Is Land a Good Investment?

Most knowledgeable real estate investors will agree that buying land is not a good idea. There’s just way too much risk.

If you bought land in California in the 1970s, you’d probably opine that land is a good investment. If you bought it in 2006, and now it’s worth a fraction of what you paid, your opinion would probably differ. Most knowledgeable real estate investors will agree that buying land is not a good idea, and this includes buying small parcels of land and/or potentially investing in a large land deal. There’s just way too much risk.

Land is speculative

Here is the issue with land: It’s a 100 percent speculative investment. You are 100 percent hoping that the value will go up to provide you a fair rate of return. And it might. But will it go up enough to provide you a fair rate of return for the extreme risk that you are taking holding that land?

Here’s the risk

Let’s say you buy $100,000 worth of land, and you pay cash. It’s still going to cost you money each month to cover property taxes and insurance. And, here’s the kicker: It’s also costing you the opportunity cost of capital.

You probably took $100,000 out of your mutual fund account, or other financial asset, to buy the land. And when that money was in the financial account, it was probably earning interest — let’s say 5 percent — but now it’s not earning anything because you took it out of your account to buy some dirt. So you’re really effectively losing 5 percent in wealth each year because you’re not earning that return. Unless, of course, the land goes up that much in value plus compensating for property taxes, insurance and other annual costs.

As an example, if you have $100,000 and put it into a mutual fund, you’d earn 5 percent, or $5,000, per year. That’s cash in the bank that you can reinvest to earn even more money. After 10 years you’d have your original $100,000, plus $50,000 to $70,000 additional cash/financial asset earnings.

On the other hand, if you bought land, you’d earn no interest or dividends, and after 10 years you’d have a piece of dirt that you’ve been paying taxes on. Will your land have gone up enough in value to match the returns you would have earned on a financial asset?

In addition to those significant financial issues, land also can be contaminated, undevelopable or have significant development restrictions, among other issues.

Who might consider land?

Land may be a good investment for home building companies and long-term corporate land investors with extensive development and entitlement skills and experience, and significantly diversified portfolios of land to reduce their overall risk. But for small investors, it’s a high-risk gamble with little chance of earning a fair rate of return. There are much better investment opportunities, such as stocks, bonds, mutual funds, rental properties or, quite frankly, heading to Las Vegas for the weekend (where, by the way, many an investor has learned some tough land investment lessons in the past decade!).

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.


Real Estate Crowdfunding – How These Investments Work, Pros & Cons

Real estate offers a fantastic counterbalance to stocks in your investment portfolio, especially in an era of low interest rates and bond yields. But not all of us have $300,000 just sitting around to start snapping up properties.

Enter: crowdfunded real estate investments. A relatively recent addition to the arsenal of investment options, crowdfunding allows thousands of investors to pool their funds, so each investor can invest a small amount of money in larger projects.

Like all investments, real estate crowdfunding has its own pros and cons, and comes in many flavors and varieties. Before you invest a cent in any asset, you must first understand the risks, rewards, and the role the investment plays in your portfolio.

How Does Real Estate Crowdfunding Work?

On the simplest level, real estate crowdfunding involves many people each contributing a small portion of the greater cost of a real estate-related investment.

But “real estate-related investment” can carry many meanings. Keep the following variations in mind as you explore real estate crowdfunding investment options.

Equity vs. Debt

When you invest money through a crowdfunding platform, does the money go toward the direct purchase of new properties, or toward loans servicing other people’s properties?

If you know publicly traded REITs, you understand the difference between equity REITs and mortgage REITs. The former buys and manages real estate; the latter lends money secured against real estate.

Crowdfunding works similarly. In fact, many real estate crowdfunding investments are REITs — they’re simply sold privately rather than on public stock exchanges subject to traditional SEC regulation (more on regulation differences shortly).

Many private crowdfunded REITs offer both equity and debt REIT options. As a general rule, debt REITs generate more immediate dividend income, while equity REITs include an element of long-term appreciation in addition to income. For example, Fundrise offers several broad basket portfolios weighted more heavily toward either real estate equity or debt investments.

Not all real estate crowdfunded debt investments come in the form of REITs, however.

Peer-to-Peer vs. Fund Investments

In the case of private debt REITs, you invest money with a pooled fund, and the fund lends money to real estate investors as it sees fit. The alternative model for crowdfunded real estate debt involves lending directly to the borrower.

Crowdfunding platforms that follow this model allow you to browse individual loans, so you can pick and choose which loans you want to put money toward. For example, Groundfloor caters to real estate investors — mostly house flippers — lending them money to buy and renovate fixer-uppers. As a financial investor, you can log into your account and review available loans, including details about the project and borrower, and then put varying amounts of money toward as many or as few loans as you like.

Your loan is secured by a lien against the property. If the borrower defaults, Groundfloor forecloses to recover all investors’ money.

Property Type

Some real estate crowdfunding platforms specialize in residential real estate, while others focus on commercial.

Within each of those wide umbrellas, there’s plenty of variation as well. Residential properties could mean single-family rentals, or it could mean 200-unit apartment complexes. Commercial real estate could mean office buildings, or industrial parks, or retail space.

Before investing, make sure you understand exactly what you’re investing in — and more importantly, why.

Availability to Non-Accredited Investors

Some crowdfunding services like FarmTogether only allow accredited investors to participate. Others are open to everyone.

To qualify as an accredited investor, you must have either a net worth over $1 million (not including equity in your home) or have earned at least $200,000 for each of the last two years ($300,000 for married couples), with the expectation to earn similarly this year. So, most Americans can only invest with crowdfunding platforms that allow non-accredited investors.

Before doing any further due diligence, check to see whether prospective crowdfunding platforms even allow you to invest. Otherwise, no other details matter.

Advantages of Real Estate Crowdfunding

These relatively novel investments come with plenty of perks, especially for everyday people with few other paths to invest in large real estate projects. I myself invest in several real estate crowdfunding platforms.

As you compare crowdfunding investments to other types of real estate investments, keep the following pros in mind.

1. Low Cash Requirements

Through crowdfunded real estate investing, investors gain access to expensive investments like hotels, office parks, and apartment complexes that would otherwise remain unavailable to them. I don’t have $5 million to buy an apartment building. But I do have $500 that I’m happy to invest in a private fund that owns apartment buildings.

Although every crowdfunding platform imposes its own minimum investment, some of those minimums remain quite low. Groundfloor, for example, allows investments as low as $10.

Other platforms impose minimums of $500 or $1,000, keeping the minimums within reach of middle-class earners. It marks an enormous advantage to investing in real estate indirectly: you don’t need a full down payment plus closing costs in order to diversify your investments to include real estate.

2. Easy Diversification

With crowdfunding investments, you can easily include real estate in your asset allocation.

And not just through publicly traded REITs, which often move in greater sync with the stock market than with real estate markets because they trade on public stock exchanges. You can invest money toward any type of real estate, residential or commercial, in any grade of neighborhood, spread across many cities in the U.S. or even around the world.

For example, I have a little money invested in commercial office space through Streitwise, and a little invested in residential real estate (equity and debt) through Fundrise’s REITs. I also have money spread among a range of individual loans through Groundfloor. All in all, these investments expose me to real estate in 15 states.

Imagine how much harder that exposure would be if I had to go out and buy individual properties in 15 states?

3. Strong Income Yields

Crowdfunded real estate investments tend to pay reasonably high income yields. Which is always welcome, whether you’re pursuing financial independence at a young age, looking to build more retirement income, or simply enjoy earning more passive income each month. Because when you have enough passive income to cover your living expenses, work becomes optional.

I’ve consistently earned income yields in the 8% to 9% range on my investments with Streitwise and Groundfloor. With Fundrise, I earn around 5% in dividend yield, plus long-term appreciation.

Not many stocks or ETFs offer those kinds of yields.

4. No Labor and Little Skill Required to Invest

As a direct real estate investor, I can tell you firsthand how much skill and labor it takes to find good deals, analyze cash flow numbers, renovate properties, hire and manage contractors, and so forth.

With crowdfunded real estate investments, you outsource all of that to someone else. You just click a button to invest your funds, and sit back and collect the returns.

Don’t get me wrong, direct real estate investment comes with many of its own perks, such as the potential for higher returns, greater control, and real estate-related tax advantages. But you have to earn those advantages with sweat and knowledge, much of it required before you even buy your first property.

This ease of investing through crowdfunding platforms comes with a side benefit: you can automate your investments. Set up monthly or biweekly investments to avoid emotional investing and build wealth and passive income on autopilot.

5. No Property Management Required

It takes an effort not to laugh out loud when tenants call you complaining that a light bulb burned out, and ask you to come over to replace it. Unless the call comes at 3 a.m. — that’s less funny.

Few landlords enjoy managing rental properties, between chasing down nonpaying tenants, hassling with constant repairs and maintenance issues, and all-too-frequent complaints from tenants and neighbors — “this person plays their music too loud,” “that one smells like weed when they pass in the hallway,” ad nauseum. It’s why so many landlords end up hiring a property manager to take the headaches off their plate.

You don’t have to worry about any of that when you invest in crowdfunded real estate investments.

6. Protection Against Inflation

“Real” assets such as commodities, precious metals, and, of course, real estate all have inherent demand. Regardless of the currency you pay with or its value, you pay the going rate based on the underlying value of these physical assets.

That makes these assets an excellent hedge against inflation. If rents drive inflation higher, rental properties only become more valuable, with higher revenues. If the dollar loses value, people pay more for housing and commercial space.

In contrast, investors actually lose money — in terms of real value — on a bond paying 2% interest when inflation runs at 3%.

Disadvantages of Real Estate Crowdfunding

No investment is perfect, without risks or downsides. Thoroughly review these drawbacks and risks before parting with your hard-earned money.

1. Poor Liquidity

It takes a few clicks to sell a stock or ETF. Investors can liquidate their holdings instantaneously, leaving them with cold hard cash.

Real estate is inherently illiquid. It takes months to market and sell properties, and for large commercial properties it can involve hundreds of thousands of dollars in costs. So investors usually hold them for at least five years, and when these investments are funded through a crowd of financial investors, that means individuals can’t easily pull their money back out of the deal.

Most crowdfunded real estate investments advise prospective investors to plan on leaving their money in place for at least five years. Some do offer early redemption to sell their shares, but not instantaneously, and usually at some sort of discount or penalty.

Don’t invest anything you might need back within the next five years.

One notable exception includes short-term peer-to-peer loans secured by real estate, such as those offered by Groundfloor. These loans usually repay within nine to 12 months. Even so, you still can’t easily pull your money back out before the borrower repays the loan in full.

2. Complex Regulation and Performance Transparency

The regulation on crowdfunded investments can quickly make the average investor’s eyes cross. For a quick taste, investors have to navigate between Regulation D investments that fall under either 506(b) or 506(c), and Regulation A and Title III investments — also known as Regulation Crowdfunding or Reg CF.

Regardless, investors can’t use the familiar brokerage account tools that they’re already familiar with to research these investments. The SEC does require crowdfunding platforms to disclose a wide range of information, but it will look and feel unfamiliar for many retail investors.

There is one huge advantage that crowdfunded private REITs have over publicly traded REITs: the flexibility to reinvest profits to buy more properties. Publicly traded REITs must distribute at least 90% of all profits to investors in the form of dividends. That leaves them with high dividend yields but poor prospects for appreciation and asset growth. Private REITs like DiversyFund can employ far more flexibility to build their portfolios.

3. Limits on Participation

The SEC puts limits on how much money non-accredited investors can put into crowdfunded investments each year. Those limits are as follows:

“If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth.

“If both your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $107,000.”

They provide a table by way of example:

Annual Income Net Worth Calculation 12-month Limit
$30,000 $105,000 greater of $2,200 or 5% of $30,000 ($1,500) $2,200
$150,000 $80,000 greater of $2,200 or 5% of $80,000 ($4,000) $4,000
$150,000 $107,000 10% of $107,000 ($10,000) $10,700
$200,000 $900,000 10% of $200,000 ($20,000) $20,000
$1.2 million $2 million 10% of $1.2 million ($120,000), subject to cap $107,000

Still, these speedbumps serve as reasonable cautions and protections for the average investor. These investments do come with an element of risk, and shouldn’t make up 70% of your retirement portfolio.

4. Less Protection from Default Than Other Real Estate Investments

When you own a rental property and your tenants stop paying the rent, you can evict them. You own the property, you can insure it against damage, and it comes with a certain amount of inherent value.

Real estate crowdfunding investments don’t come with these protections. You typically own paper shares of a fund, not all or part of a physical asset. Your investments aren’t even secured against the underlying properties with a lien in most cases.

Exceptions do exist, however. For example, when you invest fractionally in loans on Groundfloor, those loans are secured by a lien against real property. If the borrower defaults, Groundfloor forecloses in order to recover most or all of your money.

5. Lack of Control

Although stock investors have little control over the performance of their share prices, direct real estate investors do enjoy control over their returns and management. They can make renovations to boost the rents and property values, can tighten their tenant screening criteria to avoid deadbeats, can even insure against rent defaults.

But when you invest in real estate indirectly through crowdfunding, you surrender control to the fund manager. If they do well, you (hopefully) earn a strong return. If they mess up, you get stuck with the costs of their bungles.

Where Does Real Estate Crowdfunding Fit Into Your Portfolio?

While stocks belong in just about every investor’s portfolio, not everyone feels comfortable with real estate crowdfunding. Still, these investments offer a fine counterweight to stocks when used responsibly.

Your ideal asset allocation is personal to you, and depends on factors ranging from your age, target retirement horizon, net worth, and risk tolerance. I recommend thinking of crowdfunded real estate investments as an alternative to higher-risk, higher-yield bonds and public REITs.

For example, say you aim for an asset allocation of 60% equities and 40% bonds. Those equities include 57% stocks and 3% REITs, and your bonds include 30% low-risk government bonds and 10% higher-risk corporate bonds. You could take part of the 13% of your portfolio earmarked for REITs and higher-risk bonds and test the waters of crowdfunded real estate investments. If you like what you see, you can then move a little more, up to your comfort level.

However, real estate crowdfunding should not take the place of extremely low-risk investments in your portfolio, such as Treasury bonds or TIPS.

Final Word

With real estate crowdfunding, you have the luxury of investing small amounts to gauge the performance of your investments and your comfort.

These investments can play a role in any investor’s portfolio, but that role should start small. Don’t invest any money that would financially cripple you to lose, and do your homework on any crowdfunded investment’s past performance and risk management measures.

Most of all, always keep these investments in the perspective of your broader portfolio and asset allocation. These investments don’t exist in a vacuum — they play a role in a larger performance.

Have you ever invested in crowdfunded real estate? If so, what were your experiences?


11 Real Estate Exit Strategies for Low- or No-Tax Investment Gains

The single greatest predictor of wealth in the U.S. isn’t education level, ethnicity, gender, or any other demographic descriptor. It’s whether or not you own real estate.

In the most recent Survey of Consumer Finances, the Federal Reserve found the median net worth of homeowners to be 46 times greater than that of renters. While the median renter had a net worth of $5,000, the median homeowner owned $231,400 in net assets.

Homeowners benefit from appreciation, forced savings in the form of principal repayment toward mortgages, and often lower annual housing costs compared to local renters. Those advantages get compounded by a tax code that favors property owners. Beyond simple homeownership, real estate investors can reduce their taxes through myriad strategies and incentives.

Still, when it comes time to sell, many property owners face sticker shock at their prospective tax bill. So how can property owners reduce — or better yet, eliminate — their taxes when they go to sell?

Common Real Estate Exit Strategies

Try these low- and no-tax real estate exit strategies to keep more of your real estate profits in your pocket and out of Uncle Sam’s grasping paws.

1. The Homeowner Exclusion

To begin, homeowners get an inherent tax break when they sell their home — with certain requirements and restrictions, of course. If you’re a homeowner selling your primary residence, chances are you won’t have to pay taxes on your profits from the appreciation of the home’s value since you bought it.

Single homeowners can exclude the first $250,000 in profits from their taxable income, and the number doubles for married couples filing jointly. Sometimes called a Section 121 Exclusion, it prevents most middle-class Americans from having to pay any taxes on home sale profits.

Any profits over $250,000 ($500,000 for married couples) get taxed at the long-term capital gains tax rate. More on that shortly.

To qualify for the exclusion, however, homeowners must have owned and lived in the property for at least two out of the last five years. They don’t have to be consecutive; if you lived in the property for one year, moved out for three years, then moved back in for one more year before selling, you qualify.

If you want to sell a property you don’t currently occupy as your primary residence, and want to avoid taxes through a Section 121 Exclusion, consider moving into it for the next two years before selling.

2. Opt for Long-Term Capital Gains Over Short-Term

If you own a property — or any asset for that matter — for less than a year and sell it for a profit, you typically pay short-term capital gains tax. Short-term capital gains mirror your regular income tax level.

However, if you keep an asset for at least one year before selling, you qualify for the lower long-term capital gains tax rate. In tax year 2020, single filers with an adjusted gross income (AGI) under $40,000 pay no long-term capital gains taxes at all — the same goes for married filers with an AGI under $80,000. Single filers with incomes between $40,001 and $441,450 and married filers between $80,001 and $496,600 pay long-term capital gains at a 15% tax rate, and high earners above those thresholds pay 20%.

Keep your investment properties and vacation rentals for at least one year if you can. It can save you substantial money on taxes.

3. Increase Your Cost Basis by Documenting Improvements

If you slept through Accounting 101 in college, your cost basis is what you spent to buy an asset. For example, if you buy a property for $100,000, that makes up your cost basis, plus most of your closing costs count toward it as well. Let’s call it $105,000.

Say you live in the property for 20 months, making some home improvements while there. For the sake of this example, say you spent $15,000 on new windows and a new roof.

Then you sell the property for $160,000. Because you lived there for less than two years, you don’t qualify for the homeowner exclusion. After paying your real estate agent and other seller closing costs, you walk away from the table with $150,000.

How much do you own in capital gains taxes?

Assuming you earn enough income to have to pay them at all, you would owe the IRS for $30,000 in capital gains: $150,000 minus your $105,000 cost basis minus the additional $15,000 in capital improvements. If you can document those improvements, that is — you need to keep your receipts and invoices in case you get audited.

In this example, your capital gains tax bill would come to $4,500 (15% of $30,000) if you document the capital improvements, rather than $6,750 (15% of $45,000) if you don’t.

4. Do a 1031 Exchange

Section 1031 of the U.S. tax code allows investors to roll their profits from the sale of one property into buying a new property, deferring their capital gains tax until they sell the new property.

Known as a “like-kind exchange” or 1031 exchange, you used to be able to do this with assets other than real estate, but the Tax Cuts and Jobs Act of 2017 excluded most other assets. However, it remains an excellent way to avoid capital gains taxes on real estate — or at least to postpone them.

Real estate investors typically use 1031 exchanges to leapfrog properties, stocking their portfolio with ever-larger properties with better cash flow. All without ever paying capital gains taxes when they sell in order to trade up.

Imagine you buy your first rental property for $100,000. After expenses, you earn around $100 per month in cash flow, which is nice but you certainly won’t be retiring early on it.

You then spend the next year or two saving up more money to invest with, and set your sights on a three-unit rental property that costs $200,000. To raise money for the down payment, you sell your previous rental property, and net $20,000 in profit at settlement. Ordinarily you’d have to pay capital gains taxes on that $20,000, but because you put it toward a new rental property, you defer owing them.

Instead of $100 per month, you net $500 per month on the new property.

After another year or two of saving, you find a six-unit property for $400,000. You then sell your three-unit to raise money for it, and again use a 1031 exchange to roll your profits into the new six-unit property, again deferring your tax bill on the proceeds.

The new property yields you $1,000 per month in cash flow.

In this way, you can keep scaling your real estate portfolio to build ever-more cash flow, all the while deferring your capital gains taxes from the properties you sell. If you ever sell off these properties without a 1031 exchange, you will owe capital gains tax on the profits you’ve deferred along the way. But until then, you need not pay Uncle Sam a cent in capital gains.

5. Harvest Losses

Invest in enough assets, and you’ll end up with some poor performers. You can sit on them, hoping they’ll turn around. Or you can sell them, eat the loss, and reinvest the money elsewhere for higher returns.

It turns out that there’s a particularly good time to accept investment losses: in the same year when you sell a property for hefty capital gains. Known as harvesting losses, you can offset your gains from one asset by taking losses on another.

Say you sell a rental property and earn a tidy profit of $50,000. Slightly nauseated by the notion of paying capital gains tax on it, you turn to your stock portfolio and decide you’ve had enough of a few stocks or mutual funds that have been underperforming for years now. You sell them for a net loss of $10,000, and reinvest the money in (hopefully) better performing assets.

Instead of owing capital gains taxes on $50,000, you now owe it on $40,000, because you offset your gain with the losses realized elsewhere in your portfolio.

6. Invest Through a Self-Directed Roth IRA

Want more control over your IRA investments? You can always set up a self-directed IRA, through which you can invest in real estate if you like.

Like any other IRA, you can open it as a Roth IRA account, meaning you put in post-tax money and don’t owe taxes on returns. Your investments — in this case, a real estate portfolio — appreciate and generate rental income tax-free, which you can keep reinvesting in your self-directed Roth IRA until you reach age 59 1/2. After that, you can start pulling out rent checks and selling properties, all without owing taxes on your profits.

Just beware that setting up a self-directed IRA does involve some labor and expense on your part. I only recommend it for professional real estate investors with the experience to earn stronger returns on real estate investments than elsewhere.

Pro tip: In addition to owning physical properties through a self-directed IRA, you can also use your self-directed IRA to invest in real estate through platforms like Fundrise or Groundfloor.

Hold Properties to Pass to Your Children

“Exit strategy” doesn’t always mean “sell.” The exit could happen in the form of your estate plan.

Or, for that matter, through methods of passing ownership of properties to your children while you still draw breath. There are several ways to go about this, but consider the following options as the simplest.

7. Leave the Property in Your Will

In 2020, the first $11.58 million in assets you leave behind are exempt from estate taxes. That leaves plenty of room for you to leave real estate to your children without them getting hit with a tax bill from Uncle Sam.

And, hey, rental properties can prove an excellent source of passive income for retirement. They generate ongoing income with no sale of assets required, which means you don’t have to worry about safe withdrawal rates or sequence of returns risk with your rental properties. They also adjust for inflation, as you raise rents each year. You can delegate the labor by hiring a property manager, and once your tenants eventually pay off your mortgage, your cash flow really explodes.

Plus, you can let your kids hassle with hiring a real estate agent and selling the property after you depart this mortal plane. In the meantime, you get to enjoy the cash flow.

8. Take Out a Home Equity Loan

Imagine you buy a rental property while working, and in retirement, you finally pay off the mortgage. You can enjoy the higher cash flow of course, but you can also pull money out through a home equity loan.

In this way, you pull out almost as much money as you’d earn by selling. Except you don’t have to give up the property — you can keep earning cash flow on it as a rental. You let your tenants pay down your mortgage for you once, all while earning some cash flow. Why not let them do it a second time?

You pull out all the equity, you get to keep the asset, and you don’t owe any capital gains taxes. Win, win, win.

You can follow the same strategy with your primary residence, but in that case you incur more personal debt and living expenses. Not ideal, but you have another option when it comes to your home.

9. Take Out a Reverse Mortgage

Along similar lines, you could take out a reverse mortgage on your primary residence if you have equity you want to tap into. These vary in structure, but they either pay you a lump sum now, or ongoing monthly payments, or a combination of both, all without requiring monthly payments from you. The mortgage provider gets their money back when you sell or kick the bucket, whichever comes first.

For retirees, a reverse mortgage helps them avoid higher living expenses while pulling out home equity as an extra source of income. And, of course, you don’t pay capital gains taxes on the property, because you don’t sell it.

10. Refinance & Add Your Child to the Deed

My business partner recently went to sell a rental property to her son for him to move into with his new wife. But the plan derailed when the mortgage lender declined the son’s loan application.

So they took a more creative approach. My business partner and her husband refinanced the property to pull out as much cash as they could, and they had the title company add their son and his wife to the deed and the mortgage note. The son and daughter-in-law moved into the property, taking over the mortgage payments. My partner and her husband took the cash, and while they remain on the deed, their ownership interest will pass to the younger generation upon their death.

In this way, they also streamline the inheritance, as the property won’t need to pass through probate.

This strategy comes with two downsides for my partner and her husband, however. First, they remain liable for the mortgage — if their son defaults, they remain legally obligated to make payments. Second, mortgage lenders don’t lend the entire value of the property when they issue a refinance loan, so my partner didn’t receive as much cash as she might have if she’d sold the property retail.

Of course, she also didn’t have to pay a real estate agent to market it. And any small shortfall in cash from refinancing rather than selling outright could be collected as a “down payment” from your child, or you could just shrug and think of it as a gift.

Other Exit Strategies

11. Donate the Property to Charity

Finally, you can always avoid taxes by giving the property to your charity of choice.

No clever maneuvers or tax loopholes. Just an act of generosity to help those who need the money more than you or Uncle Sam do.

By donating real estate you not only avoid paying taxes on its gains, you also get to deduct the value — in this case the equity — from your tax return. But bear in mind that the IRS looks closely at charitable deductions, especially house-sized ones, and you may hear from them demanding more information.

Final Word

Property owners have plenty of exit strategies at their disposal to minimize capital gains taxes. But don’t assume all of these options will last forever — with an ever-widening federal budget deficit, expect tax rates to rise and investment-friendly tax rules to suffer. Your taxes may go up in retirement, not down.

Whether you own a real estate empire or simply your own home, choose the strategy that fits your needs best, and aim to keep more of your proceeds in your own pocket.

What are your exit strategies for your properties? How do you plan to minimize your tax burden?


Blanket Mortgage Loans – Definition, Pros & Cons of Using for Real Estate

For real estate investors, juggling multiple property deals and loans can get complicated.

Blanket loans often help simplify matters. Borrowers take out a single loan to cover multiple properties.

Even so, blanket loans come with their own quirks and have their pros and cons. Before entering into a blanket loan as an investor, make sure you understand exactly what you’re getting yourself into.

What Is a Blanket Loan?

A blanket loan is simply one loan that attaches to several real estate investment properties.

For example, if you buy a portfolio of five properties, a blanket loan allows you to take out one mortgage that covers all five buildings. The lender attaches a lien against each property, so if you default on your loan, the lender can foreclose on all five properties to recover their money.

Lenders do typically include a release clause, allowing the borrower to sell individual properties held as collateral as part of a blanket loan. However, they require the borrower to either repay a portion of the loan at the time of sale or put the money toward another investment. The lender then attaches a lien to the new investment property as a replacement for the sold collateral property.

That keeps their collateral — your remaining properties secured by the blanket loan — sufficient to cover their loan risk.

Who Takes Out Blanket Loans?

Blanket mortgages are exclusively for real estate investors and developers, not homeowners.

Investors can use blanket loans in many ways to invest in real estate. Landlords can take out a blanket mortgage to buy a portfolio of turnkey rental properties, as outlined above. Flippers could do likewise, to buy several fixer-uppers to renovate and flip, all with one loan. As they sell off properties, they typically repay a proportion of their loan.

Real estate developers use blanket loans to buy large swaths of land that they plan to subdivide into many units. As they build and sell off those units, they can either repay portions of the loan or put the money toward adding more properties to the portfolio.

Businesses with multiple locations and commercial properties can also use blanket loans. That could mean refinancing multiple existing loans into one blanket loan, or using a blanket loan to buy several new locations in one sweep.

When You Should Use a Blanket Mortgage

As touched on above, you can either use a blanket loan at the time of purchase or you can refinance to consolidate multiple mortgages into one loan.

It makes sense to use a blanket loan at the time of purchase if you plan to buy multiple properties simultaneously. You may also be able to negotiate staggered funding if you buy multiple properties in rapid succession but not quite simultaneously.

Another possibility with blanket mortgages includes buying only one new property, but securing the loan against other properties you own for additional collateral. Real estate investors sometimes do this in lieu of making a down payment on the new property.

For example, say you own a property worth $100,000, but you only owe $50,000 on it. You want to buy another property for $100,000, and the lender demands a $20,000 down payment.

Rather than cough up the $20,000 in cash, you offer your existing property as additional collateral for the new mortgage loan. The lender agrees to fund the full $100,000 for you to buy your new property, but puts liens on both properties. They now hold the first (and only) lien against your new property, and they have a second lien against your old property.

Advantages of Blanket Loans

Blanket mortgages come with several upsides for real estate investors.

To begin with, they can save on lender fees and settlement costs by holding one combined closing rather than having to pay separately for several. Lenders charge flat fees in addition to points, and those flat fees add up quickly. Title companies also charge many flat fees for each closing. With blanket loans, borrowers can pay those flat fees once, rather than at each settlement.

Aside from saving money, combining financing for several properties into one loan can also keep your finances and cash flow simpler. Rather than keeping track of 20 mortgage payments and loans, you need only track one or two.

When buying new properties, blanket mortgages can potentially reduce or eliminate your down payment if you use equity from an existing property for a cross-collateralized loan. Consider it one more way to pull equity out of your properties — and one that doesn’t require a totally separate settlement with its attendant costs.

Larger loans often mean more negotiating room for you as the borrower as well. Lenders don’t need to charge as many points on a $1 million loan to make it worth their while, compared to five $200,000 loans. Similarly, borrowers can often negotiate lower interest rates as well.

Downsides of Blanket Loans

Blanket mortgages come with their share of risks and disadvantages.

To begin with, it can be hard to find lenders that offer these loans. Up to this point in your real estate investing career, you may have established relationships with two or three lenders — none of whom might offer blanket loans. That forces you to go out and build new relationships with lenders who do.

Expect more intensive scrutiny by the lender for these larger, more complex loans. Rather than using a garden variety underwriter, bank managers might underwrite these larger loans themselves. Lenders might ask more probing questions and require more extensive documentation and paperwork from you. They may require higher credit scores than their typical loan products.

Blanket loans often come with shorter loan terms than traditional mortgage loans. Rather than the 25- or 30-year loan terms you’re used to, lenders often limit blanket loans to 10 to 15 years. That could come in the form of a balloon payment, or the loan could be entirely amortized over those 10 to 15 years. In the case of short-term amortization, that means higher monthly payments.

Finally, blanket loans pool your risk for many properties into a single loan. If you default on that loan, you could lose all the properties secured by it to foreclosure, not just one. In contrast, if you hold separate loans for each property, in a crisis you could isolate your losses to one property as long as you can afford to make your other monthly payments.

Where You Can Borrow Blanket Loans

Conventional mortgage lenders don’t typically allow blanket loans. Commercial lenders, portfolio lenders — who keep loans on their own books rather than selling them — and hard money lenders often do allow them.

Make no mistake, these lenders usually charge more than your personal home mortgage lender. But they also allow far more flexibility, and as a real estate investor, that flexibility is often necessary.

Call up your local community banks to ask whether they offer blanket loans for real estate investors. You can also reach out to portfolio lenders such as Lending Home and Rental Home Financing to inquire about them. For commercial loans, make sure you choose a commercial lender, because even many portfolio lenders only handle residential (single-family and 2-4 unit multifamily) properties.

Word to the wise: start building these connections now, before you actually have a time-sensitive deal on the line. Real estate investors need to be able to move fast and close deals quickly, else they risk losing the deal entirely.

Final Word

The average mom-and-pop property owner with a couple units on the side of their full-time job will probably never need to take out large blanket loans. But for real estate developers and full-time real estate investors, blanket loans can help them scale their investment portfolios faster and cheaper.

Start expanding your network of lenders now, before you have a hot deal at risk of falling through. Think in terms of building a financing toolkit of many different options for buying your next investment property — or portfolio of properties.


Austin Tops List of Hottest Commercial Property Markets

Austin, Texas, is No. 1 in the hearts of commercial real estate investors. So reports CultureMap Austin.

Based on a new survey by CBRE, Austin is seen as the U.S. metro area with the best investment outlook for this year.

No. 2 is Dallas-Fort Worth, followed at No. 3 by last year’s top-spot holder, Los Angeles. Austin was No. 3 in 2020.

Read the full article from CultureMap Austin.


The Pros and Cons of Renting Out Your Mother-in-Law Apartment

Also known as secondary units, these spaces can be handy when family visits or moves in. But if you’re not housing relatives, you can still put the unit to work.

Whether you’re buying your first home, looking to build one, or trying to make use of some free space, mother-in-law apartments (also known as accessory dwelling units or secondary units) are a great investment — even if you’re not planning to have relatives move in.

By renting out a section of your home, you can help ease the strain of a mortgage, or grow your savings. While these units can be difficult to find while house hunting, their advantages make them worth the extra effort — and if that doesn’t work, you can always build your own.

What is a secondary unit?

Similar to duplexes, secondary units offer an entirely separated living space that is part of a single building. They typically have their own entrance, bedrooms, kitchen, and living space. However, while duplex units are typically mirrors of each other, secondary units are a smaller part of a primary property.

In some cases, homes are built with a secondary unit in mind, and the design reflects an obviously segmented property. Other times, homeowners add a secondary unit to take advantage of underused space.

If the home has multiple bathrooms and kitchens, a retrofit can be as simple as blocking off a staircase. Otherwise, you’ll need to add basic amenities in order to rent to tenants.

While this construction may seem expensive, it can pay for itself in as little as a year or two. And as long as it doesn’t add to the square footage of the home, this type of addition may not even increase the property taxes (though your income taxes will increase).

Tally the benefits

Immediately and long term, the biggest advantages to owning a property with a secondary unit are financial. A tenant can be a huge help for first-time home buyers saddled with a steep mortgage payment. If the mortgage isn’t necessarily a concern, that rent money can help with bills or savings contributions.

Looking ahead, some homeowners will put their tenant’s rent money toward a down payment on their next home, which opens up the possibility of moving out and renting both units.

For parents whose children have recently left the nest, adding a secondary unit to rent out can help them save for retirement or provide income in twilight years. Taking recent trends into account, having this type of unit available can also be great in case adult children need to move back in, but don’t want to sleep in their old bedroom.

Beyond the initial return on investment, secondary units have long-term advantages. Along with savvy home buyers, real estate investors and property management companies are always on the lookout for these types of properties, driving up demand and price. And as any house hunter in the last decade can tell you, they go fast once they hit the market. This means that anyone planning to build their own house should definitely consider the possibility of adding a secondary unit, which may help boost the resale value and interest in the property.

The downside

Once you begin renting a secondary unit, you are no longer just a homeowner — you are a landlord. For first time homeowners, this may be a bit too much to handle; the unexpected costs and problems that creep up on new homeowners are magnified when managing two units. Repairs that you may normally leave for another day become immediate when they’re in your tenant’s unit.

You’re also responsible for finding a good tenant who will not only pay the rent on time, but will take care of your home. Tenants are sometimes harder on properties than property owners, which can be jarring for inexperienced landlords. Keep in mind that any damage your tenants do is damage done to your home.

So while houses with secondary units may seem like a cash machine, that machine requires a lot of time and maintenance to keep running. Make sure you have the time and energy to be on-call for repairs, emergencies, bill collection, complaints and more.

Finally, make sure you’ve done all your research before you start bricking up that basement staircase. State and local regulations vary, and while you’re probably okay to buy a home with an existing secondary unit, building your own may come with additional fees and paperwork.

Despite these potential issues, property management provides valuable experience that will benefit any homeowner. For many, the benefits of owning a property with a secondary unit far outweigh the disadvantages. Paying down a mortgage, building a nest egg, or increasing a home’s value are all great reasons to look into properties with secondary units.



What Can Real Estate Investor Association Clubs Teach You?

Last Updated on May 22, 2020 by Mark Ferguson

Real estate investor association clubs can be a great way to find amazing deals. The clubs offer numerous educational opportunities and networking opportunities as well. The groups can be free, or some have a membership fee. Like anything in life, you get what you put into it. If you are willing to go to meetups, talk to other investors, and ask for help, you will get much more out of it than if you sit in a corner and don’t say a word. I have been to a few clubs and even spoken at a few as well. REIA clubs are not magic and will not make you an investor, but they can be a useful tool. Some clubs can even get you discounts at stores like Home Depot.

What are real estate investor association clubs?

REIA clubs are for real estate investors to mingle and share ideas. Many REIA clubs have monthly meetings with guest speakers who are experts in their field. The meetings usually consist of a speaker, time to network, and food or drinks. I have spoken at a couple of REIA club meetings to discuss HUD homes and how investors can get a great deal on them. There will be lenders, real estate agents, and many other investors at REIA club meetings.

Some clubs have online sites, newsletters, and even coaching programs. Each club is different and runs a little differently than the next one.

What does an REI club cost?

Many clubs are free and open to anyone who wants to join or attend a meeting. Other clubs have monthly or yearly fees to join. Some clubs are very expensive, or their main focus is to sell very expensive coaching programs. Most of the clubs I have spoken at have been free and open to anyone.

We belong to one club that has a $200 a year membership fee. I don’t think I have been to any of there meetings in years, but because we are a member, we get a 2% discount on everything at Home Depot. It is well worth being a member for that perk, and while I have heard that Home Depot may be getting rid of this program, it is still active in my area.

What can you learn at a real estate club?

Many people go to REAI clubs to learn or they want to here people speak about certain topics. There are a number of things you can learn at the meetings, but as with anything, the quality of what you learn depends on the speakers and the people who run the club.

I have seen some clubs make some pretty outrageous claims and offer some less than stellar advice because they are trying to sell their own coaching programs. They are going for the shock and awe marketing technique to get attention without caring about the bad advice they are putting out there. Other clubs are very honest and offer a lot of great advice.

You can learn about a number of different subjects in a meeting or club:

  • Wholesaling
  • Rental properties
  • Flipping
  • Note buying
  • Real estate agents
  • Auctions
  • Foreclosures
  • Finding deals
  • Financing
  • Much more

I would advise to learn from more than one source and not get too excited about the outrageous claims that might come from some clubs, especially if they are trying to sell a very expensive coaching program.

Who can you network with at the meetings?

One of the big advantages of the REAI meetups is networking with people who may be able to help your business. I have met some cool people at the meetings, but again, be wary and don’t get too excited.


There are many wholesalers at real estate investor clubs who could be very valuable to any investor. A wholesaler finds properties to buy but usually does not want to fix and flip the house or rent it out themselves. They want to flip the property quickly, and in some cases, without even buying the house. Wholesalers prefer to sell or assign their deals to investors, and many times, the houses are sold well below market value.

One of the main reasons I attended meetings was to meet wholesalers and to start building relationships. A key ingredient to any investor’s successful strategy is finding properties at below market value. I never met any wholesalers at an REAI meetup that sold me a deal. I met a lot of wholesalers, but I think most of them were very new. I have bought houses from many wholesalers, but I met them through many other means.

There will be many wholesalers at meetups but realize they may be very new and just learning the business. A lot of them have high expectations. which is great, but don’t expect a ton of deals to start flowing your way from every wholesaler you meet. I would estimate 1 out of 10 people who call themselves a wholesaler will ever do a deal.


There are usually a few hard-money lenders at the meetings, or they may even sponsor or put on the meeting. Hard-money lenders specialize in financing house flips, but the loans can work for rental properties as well in some cases. I have used hard money a few times but prefer private or bank money.

You will usually see local hard-money lenders at the meetups. I have learned to be very cautious of the local lenders. I have had deals fall apart because a local hard-money lender turned out not to have any money to lend! The local lenders can also be much more expensive than the bigger, national hard-money lenders.


Many people think other real estate investors are their competition and to be wary of them. That is true, but they can also help your business. Many successful investors are willing to share their experiences to help others, and they may be able to help your business as well. They may be a buyer for your wholesale deals, or they may have too many deals themselves and look to sell some occasionally.

I would meet all the local investors you can and make friends with as many as you can. You do not have to give away all your secrets, but having those connections can be a huge help.

Real estate agents

There may be investor-friendly real estate agents at the meetups as well. Some agents at these meetings are great and others not so much. It does not hurt to network and consider using them if you need a real estate agent. I would take your search seriously and not just work with the first agent you find.

How do you find real estate meetups?

It can be tough to find meetups, especially if you are in a small area. There are not any local consistent meetups by me. I have to travel about an hour to find one. I found those meetups through networking. Other investors I knew told me about them. You can also find meetups through sites like Bigger Pockets, local Facebook investing groups,, or online searches.


REIA meetups and clubs can be a great resource for networking and learning. However, I would not rely on them solely to provide you with everyone and everything you need to know. I would also curb your enthusiasm if you are expecting to meet 20 people who will constantly bring you deals from the clubs. Most meetings are full of new investors looking to learn.


What Are the Traits of Successful Real Estate Investors?

Last Updated on May 22, 2020 by Mark Ferguson

traits of successful real estate investorsA lot of people want to be successful real estate investors, but not everyone is able to accomplish this feat. What is it that makes someone successful at real estate? Are they smarter? Do they work harder? Were they just lucky? I think there are many traits that make someone more likely to be a successful real estate investor, and I will talk about them in this article. I have many of these traits as well, and I have been flipping houses, buying rentals, and selling as an agent for almost 20 years!

Why is it difficult to be a real estate investor?

Real estate can provide some incredible opportunities, but it is not easy. Houses, apartments, commercial properties, and even land can be really expensive. Most people don’t have the cash to go out and buy a house. They need to borrow money, which can be a relatively simple process if you want to buy a house to live in, but it is not as easy if you want to buy an investment property.

When buying a house to live in, you may only need 3% down or even less with a VA or USDA loan. When you buy an investment property, you probably need 20% down. It can take $20k, $40k,, or more to buy one investment property. Most people just don’t have that money.

There is also the question of what type of investor you will be. You can flip houses, buy rentals, wholesale real estate, be an agent, or even invest in notes. There are different strategies and amounts of money needed for each type of investment. If you flip houses, you might be able to put less money down using a hard-money loan. If you wholesale, you can be successful without as much money, but you will need to put in a lot of effort and time.

What are the traits of a successful real estate investor?

I have been a real estate investor since 2002 and have met many other investors through my blog, YouTube channel, and other social media. Most successful investors tend to have these traits. These are not set in stone, and people who don’t have these traits can be successful in real estate, but in my experience, it helps to have these traits.

Good at math

Real estate is all about the numbers. If you are buying rental properties, you need to know how much a house makes each month based on the actual and possible expenses. You need to be able to estimate repair costs and how much cash you will need.

If you flip houses, you need to know all the costs involved—not just the repairs. The other costs like financing, carrying, and selling costs can be more than the repair costs. It is not as easy as they make it seem on TV!

If you want to be a wholesaler, you need to know what price will work for a flipper or landlord. You need to be able to calculate the costs and formulas that work.

You don’t have to take calculus, but you need to be able to do simple math well.

Willing to learn

We already talked about how much there is to know about real estate. You aren’t born knowing these things—you must learn them. Most people think they don’t have time to read or learn, so they don’t. They make excuses for why they don’t have time, and nothing changes in their lives.

Those who are successful make the time to read! They make time to look at houses and write out strategies!

Willing to take risks

I have bought a lot of properties in my career, including many I probably shouldn’t have bought. While I have had some house flips that did not turn out exactly how I hoped they would, I have had many more great deals that more than made up for the bad ones.

To be a real estate investor, you must be willing to take some risks. Successful investors spend a lot of money buying properties and fixing them up. Sometimes you lose that money, and sometimes you make money. You cannot let the risk of losing money scare you away.

We are still buying during the pandemic! You can see the video below that shows I may be willing to take on more risk than the average person.

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Willing to spend time

People often want to become investors because they want freedom and more time. It takes time to be a successful investor. It is not something that is easy or happens overnight. Owning rentals can be mostly passive once you buy the property and have a good property manager, but you need to take the time to find the best properties and managers.

If you are investing out of state, it makes sense to visit where you want to invest. If you are flipping houses, it takes time to find contractors, lenders and deals, and you need to be overseeing everything constantly. You have to be willing to put time into the business if you want to be successful.


Becoming a great real estate does not happen right away. It can take months or even years to buy a property. If you give up easily, real estate is probably not the best business for you. I did not buy my first rental until 2 years after I decided I wanted to invest in rentals. I was in the real estate business at the time!

You also may fail or lose money in the beginning. You have to chalk those up as learning experiences and be willing to keep trying. Some of the best investors I know lost money on their first deals, but they did not give up.


You almost always need money to be a real estate investor. There are ways to invest with little money and maybe no money, but it is a lot easier if you have money to start with. Most successful real estate investors save money before and after they become investors. Once you become successful, you need to keep putting money back into the investment to grow.


You don’t have to have the entrepreneur mindset to be a successful investor, but it helps! Even being a real estate agent means you are running your own business. I personally have to be an entrepreneur. I cannot work for anyone else. Real estate is perfect for me.

If you need someone to tell you when to work and how to do everything, it could be rough trying to be an investor. You need to be decisive and willing to act fast without confirmation from a boss that you are doing the right thing.

What if you don’t have these traits?

Don’t give up if you don’t have all of these traits. There have been many successful investors who still made it even though they lacked math skills or the entrepreneurial spirit. They may have had a tougher time or may have had to work harder, but they still did it. If you can recognize your weaknesses, that can help you figure out where you need help. You could work on being stronger in those areas or find someone to help you or work with you that is strong in those areas.

I have written 8 books that go into more detail on how to actually invest in real estate and the exact steps to take. You can find them all on Amazon.


Real estate is an amazing business, and it can provide some amazing investments. It is not easy, and it does not happen overnight. I see these traits in many successful investors but I also see people who never graduated high school have real estate empires as well.


Fixed vs. Adjustable Mortgage Rates

When you apply for a home loan, you’ll be given the option of either a fixed or a variable rate mortgage loan. Both of these loan options have some upsides and some potential negatives, but ultimately, the one that works best for you will depend on a number of different factors.

Fixed-rate mortgages offer borrowers the stability of the same interest rate and monthly payment over the life of the loan. That’s a huge plus for home buyers who want predictability in their payments. Variable-rate mortgages, on the other hand, have interest rates that fluctuate from time to time. These loans come with more uncertainty, as rates could increase in the future — but they also come with perks like lower starting interest rates.

When deciding the right type of mortgage rate for you, it’s important to consider how long you plan to stay in the home, your risk tolerance and whether you have wiggle room in your budget for an increased mortgage payment down the road. There’s more to that formula, though. Here’s what you should know about these types of mortgage loans.

In this article

What are fixed mortgage rates?

A fixed mortgage rate is a rate that remains the same for the entire life of the loan. Fixed-rate mortgages are the most common type of home loan. When borrowers apply for this type of loan, the interest rate they’re given will be determined by factors such as their income, credit scores and the current market rates.

The rate on a fixed mortgage loan never changes over the life of the loan. That means that fixed-rate mortgages come with consistent monthly payments since there are no rate fluctuations. The amount you pay per month in the first year of the mortgage is the same as the monthly payment you pay in the 25th year.

The only difference is how much of the monthly payment goes toward interest vs. principal. As you pay down your principal, your loan accrues less interest, which means less of your payment goes toward the interest portion of your loan. As a result, more of your monthly payment goes toward principal each year of your loan.

The 30-year fixed-rate mortgage is the most popular type of home loan. This type of fixed-rate loan gives buyers a 30-year period to pay off their loans. Fixed-rate mortgages can also come with 10-year, 15-year and, less commonly, 20-year terms.

[ Read: What Are the Different Types of Mortgages? ]

What are variable mortgage rates?

A variable mortgage rate is a rate that changes periodically throughout the life of the loan. An adjustable-rate mortgage (ARM) loan starts with a period of fixed interest that could last anywhere from one to 10 years. During this period, the mortgage rate is guaranteed not to change.

Adjustable-rate mortgages appear as two numbers. For example, you might have a 5/1 mortgage. This indicates that your loan has a fixed-rate period of five years and that your rate can change no more than one time per year after that.

Once the fixed-rate period passes, which is five years in this case, the mortgage rate can change periodically (often every year) based on a specific benchmark, such as LIBOR or the rate on a Treasury bill. As the market rate increases, variable-rate mortgage borrowers will see their mortgage rates increase, and vice versa. There’s always a chance your rate will go down if rates drop.

As the variable rate on a loan increases or decreases, so does the monthly payment. The good news is that these loans come with rate and payment caps. Your interest rate and monthly payment are guaranteed not to exceed a certain amount as determined at the time you take out the mortgage.

[ Read: Refinance Your Fixed-Rate to ARM Mortgage ]

Comparing the two types of mortgage rates

Fixed and variable rates are the two rate options you’ll have to choose from when you buy a home. Both are very different and come with their own set of perks.

Advantages of a fixed rate

Fixed mortgage rates provide predictability to the borrower. Because the interest rate and the monthly payment amount never change, homeowners know exactly how much they’ll pay each month over the life of the loan. You won’t have to worry about your monthly payment increasing substantially and becoming unaffordable.

Fixed-rate mortgages also allow borrowers to lock in low rates during the loan process. Imagine that you bought a house during a year like 2020, when interest rates were historically low. A fixed-rate mortgage ensures that you get to keep the low rate for the entire loan term, no matter what happens to the market rate.

Advantages of a variable rate

While variable rates don’t come with the stability that a fixed mortgage rate does, they still have their own set of advantages. First, adjustable-rate mortgages tend to have lower starting interest rates. These loans come with a fixed-rate period at the start of the loan, which is when you’re likely to see the low rate. The interest rates available for this period are often lower than the rate you’d be able to get on a fixed-rate mortgage under the same market conditions.

Variable-rate mortgages also allow borrowers to take advantage of low market rates later in the life of their loan. If you lock in a fixed interest rate when rates are high, you can’t take advantage of rate decreases unless you refinance your loan. With a variable rate, you’ll see your mortgage rate drop if the market rate goes down.

[ Read: How to Get the Best Mortgage Rates ]

Should you get an ARM or a fixed-rate mortgage?

Choosing between a fixed-rate and adjustable-rate mortgage can be challenging. Borrowers often want the stability that comes with fixed mortgage rates, but also want the lower rate available to ARM borrowers. Unfortunately, you can’t have both.

One of the first things to consider is how long you plan to stay in the home. If you’re planning to buy a home to stay in for a few years, an ARM might give you the best of both worlds. You’ll lock in the lower starting rate that comes with an ARM, but you can sell the home and pay off the mortgage before your fixed-rate period ends.

An ARM may also be a good option if you have lots of wiggle room in your budget. With this type of loan, you run the risk of your interest rate increasing later on, and, in turn, your monthly payment also increases. If you have plenty of room in the budget for a larger mortgage payment and are willing to roll the dice on the interest rate fluctuations, then you might decide an ARM is right for you.

ARMs can also be a good option for certain real estate investors. If you plan to buy an investment property to flip in the next couple of years, an ARM might help you to save money.

Ultimately, a fixed-rate mortgage is the option that most people choose. This type of loan gives borrowers the flexibility to stay in their homes as long as they want without the fear of a rate or payment increase that would make their home unaffordable. Even though these loans start with slightly higher interest rates, you could still pay lower interest over the entire life of the loan. Unlike an ARM, there’s no chance of your interest rate increasing in the future.

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