Helping family with homeownership

real estateThe holiday season is about spending time with family and enjoying each other’s company. But as a consequence of the Great Recession, some family members (including adult children) have made “family time” a year round thing by moving in. Whether it’s a child moving back with parents after college, or maybe family who suffered a financial hardship; having accommodating family can be a blessing. However, as the economy slowly improves, the post-recession family nesting trend is changing and many are (re)establishing their own homes.

Some people are taking advantage of an improving housing market to create one of the recent housing trends – purchasing an investment property to “house” family members. Although the benefits of purchasing an investment property and having family live there may not be obvious, some realize that it can be mutually beneficial. Having a trusty and inherently loyal family member live in the rental property can mean a regular rent check, as well as ensure that the home is maintained. As with any investment property – the longer you own it, the greater potential for long term equity.

Some are banking on recent rising home values and taking out a home equity line to purchase investment homes, although some are fortunate to have the assets to pay cash. However, many rely on financing the property, which requires a hefty down payment (typically 20%) as well as an interest rate slightly higher than that of the owner-occupant mortgage you might have on your own home. And although buying an investment property to house family members sounds as if it is a no-brainer to get them out of your own house; due diligence is required to determine if this is advantageous for you, as well as consulting with your tax preparer about tax benefits and/or consequences.

If buying the investment property is not an option, you may be able to help family qualify for a mortgage of their own. Although FHA mortgages are typically common among first time home buyers and/or buyers who need a low down payment loan; FHA has been the go-to program for helping family buy a home –especially when the home buyer falls short of qualifying on their own because of a lack of employment history, assets, and qualifying income. Although Fannie Mae, Freddie Mac and VA permits co-borrowers who are not intending to live in the home to co-sign for family; FHA has additional features that may make the loan more attractive. Besides allowing family to gift the borrower’s down payment, FHA may allow alternate credit sources to be substituted when the borrower has insufficient established traditional credit.

Although “co-signing” as a non-occupying co-borrower might help your child or some other family member become a home owner, it should not be taken lightly. You have to consider that even though you do not intend to live in the house or make the mortgage payments, you are signing the mortgage note. Not only could you be held responsible if payments are not made, your credit may even be dinged even if payments are late.

Although there are benefits to having extended family live together, you might be thinking of helping them start their own household. Before making any decisions, do your due diligence. And talk to several lenders, as with any mortgage loan program – underwriting varies from lender to lender and guidelines typically change without notice.

© Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

People need a place to live: Rental properties are surging

by Dan Krell
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People need a place to live. This is the mantra of many savvy real estate investors who are looking for fantastic buys on homes to use as rental properties. Real estate investors know that rental properties are looking better because markets are cyclical. Investors following the real estate market know that many people wanting to purchase a home prefer to rent during uncertain financial times.

The “MRIS Trends in Housing; Mid-Year 2008” (Metro Regional Information Systems Inc, MRIS.com) appears to confirm what real estate investors know. The report states that potential home buyers prefer to rent while timing “their entry into the market.” Interestingly, vacancies for traditional apartment complexes rose to 3.6% (from 2.9%) in the last year, indicating that renters are choosing to rent single family homes and condos rather than a traditional apartment. The report points to home sellers converting their “homes for sale” to “homes for rent” for the increase in apartment vacancies.

The MRIS report also states that rents increased 3.1% in the last year. Unlike the rental market of several years ago, where renters were negotiating leases way below list price, real estate investors are expecting to rent housing at a premium.

How much should you pay for a rental property? Savvy real estate investors typically do not want to pay any more than 70% of retail value for their rental properties; however many set their price tolerance lower. Consulting with a Realtor can assist your analysis in how much to offer for any home.

Let’s face it, if you intend to buy at bargain prices, you will probably be purchasing the home “as-is.” Seasoned investors will account for the cost repairs to bring the home up to code in their purchase price. Consulting with a licensed contractor can assist you in determining what repairs and updates are necessary.

Buying a home at the right price is only part of the equation. When considering a rental property, investors look for a home in a prime location. For example, having a rental near a metro stop can sometimes rent faster and for more money than an equivalent rental in a secluded neighborhood.

Some investors might say that the goal of buying a rental property is to have the home “pay for itself.” This means that the rent you collect should cover the home’s mortgage, taxes, insurance, maintenance and other expenses. Consulting with a Realtor and a rental management company can assist your neighborhood rent analysis.

Make no mistake, real estate investing is risky. Success as a real estate investor is not assured. From dealing with bad tenants to carrying a vacant rental property, every investor has a horror story.

Whether you are a seasoned or novice investor, you should always do your home work and consult professionals (such as your attorney, accountant, Realtor, financial advisor) to assist you in deciding if buying a rental property is right for you. Additionally your professional network can assist in determining your risk level as well as assisting you in creating your real estate investment plan. If you decide to become a real estate investor, maintaining communication with your professional network can help you anticipate and possibly overcome any bumps in the road toward your goals.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of October 6, 2008. Copyright © 2008 Dan Krell.