Real Estate Information Archive

Every Homeowner Needs One

A water meter key is like insurance; buy it before you need it.

Imagine a pipe has burst and there is water flowing like a river through your home.  There may a cut-off valve to each sink if it works and if that’s where the leak is coming from. Your home may have a master cut-off valve but if you haven't used it before, you might not know where it is. The last resort is to cut off all the water to your house at the meter.

In most cases, you'll need a key to get into the meter.  With water starting to rise in your home, concern over the damage being done may add to your anxieties.  You don’t have time to call a plumber or even go the store to buy a water meter key.

Emergencies are handled much better when you plan for them in advance and practice, even though you hope you’ll never need it.

1. Determine what kind of key you need to open your water meter. 
2. Purchase it at the home improvement or hardware store. 
3. Practice opening the meter to be able to do it quickly and easily. 
4. If your meter key doesn’t have a wrench on one end, you need a wrench to turn the water valve. 
5. Practice turning the water off just to see how it works and feels. 
6. Put the key in an obvious and conspicuous place. 
7. Have the phone number of an emergency plumber, just in case you need it.

While you’re planning for the unexpected, it might be a good idea to show some of the other family members how it works and where you keep the key.

Who's Paying Your Mortgage? 
 

As a homeowner, you obviously pay for your mortgage but as an investor, your tenant does.  Equity build-up is a significant benefit of mortgaged rental property.  As the investor collects rent and pays expenses, the principal amount of the loan is reduced which increases the equity in the property.  Over time, the tenant pays for the property to the benefit of the investor.

Equity build-up occurs with normal amortization as the loan is paid down.  It can be accelerated by making additional contributions to the principal each month along with the normal payment.  Some investors consider this a good use of the cash flows because interest rates on savings accounts and certificates of deposits are much lower than their mortgage rate.

In the example below, is a hypothetical rental with a purchase price of $125,000 with 80% loan-to-value mortgage at 4.5% for 30 years compared to a 3.5% for 15 years.  The acquisition costs were estimated at $3,000, the monthly rent is estimated at $1,250 and $4,800 for operating expenses. 

Notice that both properties have a positive cash flow before tax.  The cash on cash return is the revenue less expenses including debt service divided by the initial investment to acquire the property.  The 15 year mortgage will obviously have a smaller cash flow and lower cash on cash but the equity build-up is significantly higher.

If the goal of the investor is to pay off the property to provide the highest possible cash flow at a later date, a shorter term mortgage with a lower interest rate will help them achieve that.  A simple definition of an investment is to put away today so you’ll have more tomorrow.  Sacrificing cash flow now, during an investor’s earning years, is a reasonable expectation to provide more cash flow in the future when it might be needed more.

Contact me if you’d like to explore rental property opportunities.

Lower Anxieties/Improve Marketability

One of the anxiety highpoints during the sale of a home is waiting for the buyer’s home inspection report.  Most sellers willingly disclose what they know about their home to any potential buyers.  The concern stems from the inspector finding something that they’re totally unaware of and that it will either cost them a lot of money to correct or the buyer will simply use it to void the contract.

If the inspection does reveal some unknown problem with the home, it’s probably as big a surprise to the buyer who is not as emotionally or financially invested as the seller.  It is human nature to fear what you don’t understand and when a report identifies defects, they may simply opt-out of the home.

The solution to the situation may be for the seller to have the home inspected prior to putting it on the market.  There is still a risk of becoming surprised by an unknown defect which at that point, would have to be disclosed to potential buyers or repaired by the seller.  The advantage is that it creates a baseline to compare discrepancies that may arise when a future buyer has the home inspected.

If the seller’s inspection report is made available during the marketing process, it could give buyers a sense of confidence about the home even though they may still choose to have the home checked by their own inspector.

The cost of the inspection, possibly $500, keeps some sellers from taking this initiative when selling their home.  In an effort to minimize their expenses, they forego getting valuable, disinterested 3rd party advice that could help sell their home.  On a $175,000 home, the fee for the inspection will probably be less than 3/10 of one percent of the sales price.

Another option to the seller to increase marketability of the property and bolster buyer confidence in the home would be to offer a home protection plan.  Generally, the seller doesn’t incur cost for this coverage until the home is sold and there may even be some coverage for the seller during the listing period.  The benefit to the buyer is avoiding unanticipated expenses for specific items that are covered during their first year of ownership.

Contact me for recommendations of home inspectors or home protection plans.

Equity Dynamics

Equity is the difference in what your home is worth and what you owe. Ideally, as the value goes up and the unpaid balance goes down with each amortized payment made, the equity grows from two directions.

This dynamic leads to increasing a person’s net worth much faster than many other investments.

A homeowner has minimal control over value. It is necessary to maintain the property to avoid depreciation and make good decisions on capital improvements. After that, appreciation is generally controlled by supply and demand and the economy.

Mortgage management is something that the homeowner does have control. Making the decision to select a shorter term mortgage at a lower interest rate can have an impact on equity build-up. Lower interest rates amortize faster than higher interest rates which will also affect equity growth. Currently, it is possible to get a 1% lower rate on a 15 year mortgage than a 30 year mortgage.

Compare two alternatives of a 30-year and a 15-year mortgage. The payments will definitely be higher on the shorter term because it pays off quicker. However, if a person can afford the higher payments of $362.53 more per month in this example, the equity will be greater. Even after you take into consideration the higher payments, the increased equity is $17,236 at the end of the seven year holding period.

Another decision that can affect equity build-up is making additional principal contributions along with the regular payments. Whether you’re making an occasional lump sum payment toward principal or regular monthly contributions, it will save interest, build equity and shorten the term on a fixed rate mortgage. Estimate your personal savings with this Equity Accelerator.