Home equity seems to be a very simple calculation — the total amount of mortgages owed subtracted from the current market value of a home. Here is a simple example:
Current Home Market Value $325,000
Existing Mortgage $225,000
Homeowner Equity $100,000
One side of the equation is well defined, and it is found on the monthly mortgage statement, the loan balance. The other side is less obvious — the current market value of the property. The most accurate measurement of market value requires a comparative market analysis from a real estate professional.
Putting Home Equity to Work
Home equity represents the largest single asset of millions of people, and because it represents so much of an individual’s net worth, it must be treated with respect. Home equity is not a liquid asset until a property is sold, or it is borrowed against.
There are two types of loans that tap into homeowner equity as collateral.
Home Equity Loans
Many home equity plans set a fixed period during which the person can borrow money, such as 10 years. At the end of this “draw period,” the person may be allowed to renew the credit line. If the plan does not allow renewals, the homeowner will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period, for example, of 10 years.
A home equity loan, sometimes called a second mortgage, usually has a fixed rate and a set time to pay it back, generally with equal monthly payments.
Home Equity Line of Credit
A home equity line of credit is similar to a credit card. The lender sets a maximum amount you can borrow, and you can draw money as you need it, though many home equity lines of credit require an initial draw. The interest rate varies daily, and is usually prime plus a set number, but the required payment is usually interest only. Once the loan has been paid down, the payment is reduced, and it can be paid off and initiated as many times as a homeowner requires.
How Much Equity can be Accessed?
Since the financial institution is lending money and using a home as collateral, they will typically loan 80% of the home’s equity. The bank does not want to take the risk that if the house price drops, they would be carrying a loan for more than its market value.
Here are some good ways to use money from a home equity:
Invest in Your Home – Among the very best returns on your investment (ROI) include kitchen and bathroom remodels, adding square footage or an extra bath, enhancing curb appeal and repairing/keeping the existing structure sound.
Invest in your Children’s Education – Using your home equity to finance a child’s higher education may be the greatest pay off of all.
Supplement Retirement Needs – At retirement, when monthly income is reduced, a home equity loan could pay for a dream vacation or an unexpected major expense.
Augment the Impending Sale of a Home – If you’re planning to sell soon, a home equity line of credit may be the best way to finance improvements to maximize your selling price.
On the flip side, avoid buying luxury items, assets that depreciate like cars and boats, don’t make investments in financial markets, and do not pay routine monthly bills. You should treat a home equity loan as an investment and not as extra cash when making financial decisions.
We Are Happy to Assist You
If you would like an assessment of the market value of your home and the current equity you can access, give us a call for a comparative market analysis.
The ‘smart home’ is the new ‘internet of things’, or objects that can serve you better by communicating with each other or directly with you through apps on your smart phone. In the ideal version of the wired future, all of our appliances and gadgets talk to each other seamlessly.
What could living in a smart home look like? Picture something like this:
The lights in your bedroom slowly illuminate to quietly awaken you in the morning, replacing the typical blaring alarm. The aroma of fresh brewing coffee drifts in and stirs your senses. Once the lights are all the way up, the heating system kicks on, just in time to warm up your room so you’re not shocked once you crawl out from underneath the duvet.
When you step into the shower, it turns on automatically and remembers your preferred temperature and water pressure. And it will shut off right when you’re finished as it knows how long you take to bathe.
Once you’ve driven out of your garage, your home alarm system arms itself. And it will only unlock automatically when it “sees” and recognizes someone else from your family approaching through programmed in bio-metrics.
Do smart homes really work this way right now? Not exactly…while you may find some of these smart features in certain homes, we haven’t reached the point where every feature intuitively knows what you want and when you wanted. However, each year we’re getting closer and closer toward that shiny, idealized ‘Jetson’ future.
Here are some trends that we see for smart homes, many of which may also help you save money:
Smart Thermostats
Programmable thermostats that are synchronized with the clock have been around for decades. However, they’re often difficult to set and aren’t necessarily efficient; they simply turn on or off as programmed, whether or not you are there.
With the newer models, smart thermostats can be programmed to adjust the temperature when they sense you are present. And once you leave, they can kick back to standby mode so that you’re saving energy and money. Nest does all of this, and it also allows you to check your usage from your cell phone so that you can adjust the temperature remotely and save even more.
Smart Smoke Detectors
Having a working, effective smoke detector saves lives. But unfortunately, many of us still have those battery-run smoke detectors that make that annoying, piercing beep when their batteries are running low on power. And instead of replacing batteries right away, it’s often easier to pull them out and disable the detector (while risking our lives).
Many of the new smart smoke detectors, like the Birdi, monitor smoke, carbon dioxide, as well as air quality. With this new sensor technology, they know the difference between a real fire and burnt toast.
Smart Sprinkler Control
Weather in our area is predictably unpredictable. Often, especially during the summer months, we fall into a severe drought. But then we might have one season that brings extreme amounts of rain, like we did this past spring.
A smart sprinkler controller like Rachio Iro can not only help save you lots of money on your water bill but also help protect our precious resources.
Programmable by computer or smart phone, it can automatically adjust how often you water your lawn based on the season and the weather forecasts. You can also remotely adjust the settings through a mobile app.
Smart Solar Panels
You can put the sun to work for you by using solar technology to power your home. It’s green and renewable, and can save you money over the long term. A recent study conducted by the NC Clean Energy Technology Center determined that Austin customers who invested in a solar system saved an average of $66 per month during the first year that they owned the system.
With smart solar panels, you can program the technology to monitor their performance and even turn them off in case of a weather emergency or fire.
Smart Home Security Systems
Home monitoring has become much more sophisticated in recent years. With the old-style security systems, you had to call in contractors to wire your home with monitoring sensors.
With new smart technology, you can simply place a few smart devices in your home to monitor movement and sense whether doors and windows are closed or opened. Some systems include audio and video monitoring, as well as sirens to scare off intruders. You get real-time feedback on security breaches through an app. And, because you’re alerted as soon as the system senses an intruder, it’s more likely that they will be caught.
Canary is one popular all-in-one audio-video security system, complete with sirens and night vision.
Smart Locks
Go beyond the standard key locks, which can often be compromised by burglars. The new smart lock systems give you more control over those who can gain access to your home.
Some systems, like the Kwikset Kevo, include encrypted virtual keys that you can program for access for a limited amount of time—for example, allowing guests over for a weekend, or cleaning service in during a specific window of time.
Other door locking systems include biometric technology. The Ola Smart Lock allows you to program your lock to recognize your family member’s fingerprints. Other systems use facial recognition to greet you and unlock your door.
The new August Smart Lock integrates with Apple’s technology so you can ask Siri to open your door for you.
Smart lighting systems and light bulbs
A well-lit home feels warm and welcoming, and good lighting can instantly increase the value of your home.
However, annual lighting costs can account for up to 12% of your overall electric bill, or over $200 per year according to Energy Star. You can easily reduce this expense simply by using smart lighting technology to add efficiency.
The Philips Hue wifi-enabled lights make it easy to add to your home without installing specialized equipment. Smart lighting dimmers and sensors can give you more control over how much energy you use and allow you to turn them on and off through your smart phone.
New smart light bulbs can give you control over the warmth or coolness levels of your lighting. With the Lifx LED Light Bulbs, for example, you can program your light bulbs to turn on or off when you want, to slowly wake you up with increasing illumination, or to change from daytime work lighting to entertainment-friendly shades for parties.
Smart Appliances
Programmable slow cookers and coffee makers are the quaint, old-fashioned versions of these home conveniences. Newer, smart appliances give you more control over how your food is kept and prepared, and make it easier for you to complete pesky household chores.
Newer coffee makers, like the Smarter Coffee Machine, let you ‘order’ your coffee exactly to your liking, adjusting everything from bean grind to temperature to strength to time that it’s ready to drink.
Smart refrigeration technology can help you store your food at just the right temperature, adjusting the thermostat during peak usage times. For example, the LG THINQ Fridge can alert you via smart phone app if a door is accidentally left open.
Smart ovens can ensure that your food is cooked to the right level of done-ness, and alert you when your meal is ready to eat. June, a new counter oven invented by former Google, Apple, Go-Pro and Path employees will give you even more control—it will contain cameras, thermometers, and other technology to ‘learn’ what you like to eat and make menu suggestions.
Smart washers and dryers have customizable controls so that you can safely wash any type of fabric. Some units include controls to increase drying time to save energy. And soon, connected appliances from GE, Oster, Samsung, and other makers, will be able to re-order soap and fabric softener directly from Amazon, so you won’t even have to think about running to the store at the last minute.
Have you tested any of these technologies in your home? Did we miss any of your favorite home technologies? Let us know in the comments!
Despite the grim economic outlook for some industries, one sector is gaining viability — real estate. According to the 2016 Emerging Trends in Real Estate, which was released by the Urban Land Institute earlier this year, trends such as “18-hour cities” and millennial parents increasing moving from urban areas out into the suburbs signal that real estate as an industry is gaining strength every passing day in 2016. One lending officer at a large financial institution even went so far as to say that “the next 24 months look doggone good for real estate.”
These trends mean that real estate is a smart place to make an investment and grow your wealth. A housing shortage means that flipped homes tend to sell quickly and for high prices, and an increased demand across all age groups for rental properties means that finding tenants for your buy-and-hold properties should be a breeze.
Of course, these trends also mean that the real estate market is highly competitive right now. If you want to make a foray into real estate investing, you’ll need to educate yourself and be strategic in who you work with and where you look for investment opportunities. Read on for our beginner’s guide to real estate investing.
Assemble your real estate team before you buy
Building relationships with your team will empower you to make serious offers that will more likely get accepted by sellers. Among your team members, you will want to include:
A mortgage broker or banker, who can help you get the financing for your deal
A real estate attorney to protect you by reviewing and revising contracts
An appraiser who can help you get a correct appraisal for your potential property
An accountant who is well versed in real estate investments
A good contractor, for repairs whether you’re rehabbing or buying rental property
How to find rehab or wholesale deals
You can buy properties to fix up and resell (flip) or you can buy and hold properties that you rent out for monthly cash flow.
The advantage of flipping properties is that you can end up with a good return on investment (ROI) in the short term. For example, you buy a property for $100,000, and invest $50,000 into repairs. Once it’s rehabbed, your property is valued at $200,000, and you sell it for a $50,000 profit.
This is an extremely simplified version of ROI. There are many other factors that you need to determine to see if the numbers work in your favor — that is, you’re not overpaying initially when you buy the properties or for the renovations or holding costs.
Flipping properties means that you will need to spend more time looking for fixer uppers that may be under market value. These may be more difficult to find in a hot market with rising property prices. Beyond the actual purchase price, you will also need to factor in fixed purchase costs for inspections, closing, and lender fees.
You’ll also need to factor in holding costs. Your budget should include funds for making repairs, whether you are doing them yourself or hiring contractors. While you’re upgrading the property, you’ll need to carry mortgage payments, property taxes, utilities, and insurance.
Because of rising property values, fix-and-flip deals in good neighborhoods can be hard to find. But once you know where to find rehab opportunities, you can easily repeat the process by reinvesting proceeds from a previous flip into the next property, which can be bigger, in a more desirable neighborhood, or finished out more luxuriously, and therefore sold for more cash!
Working with the right real estate professionals will help you learn which neighborhoods to consider and determine where you should focus your search. We can help you find the right fixer-uppers that may be under market value. Also, a Realtor will have access to many properties that may not be publicly available.
Finding buy-and-hold rental properties
A buy-and-hold rental property is one that your purchase with the intent of renting it out to tenants. If you find the right long-term buy-and-hold rental property, you can earn consistent cash flow each month, which can be a great source of supplemental income.
You’ll need to carefully review the operating expenses on the property and what tenants are willing to pay for the space to know if you’ll make or lose money each month. For example, say your total costs to buy a duplex was $20,000, including down payment and closing costs. You can rent each of the units for $600. Assuming your building is 100% occupied, you’ll make $1200 per month in income. Your expenses include mortgage payments, taxes, insurance, utilities, and management fees, and you want to set aside some cash each month for capital expenditures and routine repairs. You calculate that your expenses add up to $1100 per month. Once you subtract your expenses from your income, you’ll have a positive cash flow of $100 per month.
Of course, this is a very simplified example, and it doesn’t take into account that problems will inevitably arise. Emergency roof repairs, heating system breakdowns, broken windows that need replacing, and other unexpected expenses can eat away at your profits. One of your units may be vacant for a month or more — for example, vacancies are high in the summer months in buildings around universities — or you could have a tenant who fails to pay their monthly rent.
The more you can anticipate problems before they happen, however, the easier it will be for you to recover from setbacks! Moreover, rent isn’t the only way to make money on a buy-and-hold property. You can also add amenities, such as coin laundry and vending machines, to increase your potential monthly income. If your property has space to add a billboard, you can earn advertising revenue from renting that space, too. And when you decide to sell, your property’s value will likely have increased both from the overall rising property values and by the improvements you made to increase the cash flow.
Once you find and invest in your rental property, you’ll need to decide how you want it managed from month to month.
Getting the right property manager
Do you want to manage your own property or hire a manager? Property management can become a full-time job. As a property manager, you’ll have to deal not only with maintenance, repairs and tenant issues, but also with insurance, fair rental regulations, and building code compliance. So if you’re not an expert in these areas, managing your own properties may not be worth your time and effort.
Hiring a professional manager can save you headaches over the long term. While you’ll have to factor in management as a fixed expense, your property manager will likely know how to better take care of routine repairs, tenant issues, and keeping your property near 100% occupancy.
Your real estate professional can refer you to reputable property management companies to help you take care of your investment.
Where should I start investing in local real estate?
Work with a knowledgeable real estate professional who knows about the different neighborhoods. We can help you find properties that will fit into your budget and your overall goals. Whether you’re seeking a duplex or multifamily property so you can maximize your rental income or whether you want a condo or single-family home to improve for resale, we can guide you to the best property to suit your needs.
Contact your us to learn more about investment properties in our area.
Whether you’re putting your home on the market this year or in the next five years, it is a smart decision to start building your home’s resale value now. Here are some ways to create a comfortable home while making it easier to put more money into your bank account on closing day.
Small Maintenance and Repairs
If you think that home maintenance on the weekends waste your time and energy, think again. The small chores you do around your home prevents it from losing value. Neglecting small maintenance and repairs causes 10% of your home’s value to walk out your door and slip through your windows. Most appraisers claim that homes showing little to no preventative maintenance can depreciate from $15,000 to $20,000.
A study conducted by researchers at the University of Connecticut and Syracuse University shows that regular maintenance boosts your home value by about 1% per year. However, ongoing maintenance costs offset that value, which means that regular maintenance actually slows down your rate of depreciation. Furthermore, because homebuyers generally notice any repairs needed upon buying a new home, proactive maintenance lets the homebuyer know that he or she will not have to spend extra money to maintain the basics. This makes your home more attractive, and thus more likely to get higher priced offers.
Maintaining the basics can cost you little money and certainly some effort, but there’s a way to accomplish this very important activity smartly. This article by HouseLogic, for example, shows you how to keep home maintenance below $300 a year. Planning ahead will also help make maintaining your home easier. Most professional appraisers and real estate agents recommend a proactive maintenance schedule that includes:
Keeping enough cash on hand to replace systems and materials
Creating and following a maintenance schedule
Planning a room redo every year
Keeping a notebook of all your maintenance and repairs
Landscaping
The Virginia Cooperative Extension at Virginia Tech published a study that shows landscaping can increase a home’s value by 15%. The study claims that a home valued at $150,000 could increase its value between $8,300 and $19,000 with the addition of landscaping. Particular landscape elements add different value. For instance, landscape design can increase your home’s value by 42%, plant size can increase your home’s value by 32%, and diversity in plants can increase your home’s value by 22%.
Replace Entrance Doors
If your entry doors are wood, consider switching them out for either fiberglass or steel doors. Steel doors add style and architectural interest to your home while improving security; you can add a deadbolt and electronic keypads to keep out intruders. Unlike wood doors, steel doors do not rot or splinter.
Alternatively, fiberglass doors can be designed to look like wood doors and give your home a modern look. Fiberglass doors conserve more energy than steel doors.
Pricewise, a steel door will cost you $1,335 with a 91% return on investment whereas a fiberglass door will cost you $3,126 with an 82.3% return on investment.
Garage Door Replacement
At first, you might not think that your garage door increases the value of your home. However, your garage door distinguishes your home from the other homes on your block. As the largest entryway of a house, garage doors get noticed first because they’re the focal point of your home. If you want to quickly increase the resale value of your home, you need to make the most of this space.
Some interesting things being done with garage doors include:
Increased Size: Bigger garage doors help homes stand out more, and homeowners can do more creatively with them.
Bold Colors: Bright and bold colors now can complement the color of your home, or you can build a concept around the color of your home.
Faux Wood: You can install fiberglass or steel garage doors that look like wood garage doors. This gives your home a new level of sophistication.
Windows: Large Windows on your garage door improve the aesthetic of your home, and provide light into your garage so that it’s no longer a dark space.
More importantly, a garage door replacement will cost you $1,652 and add $1,512 to the value of your home; that’s a return on your investment of 91.5%.
Fiberglass Attic Insulation
While energy efficiency is still not the sexiest selling point of your home, installing fiberglass attic insulation saves energy and garners a big payback on your investment. According to Remodeling Magazine’s 2016 Cost vs. Value top trends report, fiberglass attic insulation gained the top return on investment among the 30 projects in this year’s report. Using Remodel/Max as the cost source, a fiberglass attic insulation project cost $1,268 nationwide. Real estate professionals surveyed estimated that the work would boost the price of a home at resale, within a year of its completion, by $1,482. That’s a 116.9% return on investment.
Replacing Windows
Replacing your windows is another way to save energy and increase your home’s resale value. Replacing your old windows with energy saving models will beautify your home, keep it comfortable, and ease the workload of your HVAC system. According to HGTV, you’ll see a reduction in your utility bill by 7% to 15%. However, if you’re selling your home, you could expect a 60% to 70% recoupment of your investment. The two types of replacement windows that fetch the best return are vinyl and wood.
Remodeling Your Kitchen
Kitchen remodeling can get expensive, but small renovations can make your home more buyer friendly. Changing your kitchen’s texture and color using a matte finish and neutral colors such as putty or grey enhances your home’s resale value. Because matte finishes have transitional qualities, your potential homebuyer can easily match his or her stainless steel or black and white appliances. Also, refinishing cabinetry, or switching to Energy Star™ appliances provide comfort you like and pizazz buyers adore.
Flow is important to any interior design of a home. If you feel that your kitchen hinders a good flow, change it. A small investment to knock out a non-structural wall or remove a kitchen island creates space and provides flow that buyers love.
A minor kitchen remodel can cost you $20,122 while putting $16,716 of resale value into your home; that’s an 83% payback on the project. If you want to do a major kitchen model, this can cost you about $60,000 and put about $39,000 of resale value into your home, which is only about a 65% payback on the project. Therefore, consider a minor kitchen remodel first.
Bathroom Addition or Remodel
Likewise, carefully consider adding a bathroom or remodeling your bathroom. Switching out your frosted glass shower doors for glass doors, cleaning the grout, replacing the shower and floor tiles, switching out your sink or toilet, or replacing your sink and shower fixtures can cost you little money.
Adding a bathroom can get expensive, but it can reduce congestion during hectic times and provide your guests with a bathroom. Consult with your real estate agent or a local appraiser before deciding whether a full remodel or addition is right for your situation. While a bathroom remodel will cost you about $18,000 with a return on investment of about 66%, a bathroom addition will cost you about $42,000 with a return on investment of about 56%. Therefore, it’s best do your due diligence before working on your bathroom.
Your Needs and Buyers’ Wants
On that note, if you need to renovate your home, be sure to consider how those changes will affect its appeal to future buyers. Knowing design trends will give you the opportunity to make changes to your home based on where your needs and your potential buyer’s desires intersect, thus increasing your property’s resale value drastically.
Designers and design websites provide great ideas when you’re brainstorming home renovations. Keep in mind as you research, however, that you don’t want to sacrifice your needs for a comfortable home just for the sake of what you think a future buyer will want!
Therefore, before you begin making any changes to your home, consult your real estate agent. Real estate agents, because we are constantly working with new buyer clients, have insider insight into what home buyers are looking for now and in the future. We’ll be able to help you make smart choices when remodeling or renovating your home.
If you think you might want to remodel or renovate your home in the near future, or if you are just curious about other ways you can increase its resale value, please reach out to me!
Weather and the time of year have a big impact housing activity, and in every housing market there are times of the year when fewer homes sell. For most, that time of year coincides with the winter months, and in much of the U.S., that’s the case right now.
But no matter where you live, it’s important to know how seasonality affects the housing market. So let’s look at the current housing numbers, how seasonality affects them, and what it means for you if you’re looking to buy or sell.
With few homes available, sellers are in pole position
Last year, limited inventory dominated the headlines for the real estate industry, and that trend looks to continue this year. According to the National Association of Realtors (NAR), inventory dropped 12.3 percent from November to December, falling to 3.8 percent lower than December 2014. That equated to just a 3.9-month supply of homes.
Generally speaking, a 6-month supply of homes (meaning it would take six months at the current sales pace to sell all the homes on the market) represents a balanced market, one in which there are enough homes to meet demand. For much of 2015, inventory remained well below a 6-month supply, and will likely remain so for 2016.
Why is inventory so constrained? Part of the sharp drop in December is due to the seasonal slow down in many states. Cold weather and holidays keep many buyers out of the market and many sellers waiting for demand to pick back up. Additionally, new home construction came to a standstill when the housing market crashed, so there are fewer new homes available. Existing home inventory is low as well. A combination of factors, such as locked-in low interest rates and a sense that home prices will continue to increase, are keeping current homeowners from listing their homes.
If you’re thinking of selling, this market is very much a seller’s market. When inventory is scarce, buyers are forced to compete over the few homes for sale. Homes are selling faster, and in many markets bidding wars drive home prices up well above asking. At the very least, you’ll be in a strong negotiating position.
Economic Conditions and Home Affordability Continue to Sideline Buyers
For buyers, the market is tough, and the low number of first-time buyers illustrates just how tough it is. In a separate study conducted by NAR, first-time homebuyers in 2015 made up the lowest share of the market in nearly three decades.
Many factors are keeping first-time home buyers sidelined. Despite a strengthening economy and job growth, wages have remained relatively stagnant. At the same time, rent prices have skyrocketed and continue to rise. Combined, these factors are preventing millennials from saving enough for a significant down payment.
At the same time, home affordability continues to suffer. Home prices have risen quickly over the last three and half years, again outpacing wage and job growth. Prices are expected to rise more modestly this year, somewhere around 4 to 5 percent.
These factors combined with limited inventory are making it difficult for buyers to find the home they want at a price they can afford. However, if you’re thinking of buying, it is important to start looking sooner rather than later…
Mortgage Rates & Increasing Finance Accessibility
In February, mortgage rates remain near record lows. According to Freddie Mac’s Mortgage Survey, the average mortgage rate for a 30-yr FRM was just 3.65%. Despite tough market conditions, these rates present an excellent opportunity if you’re thinking of buying.
In a piece of good news for buyers, it should be easier to get financing in 2016. Fannie Mae’s fourth quarter 2015 Mortgage Lender Sentiment Survey™ shows that lenders expect to ease mortgage credit standards for GSE-eligible loans and government loans over the next three months, opening the door for more buyers to get financing.
If You’re Thinking of Buying, Act Sooner Rather Than Later
If you’re thinking of buying a home, it’s important to act sooner rather than later. As the year goes on, affordability will continue to suffer. With home prices expected to increased around 4 to 5 percent this year and mortgage rates expected to rise to around 4.5 percent, the longer you wait to buy, the less home you’ll be able to afford. Even small increases in mortgage rates and home prices can have a large impact on your future monthly mortgage payment!
What is Home Equity?
