohio. “When you’re looking at a multi-family home, you have to think of it more as a business: What will the needs of your tenants be? What kinds of income will it produce, and what will your expenses be?”
Multi-family vs. single-family homes
While you can rent out some or all of a single-family home, multi-family homes have other distinct characteristics. Some started out as large single-family homes that an owner or developer decided to divide into multiple units. Each unit in a multi-family home has its own address, its own kitchen and bathrooms and typically its own entrance. However, those living in multi-family homes may have less privacy than those living in single-family homes because of shared walls.
Types of multi-family homes
There are various kinds of multi-family homes to consider, with different offerings in terms of layout and living space. Each type of house has its own pros and cons, as well.
Duplex/Triplex
The term duplex refers to two units or homes that are connected either via a common wall, ceiling or floor. A triplex has three. Each home in a duplex or triplex has its own entrance. The units may also have separate yards and garages.
Condo
A condo is typically an individually owned unit within a community or building made up of other individually owned units. In most cases, condo owners are required to pay monthly fees to a homeowners association. These fees cover the costs of upkeep for any amenities that may be included, and in some cases they cover insurance for the building or community, as well.
Townhome
Similar to duplexes, townhouses or townhomes are homes that are attached to one another via a common wall. Typically they have two or three stories. They are more spacious than apartments and generally involve far less maintenance and upkeep than a single-family home.
Semi-detached house
Like townhomes, semi-detached homes include a shared wall with another home. However, semi-detached houses are typically bigger than townhomes. These types of homes can be more affordable than a freestanding single-family home. They may also offer less costly maintenance, as the owners of semi-detached homes may share upkeep expenses.
Pros and cons of multi-family homes
Pros
The rental income a multi-family property earns can help offset the cost of your mortgage and other expenses, providing you with an income stream. “For some owners, the rent is enough that they don’t have a house payment at all,” says Paul Wyman, managing broker of the Wyman Group in Kokomo, Indiana. “They’re able to use income from other units to cover their mortgage and insurance, and that frees them up to use their cash for other things.”
You’ll be able to tackle repairs and maintenance more easily. If you live in or close to your rental property, you are less likely to miss major issues and will be able to respond faster when problems arise.
You can write off much of your home maintenance as a business expense and prorate part of your mortgage interest payments.
These properties can be an ideal option for multi-generational families who want to be close but retain their privacy. (They also help you keep such options open in the future.)
If you start out living in one unit but ultimately move out, you can still keep it as an income-producing investment, earning even more once you start renting it out.
Cons
Since you’re buying more than one unit, it may cost more upfront to purchase a multi-family home than it would to buy a single-family home.
Being a landlord is a time commitment, and living in the immediate vicinity of your tenants means you may get knocks on your door at any time. You’ll also need to be comfortable negotiating lease terms and screening your tenants, not to mention dealing with them in a business-like way when the rent is overdue, there are issues with noise or there’s damage to the property.
If your units go vacant or a tenant is late with the rent, you’re still responsible for paying your mortgage. You also have to cover the cost of (quickly) repairing problems, like a leaky roof or clogged toilet. “Even if you don’t have a housing payment every month, there is still financial risk in multi-family homes,” Wyman says.
You’ll need a substantial emergency fund. The more units you have, the less impact an individual unit will have on your overall cash flow, but landlords should have plenty of money set aside to cover unexpected repairs and rent on vacant units.
It can be complicated to sell a multi-family property that has tenants in place, since you’ll need to coordinate showings and appraisals — and keep the tenants apprised of the process.
Maximizing returns on a multi-family home
In most cases, a multi-family home will also serve as an investment property for the owner. In order to maximize your investment, it’s important to understand the costs associated with the property, including not only your mortgage, property taxes and homeowners insurance, but also other expenses, such as utilities, real estate agent fees, advertising (to attract tenants) and legal fees.
“An evaluation of the property should include an inspection by a licensed inspector and market research to include a market lease-rate analysis along with current market rental conditions,” Wyman says.
Who are multi-family homes best for?
Purchasing multi-family real estate is best for those who are interested in getting into real estate investing to generate wealth and are comfortable with the added responsibility and time commitment that comes with being a landlord. These types of homes can allow you to live rent free, if you occupy one of the units and the rent from the other units generates enough income to cover your monthly expenses. Once the mortgage is covered, the rent from multi-family homes can become a passive stream of income.
They can also be a smart choice for multi-generational families interested in buying a property together while having their own dedicated space. Typically including anywhere from two to four units, multi-family homes allow extended families to live under the same roof while still enjoying the benefits of having the privacy of individual units.
How to find a multi-family home
Like single-family homes, multi-family properties are listed for sale on real estate search websites, where you can typically filter the results of your search based on the type of property you’re seeking.
A real estate agent, either with a residential or commercial specialty, may be able to help you find investment opportunities in your area, as well, and could even know of some opportunities that have not been advertised online.
As with any house hunt, do your homework to see what multi-family home prices are like in your market and what you might expect to pay.
Find other housing types
Apartment
Apartments are suited for anyone looking to stay in a prime location for a cheaper price near shopping, restaurant and entertainment centers, often at a more affordable cost than buying a condo or single-family home.
Condominium
Condos appeal to those looking for a lower-maintenance living, home with a sense of security, opportunities to be social with neighbors, among other factors.
Townhouse
Townhouses are a particularly good option or first-time homebuyers or other budget-minded home buyers who want more space than typically afforded in a condo.
Modular home
Modular homes are enticing to empty-nesters looking to downsize, couples looking for backyard units like tiny homes or families looking to upgrade their dated properties in nice but expensive neighborhoods.
Single-family home
Single-family homes are best for families who prefer a huge yard and plenty of room to spread out. Others still prefer a low-maintenance condo or townhome that includes benefits like landscaping, snow removal and exterior maintenance.
Multi-family home
Multi-family homes are best for those who are interested in getting into real estate investing and are comfortable with the added responsibility and time commitment that comes with being a landlord.
Bungalow home
At between 1,000 and 2,000 square feet, bungalows are a great option for young families looking for a starter home or retirees hoping to downsize in a home without stairs, or single homeowners who want the single-family home lifestyle without managing a huge property.
Co-op
Co-ops are most often found in major cities, and they can be good for those looking for security or neighbors who largely adhere to the building’s rules and policies.
Patio home
Typically capped at one-and-a-half stories and part of a larger association, patio homes are best for homeowners who don’t want to deal with stairs or maintenance.
Ranch home
Ranch homes are ideal for anyone who prefers single-story living. Singles, couples and families with children can find something to love about a ranch home.
Some mortgage professionals see unconventional homebuyers as the “difficult ones.”
And, truth be told, those with more complicated financial situations can make the home loan qualification process longer and harder these days.
Enter: creativity in lending. The conventional home loan that often requires a stellar credit score and a hefty down payment isn’t the only option. Mortgage brokers — who can shop countless loan products from any wholesale lender they choose — have access to a variety of alternative home financing options. That’s all to say, “unconventional” financial situations aren’t so difficult when you have “unconventional” home loans.
Emily Tolbert, mortgage loan originator at Motto Mortgage Signature Plus, relies on alternative financing options for many borrowers. “I have seen dreams come true for self-employed people who cannot qualify for a conforming conventional loan. One of my clients struggled to qualify for the home he wanted when using his tax return income calculation. After speaking with him about the Bank Statement Loan program, I gathered 12 months of bank statements and had his income calculated at around 3 times the tax return amount. This allowed him to increase his purchase power and get into a home he now loves.”
You want to expand your homebuyer pool. You want to encourage your clients. You want them to know that homeownership might be for them… right… now. Alternative home financing knowledge can do that.
Our top 5 alternative potential home loan options
1. The Home Loan for the Self-Employed (AKA: The Bank Statement Loan)
Your homebuyers might not get a paycheck from “the man.” But that doesn’t necessarily mean they’re out of the mortgage loan game. A Bank Statement Loan may allow them to qualify with their actual cash flow instead of their tax documents.
2. The Home Loan for the City Dweller (AKA: The Jumbo Loan)
Do your buyers need a bigger mortgage loan for a home in a more expensive part of town? Many mortgage program loan limits fall short of home prices in high-cost areas. That’s where a jumbo loan might help. They’re designed to offer home loan amounts above the limits established for many other mortgage programs.
3. The Home Loan for a First Investment Property (AKA: The Cash-Out Refinance)
Have any budding investors or side hustlers in your pipeline? Reaching out to chat about potentially using their home equity to buy an investment property can expand your opportunities too. Their equity might be high right now and so are rent prices. Just saying.
4. The Home Loan for the Budget-Conscious (AKA: The FHA Loan)
Your clients have probably heard of that “more obtainable home loan” option, but they might not know it by name. The Federal Housing Administration (FHA) loan was created to make homeownership more accessible. Applicants with lower credit scores may be able to qualify (as compared to a conventional mortgage loan) and the minimum down payment requirement is just 3.5%.
5. The Home Loan for Retirees (AKA: The Asset-Based Loan)
Are your retired clients ready for their next homeownership chapters? They don’t necessarily need to let a fixed income bookmark their plans. An asset-based mortgage loan program might allow them to qualify for a home loan using existing wealth like home equity, stocks, certificates of deposit (CDs), and 401Ks.
Loan knowledge = more homebuyers
Sure, the market is picking back up. And sure, bidding wars are becoming less of a “battle.” But home affordability remains a major challenge in the housing market (we know we’re preaching to the choir here). By brushing up on some “unconventional” home loan options, you can help guide your homebuyers to the purchase they’re hoping for.
Because let’s face it. As many times as we (the mortgage people) tell homebuyers to speak with a mortgage professional as the first step in their homebuying process, we all know they’re going to you, their agent, first. And that’s kind of a great thing… especially when you can explain what’s possible.
Hi. We’re Motto Mortgage. We’re a mortgage brokerage franchisor – that just means we’ve put a mortgage business together for you. With Motto, you can get an additional revenue stream and your customers get in-house home loan services. Plus, we’ll help with the heavy lifting so you can grow your business without having to take your eyes off your real estate brokerage.
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Real estate can be a great addition to your portfolio if you’re hoping to diversify and create passive income. And investment property loans can make it easier to purchase property if you’re interested in owning real estate directly. However, qualifying for an investment property loan is a little different from getting a mortgage to buy a home that you plan to live in. It helps to know what to expect and what’s required before wading in. Here’s what you need to know.
You can also talk to a financial advisor about the pros and cons of borrowing to purchase an investment property.
Understanding Investment Property Loans
Investment property loans are loans that you can use to buy a property that you plan to generate income from. You would do that by leasing it to one or more tenants who pay rent back to you on a monthly basis.
Generally speaking, you can use an investment property loan to buy a property that has between one and four units. The types of properties you may be able to buy include:
Single-family homes
Multi-family homes, such as a duplex or triplex
Condominiums or townhomes
Manufactured homes
There are also investment property loans for investors interested in flipping real estate. Rather than generating a steady stream of passive income, flippers aim to purchase a property at a low price and renovate it, then resell it at a higher price to turn a profit.
Investment Property Loan Requirements
Is it easier to get an investment property loan versus a mortgage to buy a primary home? Not necessarily, as lenders typically impose more requirements for investment property loans.
Compared to a traditional purchase loan for a home, loans for investment properties may require you to have:
Higher credit scores
More cash in reserves
A larger down payment
Evidence of past experience with managing investment properties
You may also need to provide additional details about the property itself. This includes information about the neighborhood where it’s located, how much rental income it’s currently generating and estimates of how much income you expect it to produce once you own it.
Why is getting a loan for an investment property more challenging? One simple reason: These loans can pose a greater risk to lenders.
Let’s say that you have a main home that you live in, which has a mortgage. And you have a second home as an investment property. If your renters don’t pay up or you can’t keep the second home rented long-term, that could put you in the position of having to stop making the mortgage payment in order to keep up with the loan on your primary home.
Once the loan goes unpaid long enough, it goes into default which can lead to other consequences, including foreclosure. Lenders don’t want borrowers to default on investment property loans, which is why they can make it harder to qualify.
Types of Investment Property Loans
If you’re interested in getting a loan to buy an investment property, you have more than one option. Banks, credit unions and online lenders can offer investment property loans.
The range of loans you have to choose from can depend on the lender, while the loan terms that you’re able to qualify for can hinge largely on your credit score, income and the specifics of the property.
The main types of investment property loans include:
Conventional Loans
A conventional loan may be your first choice if you’re planning to buy a single-family home as an investment property. Conventional loans can offer fixed rates and longer loan terms, but you’ll likely need a higher credit score to get the lowest rates.
FHA Loans
The Federal Housing Administration (FHA) allows you to use FHA loans to buy investment properties with multi-family homes with up to four units. There is one requirement: You’ll need to live in one of the units for at least 12 months to qualify.
VA Loans
Veterans and military service members can use the VA loan program to purchase investment properties with as many as seven units, with no money down. Similar to FHA loans, borrowers must live in one of the units to qualify.
Owner Financing
A less traditional option for buying an investment property is owner financing. With this type of arrangement, you borrow from the seller and make payments back on a set schedule. This type of loan agreement may require you to make one large balloon payment at the end of the term.
Home Equity Loans
If you own a home and have a significant amount of equity, you could borrow against it to buy an investment property. A home equity loan provides you with a lump of money that you might use to buy a second home to rent out. Similar to first mortgage loans, home equity loans can offer fixed rates and lengthy terms.
Hard Money Loans
Hard money loans or bridge loans are more commonly used to purchase fix and flip properties. With these loans, you can get the money you need to buy the property and renovate it, but you typically have to pay it back within 12 to 18 months.
When searching for an investment property loan, it’s important to check the minimum qualification requirements first. That can help you weed out loan options that aren’t a good fit. Once you’ve narrowed down the list, you can take a second look to compare interest rates, down payment requirements, fees and loan terms.
How to Get an Investment Property Loan
Getting an investment property loan is something of a process and you may need a little patience to get through it. Here are the main steps involved in getting loans for investment property:
Find a Lender
The first thing you’ll need to do is find a lender that offers investment property loans. You can start with your bank. Then branch out to other banks, credit unions and online lenders to see what options are available.
Apply for a Loan
Next, you’ll need to apply for the type of loan you’re interested in getting to purchase an investment property. At a minimum, you’ll need to provide your personal information along with some details about the type of property you want to buy and the loan amount you’re seeking.
Provide Documentation
Any time you’re applying for a mortgage, the lender will ask for certain financial documents, including tax returns and bank statements. You’ll also need to share any information you have on the property, including its current rental income if available.
Get the Property Appraised
The appraisal determines how much an investment property is worth. A thorough appraisal should also provide you with details of comparable rental properties in the area and the income they generate.
Close on the Loan
Assuming that you’ve checked off all the lender’s boxes, the final step is closing on the loan. At this stage, you’ll need to review and sign the loan paperwork, transfer your down payment to the lender and pay any closing costs due.
Bottom Line
Investment property loans can help you get a step closer to your financial goals if they include owning real estate for passive income. Before applying for a loan, it’s important to understand what’s required to qualify, as well as what you might pay in interest and fees.
Investing Tips
Real estate can be a great investment though owning rental property isn’t necessarily right for everyone. Talking to your financial advisor can help you weigh the pros and cons if you’re unsure whether property ownership is a good move. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get personalized advisor recommendations just by answering a few simple questions. Get started now.
While the upfront cost might be your main focus when getting an investment property loan, it’s important to consider the longer-term cost of owning rental property. In addition to mortgage payments, you’ll be responsible for maintenance and upkeep, repairs, property taxes and insurance. All of those things can affect your profits when renting property, so remember to look at the bigger financial picture before you buy.
Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.