Guarantor vs. Cosigner: Important Differences You Need to Know

Lining up a guarantor or co-signer can help you move more quickly through your rental journey.

Just when you thought the long search was over, property management denied your rental application. Wait. What?

There are several reasons this might happen, but the big red flag for landlords and property managers is your financials — credit history, income, outstanding bills. Landlords need to protect themselves by making sure you can pay the monthly rent and those red flags get in the way.

But don’t despair. You can help your case and increase the odds you land the next apartment by getting a cosigner or a guarantor. Although these terms are often used interchangeably, a cosigner and guarantor are two different things.

What is a guarantor?

Who do you call when you need help? For most people, it’s a family member or close friend. A guarantor is usually in one of those categories. He or she signs up to take on the responsibility of paying your rent, rental fees or damages if you’re unable to fulfill your rental obligations. A guarantor is an outside person who signs the lease but doesn’t live with you.

What is a cosigner?

A cosigner is often a roommate who shares your living space. Your roomie signs the lease with you and becomes responsible for paying part of the rent and fees. But the cosigner can also be someone from the outside, as long as they promise to pay your rent if you can’t.

A cosigner has more financial responsibility than a guarantor since the cosigner is responsible for rent on day one. The guarantor only steps in if a renter can’t make payments. Plus, if a cosigner is a roommate, he or she has to pick up the slack if the other roommates can’t make rent.

Why would I need a guarantor or a cosigner?

Here are a few reasons you might consider getting a guarantor or cosigner:

Income is too low

When a landlord or property manager looks over your application to determine whether you can afford the rent, they often use the 40X rule (which is eerily similar to the 30 percent rule that renters should consider. It’s eerie because the numbers work out the same. But you math people knew that already.) This means that a landlord expects your gross salary to equal 40 times the monthly rent (i.e., if you earn $64,000 before taxes, you can spend $19,200 on rent, or $1,600 each month). Note that in New York City, many landlords use the rule that a tenant must earn an annual salary of 40 times the rent to qualify.

Bad credit score

According to Experian, a credit reporting agency, a score of 700 or above (out of 850) is good, 800 or above is excellent, 580 to 700 is fair and anything below 580 is poor. Most people fall between 600 and 750. Statista reports that the average credit score of renters of mid-range apartments in the U.S. was 626 in 2020.

First-time renters

Just out of school? Just got your first “real” job? Most people need help on their first rental go-’round, especially if they have little credit history for the landlord to check into.

Rent is crazy high

If you don’t think you can swing it, get a guarantor on board early on. Or, find a roommate to cosign the lease with you.

It’s required

If the landlord believes there might be trouble ahead when it comes to paying the monthly rent (based on all of the above), he or she may require a prospective tenant to have a guarantor.

Group all in over paperwork

Group all in over paperwork

Can there be more than one guarantor?

Usually, one guarantor suffices even if you’ve got a roommate. Make sure that person is aware that they’ll be financially liable for you and all the roommates.

But, if you and your roomies’ combined incomes are still close to the edge, the landlord might specify that you each need your own guarantor. If there are multiple guarantors, they’ll need their own contract to determine what happens if one of the roommates doesn’t make the rent.

Who can be a guarantor or a cosigner?

Family, friends or sometimes a colleague may be a cosigner or a guarantor. In general, landlords prefer parents as guarantors. Landlords also have stricter requirements for cosigners and guarantors than they do for prospective tenants.

For example, a guarantor has to have a high credit score (at least 700) and an income that’s a specified multiple of the monthly rent, usually 80 to 100 times (as opposed to the 40X rule for a renter.) A landlord may also request a guarantor live nearby in case the renter skips town or defaults. If the guarantor is a homeowner, that’s a plus.

Are there alternatives to getting a guarantor vs. a cosigner?

There are other ways to get support if you don’t have anyone to turn to.

  • Offer to pay several months’ rent upfront.
  • Try to sublet an apartment, rather than rent one on your own directly from a landlord. In a sublet, you rent from the tenant.
  • Find a lenient landlord, maybe one who rents a portion of a house, rather than renting in a building with a rental company on its payroll.
  • Use a company, such as The Guarantors or Insurent, which, for a fee, will help you with a guarantor and other rental services. Co-signing.com does the same when you need a cosigner.

Choose wisely

Getting an apartment, especially in high rent towns, is stressful enough. Consider a guarantor vs. a cosigner as part of your due diligence at the start of your rental journey.

Having the discussion will be difficult so lay out your talking points beforehand. Explain the high costs of rentals and the number of other renters you’re competing with for a place to live. You may draw up a separate contract with the person defining how you will pay them if you miss rent.

Remember that asking someone to be a cosigner or guarantor will change your relationship with that person. The landlord will need all sorts of personal and financial information about the person. And, if you bug out on the rent, you’ll have to face that individual. Make sure you choose wisely and be as transparent as possible.

The hope is that you’ll only have to do this once.

Source: rent.com

Feel Like Home: Making the Most of a Small Rental Space – Apartment Life

Written by: Grace Huxley

As the age-old saying goes “home is where the heart is.” It holds true to this day. Even if you have a rental space, it does not mean that you cannot call it home. After all, it ‘is’ your home. Here are a few steps that can help you make your small rental space become the home you had always dreamt of having all your life:

Position your furniture strategically

If your room is small and seems over-furnished, no need to fret, not when you can position your stuff in such a way that it becomes unobtrusive. The thing is, even if you have a really large space, it would still look stuffy if your clothes and furniture are scattered all over the place. You can create a small reading nook that can perform double duty as a means of camouflaging some of the extension cords coming out of the TV and the Wi-Fi box. You can also hide other wiring and light consoles behind a faux olive tree and other odds and ends standing discreetly in different parts of your home.

Hang your kitchen accessories

If you feel that there isn’t enough space in your kitchen for all the pots and pans and other cooking implements in your small studio kitchen, just install some hooks and place them there. This way, you can clear up both kitchen counters as well as shelf space. Moreover, if you don’t love the spiky metal, industrial-looking hooks in your hall or outside your bedroom closet, you can always cover them with a bit of creative artwork. An otherwise ugly wall festooned with hooks can become a highly fashionable display of your art and photographs. If you hang a collage of your favorite and most memorable photographs on these walls, you will be able to conserve space and create a morale booster, every time you look at the walls.

Cover the ungainly electrical box

Unfortunately, these ugly but extremely useful boxes are found in every household. However, they can become eyesores in a small rental space. You can choose to hide yours with a favorite portrait or picture. Alternatively, if you have an artistic bent, you can simply paint them with vivid colors so that they become the centerpiece of your home, instead of a place you would want to hide.

Add some live plants to the mix 

Plants and flowers are a surefire method of making any place feel warm, cozy, and welcoming. Not only do they look good they also smell good too. Who would not want to come home to a sweet-smelling home full of fresh flowers? And if your small home is particularly stuffy, plants can offer an additional benefit. They might help clean up all the toxins and CO2 from your home. While most plants look good in any setting, you can plant them in brilliant white pots or even neon colors if you want to make your place particularly bright and cheery. You can also place them in your bathroom and kitchen. In fact, why not go the whole way and grow your own vegetables in your kitchen and on the windowsills?

Call in the professionals

If you feel that your rental space needs a complete makeover, it might be a really great idea to contact a property management company near where you live. For example, if you live in New York City, you can simply get in touch with an NYC property management company to help you make the most of your rental space. These people are absolute experts in making your rental space become a perfect home. They can decorate the place and even provide the necessities that can help turn a house into a home.

If you have recently shifted from your own home in the suburbs (for instance) to a small rental space, you might be feeling a bit homesick. Under the circumstances, it would be a great idea to try and make your rental space as homelike as possible. You can buy plants and flowers, decorate the walls, and remove the clutter so that your rental accommodation becomes your home sweet home.

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Source: blog.apartmentsearch.com

Capitalization (Cap) Rate Definition – How Real Estate Investors Use It

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One of the greatest advantages of real estate investments lies in their ability to generate ongoing passive income. 

It’s certainly what attracted me to rental properties. Because with enough passive income, you can cover your living expenses and retire early. 

And capitalization rates — cap rates for short — let you compare properties’ income potential, compare different real estate markets, and more. You can do all the math on the back of a cocktail napkin, even after your second or third helping. 

What Are Cap Rates?

Cap rates might sound jargony, but they’re actually extremely simple. 

In short, they simply represent the net return on investment (ROI) you can expect an income property to generate each year, in the form of cash flow. Cap rates don’t include returns from appreciation, and they don’t account for financing, to help you just compare income yields. 

Thus, they offer a shorthand way to compare cash flow on different properties if you buy in cash.

Capitalization Rate Formula

You don’t exactly need a degree in mathematics to calculate cap rates. Here’s the formula for capitalization rate:

Cap Rate = Annual Net Operating Income (NOI) ÷ Purchase Price (or Value)

For example, imagine a property nets $8,000 in income per year and it costs $100,000 to purchase. That makes the cap rate 8%. Just remember this is a simplified stand-in for ROI, so don’t mistake it for your actual cash-on-cash return (more on that later).

While the purchase price is easy enough to understand, the annual net operating income requires a little explaining and a formula of its own. 

Calculating Net Operating Income

A property’s NOI is simply the net income it generates each year, after operating expenses. 

Operating expenses are easy for novice investors and non-landlords to overlook or try to ignore. But the fact is that most rental properties come with expenses that average around half the rent when averaged over time. There’s even a term for it in the world of real estate investing: the 50% rule. 

These non-mortgage expenses include: 

  • Vacancy rate
  • Property management costs
  • Repairs and maintenance
  • Property taxes
  • Insurance
  • Accounting, bookkeeping, travel, legal costs, and other miscellaneous costs

So when you buy your first rental property, if it rents for $2,000 per month, expect around $1,000 of that to go to non-mortgage expenses. It won’t happen every single month, but you can expect expenses like that averaged out over time. 

Oh, and word to the wise: even if you plan to self-manage rather than hiring a property management company, budget for property management fees. It’s still a labor expense, whether you do the labor or you pay a property manager to do it for you. Besides, the day will likely come when you either can’t or no longer want to field 3am phone calls from tenants complaining that a light bulb burned out.

How to Forecast Expenses

Your cap rate figures will only be as good as the expense numbers you plug into the formula.

For each expense figure above, do your due diligence. Call up local landlords, property managers, and real estate agents to find out the vacancy rate in that neighborhood. Look up the local property tax rate, and multiply it by the purchase price. Get quotes for property insurance, and so on. 

In other words, get real numbers wherever possible — don’t guess. 

With repairs and maintenance costs, I usually estimate around 13% of the rent. But depending on the age and condition of the property, expect them to average out to 10% to 15% of the rent over time.


How Do Real Estate Investors Use Cap Rates?

Cap rates come in handy in several ways as a real estate investor. While some investors use this metric for other purposes, keep the following three main uses in mind as you explore single-family or multifamily real estate investments.

1. To Compare Properties

Imagine two identical properties down the street from one another. They both cater to the same quality of tenant, and both are in the same condition. Which should you buy?

In theory, you should buy the one with the higher cap rate because it will deliver a higher rate of return. 

Cap rates offer a quick and dirty way to compare rental income returns on investment properties. They offer a shorthand for a property’s income yield to help you compare properties. 

While the example above is uncommon, consider a more common one. After looking around town, you come up with several properties that look promising. One of them offers a cap rate of 8%, another offers a cap rate of 10%. The property with the higher cap rate sits in a lower-end neighborhood, with more crime and higher turnover rates. 

Which one you buy depends on your risk tolerance, and your tolerance for landlording headaches. You may well opt for the property with the lower cap rate to avoid the higher risk of break-ins, more frequent turnovers, more difficult tenants, and so forth. Knowing the cap rates of both options helps you compare the properties and decide whether the higher return is worth the risks.

If you buy turnkey properties on Roofstock, you can filter properties across the country by cap rate. Which can not only help you find appealing properties, but also appealing real estate markets.

2. To Find Attractive Markets

I actually find the best use of cap rates to be identifying higher-profit housing markets for investors. 

For example, as much as tenants and housing activists love to complain about the rents in San Francisco, the ratio of rents to home prices there actually favors tenants — by a lot. So much so that rental investors can expect negative cash flow if they finance a typical rental property there. 

In Memphis, however, investors get far more rent for each dollar of purchase price. The ratio of rents to home values favors landlords, leading to high cap rates. It also doesn’t hurt that median home prices in Memphis are a tiny fraction of those in San Francisco, making it easier to invest there.

By researching cities with higher cap rates, you can find markets with high rents relative to asset values. And in doing so you can identify some of the best cities for real estate investors that the nation has to offer.

3. To Set an Offer Price Limit

Often real estate investors set a floor for the minimum cap rate they’ll accept for a property. That in turn helps them set a ceiling for the most they’re willing to pay for any given property. 

For example, imagine an apartment building generates $18,000 in net income each year. The seller wants $300,000 for it, which would mean a cap rate of 6% ($18,000 ÷ $300,000 = 6%).

Your minimum cap rate is 7% however, so you offer $257,000 as your highest and best offer ($18,000 ÷ $257,000 = 7%). The seller can agree or decline, but either way you know you’ve stayed within the bounds of your investment strategy. 

It frees you to ignore what other people think the market value of the property is, and focus on maintaining your own minimum standards for returns. 


Limitations of Cap Rates

Despite their uses as a simple way to compare properties and make investment decisions, cap rates come with several limitations. 

First, the very thing that keeps them simple and allows them to compare properties on equal footing is what limits their usefulness for you personally. By ignoring financing, you can compare apples to apples among properties — but that tells you nothing about what you can personally expect to earn on your own cash investment. 

Your cash-on-cash return is the return you receive on your actual cash invested in the deal. That includes your down payment, closing costs, and any initial repairs and carrying costs before you rent out the property. And don’t assume that mortgages always improve your cash-on-cash return, either. Leverage can turn a mediocre cap rate into negative cash flow each month. 

Imagine a property that offers a 7% cap rate if you were to buy it in cash. You buy it for $100,000, and after all expenses, you net $7,000 each year. Now imagine you were to finance $80,000 of that property, and you net $2,600 per year (after the mortgage payments) on your $20,000 cash down payment. That would put your cash-on-cash return at 13% (ignoring closing costs in both cases, for the sake of a simple example). 

Cap rates can help you do a quick analysis, but cash-on-cash return is your true bottom line for any given property. Make sure you calculate the net annual income you can expect on your total cash invested. 

Finally, remember that financing terms and opportunities can vary from one location to the next. 

You might be able to borrow money at 4.5% interest from a lender in one state, but 6% interest in another where regulations are tighter and fewer lenders operate. Or in high-regulation states, lenders might offer a lower loan-to-value ratio, requiring a 30% down payment instead of 20%. Or lenders could charge higher loan fees in those states, or transfer taxes and recordation fees could be higher. 

Cap rates don’t include borrowing terms or closing costs, but these factors impact your profitability and returns nonetheless.


What Makes a “Good” Cap Rate?

Every investor has a different answer for what they consider a good cap rate. Even so, rental properties come with far more hassles and work than truly passive investments like real estate investment trusts (REITs), so you should demand higher returns on them. 

I personally wouldn’t invest in a property with a cap rate under 7% or 8%, and I wouldn’t exactly get excited about those numbers. I can earn higher returns on real estate crowdfunding through platforms like Fundrise, Streitwise, and GroundFloor without the rent defaults, eviction moratoriums, or phone calls from alleged adults who don’t know how to change a light bulb. 

Those platforms also require a far lower minimum investment, and let me diversify my funds into commercial properties and real estate assets all across the country. 

But because platforms like Roofstock have made it so much easier to buy real estate properties from anywhere, buyers have flooded a once-niche market and driven prices up and returns down. That makes the average cap rate on U.S. properties unappealing to me, so deals have to be exceptional for me to consider them in today’s housing market. 

What’s a “good” cap rate? One that beats other real estate investments by enough margin to justify all the headaches that come with being a landlord. 


Final Word

Cap rates offer an easy way to compare potential returns on different investment properties. Consider them a fundamental that every new real estate investor should understand. 

But they lack nuance, and should be treated as a high-level valuation tactic, not the basis for your investing decisions. 

Use them to find good markets and review comparable properties, or to set price ceilings. But remember that they’re only as useful as the accuracy of the numbers you plug into the cap rate formula. If you underestimate vacancy rates or repair costs, it throws off your cap rate calculations — and your bottom line. 

Don’t like the idea of all this research to invest in real estate? Skip the labor and learning curve required to buy rental properties, and invest through real estate crowdfunding platforms instead.

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Source: moneycrashers.com

3 Ways To Find a Co-Signer for Your Apartment Lease

Finding a co-signer for an apartment lease is necessary if you don’t meet the financial requirements.

Renting an apartment is a major financial undertaking, one that you may not be able to take on by yourself. You may need a co-signer to join you on the apartment lease so you’ll get approved. It probably isn’t your ideal way to get the apartment you want, but it may be the one thing you need.

What is a co-signer?

A co-signer is someone who signs the apartment lease with you, taking on the same financial responsibility for paying the rent as agreed. The co-signer also takes on legal responsibility outlined in the lease agreement for taking care of and maintaining the apartment, even if they don’t actually live in the apartment.

For instance, if you hit the wall and it results in a large hole needing repair and you refuse to pay for those repairs, your co-signer could be on the hook for that bill. Likewise, if you default on your apartment lease by moving out early without paying the remaining rent due, as well as early departure fees, your landlord has the right to seek those monies from your co-signer.

Why would you need a co-signer?

There are numerous reasons why you might need a co-signer. A primary reason is your landlord may not think you have sufficient income to cover the rent, and they want to ensure you’ll pay your rent. Or, if you have a low credit score, previous bankruptcy or a history of late payments, your landlord may want some reassurance that they’ll get rent on time.

If you’re a college student or a recent college grad, your landlord may ask for a co-signer because you don’t have sufficient income or established job history. Another possible reason for a co-signer is if you’ve been evicted from an apartment in the past. Your landlord may be hesitant to take a risk on you without the security a co-signer could provide.

Who should I ask to be a co-signer?

Becoming a co-signer is both a financial and legal risk for the person who agrees to do it. Therefore, it’s important to find a co-signer who knows those risks and will step up and take responsibility.

In addition, you need to find someone with the financial resources to cover the rent in the event you aren’t able to. Your landlord will put them through the same qualification assessments — credit check, income and employment verification, background check, etc. — you undergo, so it’s important to find someone who will meet those requirements.

Also, you need to find a co-signer who will not walk away should you experience financial difficulty. Choose someone you trust to be there if you need them. That person also shouldn’t harbor hard feelings against you if you were to need their help. Family members or close friends are a good starting point for finding a co-signer.

Friends in agreement with a fist bump

Friends in agreement with a fist bump

How to find a co-signer

Knowing who to ask to be a co-signer is a good starting point. Once you know who you want to approach, there are certain steps you should take when asking them to co-sign your apartment lease.

1: Explain why your landlord wants you to have a co-signer

Tell your potential co-signer the reasons your landlord gave for having a co-signer. Is he looking for a sufficient income to cover the rent? Is your credit history bad? Is it because you’re a new renter?

2: Be clear about the financial obligations

Spell out what the financial terms are in the lease. How much is the monthly rent? How much is the security deposit? How much are late fees? Is there an early termination penalty if you break the lease? If so, how much?

It’s important any potential co-signer understands how much they would need to pay if you’re unable to uphold the terms of the lease agreement.

3: Make sure the co-signer understands the risks

If you’re unable to pay your rent, your landlord will report any late or missed payments to the credit reporting bureaus, where it will show up on your credit report and affect your credit score. But you won’t be alone. Your landlord will do the same for your co-signer, so his credit report and score will also take a negative hit. This could affect their ability to get approved for future loans, credit cards or mortgages, something they may not be ready to risk.

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Alternatives to a co-signer

If you cannot find a co-signer, all is not lost. There are some options available to you.

  • Get a roommate: Although you may have planned on having an apartment all your own, you may have to find a roommate who can share the lease — and rent —with you. It may be a short-term fix until you can increase your income, improve your credit history or build a steady work history.
  • Enlist a co-signer service: These third-party services will guarantee your rent for a fee. However, it’s possible your landlord may not accept these services as your co-signer.
  • Provide references: Give your landlord a list of people who can vouch for your fiscal health and sense of responsibility. Talking with them may reassure your landlord that you’re taking the apartment lease seriously and are prepared to uphold your financial responsibility.
  • Look for a private landlord: While many apartment communities use property management companies that require all tenants to undergo stringent financial vetting, renting an apartment from a private landlord may be more lenient. Think of someone looking to rent a basement or garage apartment, a tiny home in the backyard or a duplex owner renting out the second half of the building.

These options may not be ideal, but they may provide a pathway to renting your apartment.

Moving forward

Now that you know what a co-signer is and how to find one, you’re ready to find your apartment. Start searching for apartments for rent, and you’ll be moving in before you know it.

Source: rent.com

Turnkey Rental Properties – 7 Mistakes to Avoid When Buying

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Additional Resources

Love the idea of investing in a rental property but not the idea of hassling with renovations or constantly hunting for deals?

Turnkey properties, which can be purchased through Roofstock, let you skip the headaches and jump straight into being a landlord. By its very definition, a turnkey property is either immediately ready to rent (no work required but “turning the key”) or is already rented to a tenant. No muss, no fuss, just rental income right away.

For all their ease, though, turnkey properties come with their own pitfalls. Here’s what you need to know before investing in one to make the process smooth and your profits strong.

Mistakes to Avoid When Buying Turnkey Properties

Many first-time real estate investors find themselves lulled into a false sense of security. They think to themselves, “I know real estate. I’ve bought and sold several homes. Besides, I’ve been living in real estate my whole life!”

Then, they promptly go out and make mistakes costing them tens of thousands of dollars.

Buying a turnkey rental property is not the same as buying a home. Here’s what investors need to know to avoid costly mistakes and ensure their first deal is a successful one.

1. Overestimating Returns

Yes, turnkey properties offer predictable returns. But that doesn’t mean all investors run the numbers correctly.

Far too many new investors underestimate or even ignore expenses like vacancy rate, property management, and repairs and maintenance. I did when I first started investing.

Similarly, investors sometimes get starry-eyed about rents, using the best-case rent in their calculations instead of the worst-case rent. These two mistakes combine to leave many new investors’ cash flow calculations woefully overstated.

Before buying your first investment property, do your homework and collect accurate figures for rents, neighborhood vacancy rates, and other expenses. Use conservative numbers, always plugging the worst-case scenario into your calculations.

Otherwise, you might find yourself with a property that loses money every year rather than earning passive income.


2. Confusing “Turnkey” with “New”

Just because a property is tenant-ready doesn’t mean it’s in perfect condition or that every component in the property is new.

To be considered turnkey, a property must simply be ready for marketing to renters. Everything needs to work, but “functional” doesn’t mean “new.” A furnace can be 20 years old and still work just fine. But there’s a huge difference between a 20-year-old furnace and brand-new one.

Turnkey properties still need ongoing maintenance and repairs, often major ones. Six months after buying a turnkey property, the air conditioning condenser, hot water heater, or refrigerator may need repair or even replacement.

Investors must take the long-term average of ongoing expenses to forecast returns. Once you own the property, those numbers should go from theory to practice. You need to actually set aside money for those expenses every single month. Then, when these expenses inevitably rear their heads, you won’t have to wonder how to pay for them.


3. Failing to Do a Home Inspection

To estimate the potential expenses mentioned above, you need to know the condition of the property before buying it. That means getting as many expert eyes on the property as you can.

That starts with a home inspection. While Roofstock requires sellers to get a home inspection before listing their property and to include the report with the listing, buyers should also conduct their own due diligence.

Review the inspection carefully and ask someone else with real estate experience to review it as well. Ask the inspector questions about anything you don’t understand. If you’re using a real estate agent, ask their opinion about the age of each major appliance and mechanical system in the property, as well as the age and remaining lifespan of the roof.

There’s nothing wrong with buying an aging property — if you know it’s aging and budget accordingly. But far too many new investors get complacent when shopping for turnkey real estate, assuming everything in the home is in great shape just because the property is in “rentable” condition.


4. Failing to Build a Support Team Before Buying

Likewise, just because the property doesn’t need renovation now, that doesn’t mean it won’t need repairs in a year — or even a month — from now.

Start screening and networking with contractors before you buy. When you do get that 3am phone call about a burst pipe, you need to have a plumber and general contractor lined up and ready to spring into motion.

That goes for every specialty of contractor, plus several low-cost handymen as well. The property will need repairs, and you need to be ready with trustworthy people to make them.

Your support team doesn’t end with contractors. If you plan to hand over management to a property management company, you should be screening and interviewing managers before you even take title.

And as important as all of this is when you buy local turnkey properties, it goes doubly when buying properties long-distance. Your support team is your eyes, ears, and boots on the ground. Screen them carefully and build trust and rapport with them. The day will come when you need to rely on their judgment because you aren’t there to handle an issue yourself.


5. Fixating on Traditional Mortgage Financing

When new investors go to buy their first property, they typically stick with what they know: traditional mortgage financing.

It’s what they used to buy their own home, and they understand the process. But while it may work, especially for the first property or two, it’s a one-dimensional way of thinking about funding.

Real estate investors should instead start thinking in terms of building a “financing toolkit.” Different situations call for different types of financing, and investors need to get comfortable with a range of options.

Turnkey properties are well-suited to portfolio loans kept in-house by the lender rather than sold off on the open market. Many portfolio lenders specialize in working with investors and offer discounted interest rates and fees to experienced investors.

In contrast, traditional mortgage lenders restrict the number of mortgages an investor can have on their credit report. Most often they cap borrowers at four mortgages.

Other types of financing include seller financing, private financing from friends and family, and hard money loans, which are best for short-term purchase-rehab loans. Start familiarizing yourself with different types of financing, and start networking with lenders in each category, particularly portfolio lenders for turnkey properties.


6. Failing to Screen Existing Tenants

Turnkey properties that come with existing tenants are a double-edged sword. While it can save you the hassle of advertising the unit, running credit checks on applicants, and signing a new lease, it also leaves you stuck with a tenant who may not be everything the seller claims.

I knew an unscrupulous turnkey seller once whose only criteria in screening tenants was the amount of rent they were willing to pay. He’d stick some deadbeat in the property paying above-market rent so he could advertise the property as generating higher revenue and therefore justifying a higher sales price.

Never mind that the deadbeat tenant would default within a month or two. That was the buyer’s problem, not this seller’s.

As a buyer, your due diligence doesn’t end at evaluating the property. You also need to evaluate any existing tenants and make sure they’re reliable, clean, and respectful of your property.

Ask to see the original tenant screening reports, including credit, criminal, and eviction history. If the seller can’t or won’t release them, consider it a huge red flag.

Conduct your own inspection of the property with minimal notice to the tenants. You want to see how they live and keep the property on an average day, not after cleaning up specifically for your visit.

You can and should ask to see the property’s rent roll, but take it with a grain of salt, because the seller can fudge the numbers.


7. Allowing Mediocre Tenants to Stay

Along similar lines, if you inherit tenants who turn out to pay rent late or treat your property roughly, you need to get them out of there as quickly and peacefully as possible.

That could mean filing for eviction if they’ve violated the lease contract in a tangible way. For tenants who don’t merit immediate eviction yet aren’t ideal renters, the other option is simply not renewing their lease agreement when it comes up for renewal. 

Word to the wise: Each state imposes a minimum notice requirement, usually between 30 and 90 days, before the lease is due for renewal. So plan accordingly.

As a landlord, your returns are only as good as your renters. Reliable, respectful, low-impact tenants mean strong returns and few headaches. Unreliable, dirty, and downright bad tenants make your life miserable and lead to dramatically higher expenses.

If you inherit bad or just plain mediocre tenants, do yourself a favor and show them the door. The world is full of good people who will treat your property respectfully and pay their rent on time — rent to them instead.


Final Word

Far too many new investors dive headfirst into turnkey rental properties, falsely assuming that just because they don’t require renovation, they don’t require knowledge and skill to invest in.

Turnkey properties do help you avoid the headaches of corralling contractors for rehab work, pulling permits, and carrying a vacant property for months on end. But direct real estate investment still costs time and labor on your part.

Before laying out thousands of dollars on a down payment, invest in your own education. Learn how to accurately forecast cash flow. Assemble a team of experts to help you find and manage turnkey properties. And if you decide to manage the property yourself, learn the ropes of property management.

Not everyone is cut out to be a landlord. But for those who are, rental properties can make outstanding income-generating investments.

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Source: moneycrashers.com

Are You a Good Tenant? 6 Qualities Your Landlord Will Appreciate

You may think you’re the bee’s knees as a tenant, but your landlord might not agree.

A positive landlord-tenant relationship is crucial to any rental experience. Most landlords will go to great lengths to find and keep qualified, trustworthy tenants. Those who honor lease terms, respect the property and display financial responsibility.

However, your desirability as a tenant goes beyond a good credit score and a clean background check. There are certain qualities that will make you stand out as a tenant in your landlord’s eyes and certain qualities that are immediate red flags.

Are you the type of tenant that helps landlords breathe easier or the type they warn each other about?

Rent due on the 1st.

Rent due on the 1st.

Do you pay rent on time?

Sometimes, all it takes is making one payment on time each month to stay in your landlord’s good graces.

Your monthly rent payment is likely one of your largest expenses, and it’s also probably one of your landlord’s largest sources of income. Receiving this payment even a few days late can affect a landlord’s ability to pay their mortgage or other financial obligations related to a property management business.

If you’re simply having difficulty remembering to put a check in the mail each month, talk to your landlord about online payment options. This will allow you to set up automatic payments or instant bank transfers.

If you’re dealing with financial struggles, avoid lying to your landlord or making up excuses to avoid repercussions for late payments. Be honest and direct to maintain trust — most landlords will be willing to work with you.

Guests.

Guests.

Do your guests crash for months at a time?

Most rental leases veto long-term guests without first touching base with your landlord. This is mainly because these guests go unscreened and they’re not on the lease. Unapproved subletting or long-term guests can put you at risk, as well, since your name is on the lease and you are responsible for any potential damage they may cause.

If your landlord finds out about any unapproved roommates, you risk breaking your rental agreement and forfeiting your security deposit. Of course, your rental should feel like your home and you should host visitors as you please. But go ahead and give your landlord a quick heads up for any guests that are sticking around (check your lease agreement to see if long-term guests are defined as 7, 14 or 30 days).

Woman on the phone with landlord because her sink is leaking.

Woman on the phone with landlord because her sink is leaking.

Do you report maintenance issues right away?

Regular maintenance can make or break the profitability of a rental property, so your landlord will appreciate your help in protecting their investment. Issues like water leaks, electrical complications or HVAC system failure can quickly grow into larger problems if left unaddressed. Landlords have no way to keep tabs on these items themselves.

They’re trusting you as their tenant to report maintenance issues in a timely manner, even if they might not seem like a big deal to you.

Mopping.

Mopping.

Do you keep your space generally tidy?

Some tenants are cleaner and some tenants are messier. But keeping your rental in generally good condition is crucial to preventing pests and ensuring the return of your security deposit at the end of your tenancy. The best way to ensure the longevity of a rental property is to keep it clean and well maintained, free of dirt, garbage and pests.

Carefully read through your lease agreement to understand your responsibilities as a tenant when it comes to maintaining the rental property. If your landlord conducts regular property inspections, they’re likely to take note of the cleanliness and upkeep of your rental.

Commit to a deep clean of the entire unit on at least a seasonal basis to disinfect and keep less trafficked areas free of dirt and debris.

Eviction.

Eviction.

Have you gone through an eviction?

A prior eviction is one of the biggest red flags a tenant can have in a landlord’s eyes. It means you’ve directly violated lease terms in the past with no potential to resolve the conflict. It’s important to note that tenants may also be evicted for reasons that don’t have to do with rental behavior. For example, if your landlord wants to occupy the property themselves or complete substantial renovations.

Having an eviction judgment against you can make it more difficult for you to rent in the future and can also negatively impact your credit report. If you’ve gone through an eviction, it’s time to start working on your tenant appeal. Focus on building your credit score, pay any outstanding debt involved in the eviction and try to build a roster of strong references.

Remain professional and honest about the situation and consider offering an additional deposit or first and last month’s rent to show your new landlord that you will be a stable tenant moving forward.

Are you a good communicator?

While landlords value open communication and timely responses, no one wants a tenant who is constantly complaining or asking for above and beyond attention. Bring up maintenance issues right away, be available to answer landlord inquiries as needed and contact your landlord with any other questions or concerns that may arise. Prioritize your requests and understand what classifies an emergency. In most cases, you won’t be your landlord’s only tenant or only priority. Unless it’s a true emergency (fire, burst pipe, etc.), try to resolve the issue on your own before bringing in your landlord.

Keep up with being a good tenant

It’s never too late to start being a great tenant. If you’re struggling with your landlord-tenant relationship, check in with your landlord to see where you can improve as a renter to try and salvage the relationship.

Pay your rent on time and treat the property as if it was your own and you’ll be well on your way to a better relationship, plus a higher probability of having your security deposit returned and an overall great rental reference in the future.

Source: rent.com

8 Tips for Lowering Your Homeowners Association Dues

Llike any budget, there could be lots of ways to reduce HOA expenses.

Whether you just bought a condo or have owned one for years, you’ve probably accepted the monthly homeowners association (HOA) dues at face value. But there are reasons why you shouldn’t.

HOA dues are money out of your pocket. They can have a huge impact on your decision to buy, or not buy, a particular condo. For example, you might have fallen in love with a condo in a big complex but decided you just can’t afford the HOA dues. Also, high HOA dues can be a deterrent to future buyers, too, when you go to sell later.

An HOA is made up of residents of the condo building or complex — volunteers who are busy with their jobs and families just like everyone else. It could be that no one on the HOA board has time to look for ways to reduce the monthly HOA dues.

But like any budget, there could be lots of ways to reduce expenses. Here’s how you can have a positive impact on your HOA dues.

1. Ask to see the HOA budget

As a condo owner, you have the right to review the HOA budget. Get a copy and check it over thoroughly. If you have questions, ask the HOA president or a board member.

2. Join the HOA board

If you’re on the board, you’ll have more opportunity and more clout to dig into the HOA’s finances — such as its contracts with the property management company, landscapers and so on.

3. Review the HOA’s contracts

An HOA often has agreements with a variety of vendors: the property management company, a landscaping/grounds maintenance company, and so on. In some cases, those agreements or contracts may have been negotiated years ago and might be renegotiated today in more favorable terms for the HOA.

For example, the recent buyer of a condo in an Atlanta complex felt like the HOA dues were too high. So he asked to join the board, and the members were happy to have him. He then performed an audit and discovered money was being wasted in several areas, such as on landscaping/gardening.

The HOA’s agreement with its gardener had been negotiated five years earlier. The gardener, by default, raised his fees every year. The Atlanta condo buyer, with the HOA’s approval, sought bids from a variety of other gardening companies and succeeded in finding a reputable gardener at a lower monthly cost.

4. Reduce landscaping costs

If finding another landscaping or gardening company isn’t an option, maybe the HOA can reduce the frequency of these services, without jeopardizing aesthetics. It’s worth asking.

5. Determine if HOA is paying too much in property management fees

In large condo developments, the property management company would likely be the one to lead the charge to reduce expenses. But they’re unlikely to advocate lowering their own fees. So you’ll need to work with your HOA directly in exploring ways to reduce the property management company’s fees.

6. Look at insurance premiums

Insurance is often a big HOA expense. Get quotes for insurance premiums and be prepared to renegotiate with your current carrier once your policy comes up for renewal.

7. Defer non-essential maintenance or other projects

Aside from HOA dues, condo owners are often hit with assessments to cover things such as roof repairs and hallway painting. Talk to the HOA board about deferring any non-essential HOA projects for a year or two.

8. Reduce reserves, if possible

Every HOA has reserve funds to cover unexpected expenses. Over time, those reserves, if not tapped, build up. Find out how much the HOA has in reserves. If it’s a healthy amount and no major improvement or repair projects are in the works, ask the HOA board to consider temporarily reducing the amount it puts into reserves every month.

Easier said than done?

Most HOAs will welcome your participation. But your belt-tightening suggestions may require a formal vote from HOA board members or the entire association before they’re enacted.

At any rate, understand that changes to the budget may not happen overnight. Finding the fat, renegotiating fees, and asking for additional bids can be extremely time consuming.

Still, it’s worth a try. Talk to your HOA president, treasurer or other board member. Tell them your goal is to simply explore possible ways to lower the association’s cost for everyone’s benefit. A little bit of legwork may save you — and your neighbors — some money every month.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Source: zillow.com