Blog :: 2019

Does rental income count towards our own income?

 

 

Your teachers always said that if you have a question, you should ask because. You’re probably not the only one with the same question. Well, I have a feeling that holds true even when we’re out of school. Here’s a real question asked by a real buyer:

 

Question:

If we’re buying a multi-family rental that we plan on living in, can we count the rental income toward our own income?

Answer:

Yup.

 

Most lenders will count at least some of the rental income from a rental property toward a buyer’s income. One lender I spoke with in person recently told me that they can count 75% of the rent toward a buyer’s income. Even if you don’t have landlord experience. Even if your income comes from 1099 income.

 

It’s best if there is a lease in place, so you can show the lender exactly what the tenant is supposed to be paying. But if there isn’t (yeah, I asked!), then a lender will have a market rent analysis completed as part of the appraisal.

 

If you can show that the other half of a duplex is renting for $900, with a lease or rental analysis, then you can count $675 per month as income for you, for qualifying (that’s $8100 annually). But with no lease, an appraiser would have to confirm what market rent would be for a similar unit. Presumably that would be around $900.

 

Why not 100%? Because we don’t live in a fantasy land, is basically why. That 25% cushion accounts for unexpected maintenance, capital expenditures, and vacancy (incidentally, when I run numbers for investors looking to buy multi-family in Montpelier and Barre, I use a 25%-30% cushion when calculating cash flow, the difference is whether I feel confident that the condition and layout will lower my vacancy to 0%-5%, or whether it’s more realistic to use 5%-10% for vacancy).

 

Even a few hundred dollars each month can make a difference in the ability for someone to buy a rental property in Montpelier or Barre. An owner-occupant can get an FHA loan on a 1-4 unit, and get in with as little as 3.5% as a downpayment. But, as of this writing, the FHA only allows the ratio of housing payments to gross income to be up to 31%. 

 

Which means that the extra $675 monthly that counts toward your income could increase your purchase power by $26,000. If you were approved for $150,000 for a single family home, you’d likely be approved for $176,000 for a duplex where you live in one unit and rent the other for $900 each month.

 

Different banks handle things differently, so make sure to ask your lender what their policy is on handling rental income. Also, loan decisions can be property specific. A straight side by side duplex might be treated differently than a large Victorian with a small accessory unit on the third floor. You’ve just got to ask about them.  And if you don’t get the answers you want, call a different lender. Or call us at 802-225-6425 and let us connect you to a lender who can help you.

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    May Market Report

    May Market Report

     

    Photography by Ted Dawson

      Active Under Contract Average Sale Price (last 12 mos) # of Closings last 12 mos Average Days on Market
    Barre City

    42

    21 $137,215 88 79
    Barre Town 29 13
     

    $205,046

    89 62
    Montpelier 15 15 $263,376 72 69
    U32 37 12 $238,587 83 119
    Northfield/Williamstown 31 11 $212,905 78 67


     

      New Listings April 2019 Sales/12 Absorption Rate (# mos of inventory)
    Barre City 16 7.33 5.73
    Barre Town 6 7.42 3.91
    Montpelier 8 6.00 2.50
    U32 11 6.92 5.35
    Northfield/Williamstown 10 6.50 4.77


    Buyers are out there ready to buy, and it would be just lovely if there were a few more homes for sale. Especially in Barre Town and Montpelier. With just 2.5 months of inventory in Montpelier, and under four months of supply in Barre Town, those two are very clearly “sellers’ markets”.

     

    Experts use six months of inventory as the threshold between a buyers’ market and a sellers’ market, which puts all of the Central Vermont markets solidly as sellers’ markets.

     

    Buyers are being successful when they make solid offers, and when they have realistic expectations about inspection items. Even in this market, sellers need to price their homes correctly and be realistic about their home’s condition.

     

    Are you in the market to buy or sell? Get in touch! Call us at (802) 225-6425

     

     

    Should I buy or should I rent?

    Should I buy or should I rent?

     

     

     

    Ah yes, the time honored question. Should I buy or should I rent? If only it were that easy. A lot goes into that question, and a lot of it is long term, down the pike kinda thought.

     

    But some of it is right in front of you.

     

    The first question is...do you want to own a house or be a tenant? When you own, you have a type of freedom that renters don’t have. You can get a dog and paint the walls. You can plant your own garden and pick whatever type of towel rack you want. You can invest in energy efficient improvements and even change the layout. The list goes on and on. These are all choices that you get to make when you own.

     

    Independence and Security

    Many people report a sense of independence when they own. Especially, those who are first time buyers. Your entire life, you have had to ask if it’s ok to do something with your living space. That changes when you own. You don’t have to ask anyone (but if you live with at least one other person, it’s probably a good idea to at least talk about what’s happening with your house.)

     

    Additionally, many renters feel a greater sense of security when they buy a house. A landlord can choose to raise rent, undergo renovations, or even sell the property. And there’s that a tenant can do about it, so long as the landlord is following the terms of the lease.

     

    Sure, it can seem as if your landlord loves you. Maybe you even have a slightly below market rent because you’ve been there so long and you have a great relationship. But at the end of the day, as soon as the landlord decides to sell, you may be looking at finding a new place to live. 

     

    As long as you pay your mortgage and taxes, when you own real estate you can stay there as long as you want.

     

    Monthly Expenses

    Which brings me to what I know you’re really reading this for. Does it make sense financially to buy a house, or is it better to rent?

     

    Over time, financially, it almost always makes better financial sense to own than to rent. There are a few reasons for that.

     

    Rent Check Vs. Mortgage Check

    One is that if you have a fixed rate mortgage, your monthly payments will only go up as property taxes and insurance go up. In Vermont, that means that if your town votes to increase the budget, your tax bill is going to go up. So, if your property taxes went up $350, then you’d have to pay an extra $30 each month.

     

    Many landlords increase by 2% to 3% (or more) each year anyway. But what happens if your landlord realizes that they could charge 10% more and still keep tenants? Your $1000 monthly rent just went up by $100. And what are you going to do about it? Well, you’re either going to pay it, or you’re going to move out. 

     

    And guess what? If the place your renting should really be renting for could fetch $1100, then you’re going to have to pay that somewhere else. Either that, or you’re going to move to a place that’s not as nice, or not as desirable a location for you.

     

    But when you own, no one’s going to unexpectedly jack the rent on you.

     

    Maintenance, Repairs, Utilities

    I’ll admit, one of the most awesome things about renting is that you’re not responsible for most repairs and maintenance, or for some utilities. It’s kind of nice to have someone else cover that for you.

     

    But, ready for a dirty little secret? Most maintenance isn’t really that hard. And you can usually plan for the big things that come up (See blog post: How long do things last, and how much do they cost?)

     

    You can learn to fix a toilet, change an outlet, repair handrails, and all sorts of light carpentry. And honestly, if you really don’t want to, you don’t have to. You can hire someone to bang those things out. There aren’t too many things in a house that really need to be repaired at three in the morning. (See blog post: repairs that you have to make at three in the morning, and how to avoid having to do them by planning ahead)

     

    Get the furnace checked, pump the septic tank, keep an eye on the roof, hit peeling paint when it comes up. Those are normal maintenance items that you get to perform. And in return, you get...

     

    Appreciation

    Yeah, this is the fun part. You bought your house, and you’ve kept it up. Home values go up and down in cycles, but over the long term, residential real estate has appreciated at around 3% annually. Which means if you just kind of keep your house in decent shape, your $200,000 house is likely to be worth around $268,000 in ten years. So, in appreciation alone, you’d have an additional $68,000 in net worth.

     

    If, instead, you had rented for those ten years, your real estate net worth would still be, hmmm, let’s do the math here...zero.

     

    And yes, I know that you could have taken the difference in monthly payment, maintenance, repairs, etc. and put it in a savings account or invested in a mutual fund. But would you? Really? Really??

     

    Mortgage Pay Down

    You would also be paying down your mortgage each month. At first, just a teensy part goes to paying down principal, but those decreases add up. In those ten years, your original $200,000 mortgage would be down to $162,000 (assuming a 30 year loan at 5% interest). 

     

    Which means you just tacked on another $38,000 in net worth.

     

    Which also means that in ten years, your net worth increased by over $100,000. While it’s not all about money and net worth, all things equal, most people would prefer to have an extra $100,000.

     

    Summary

    If you can, it almost always makes financial sense to buy instead of renting. You get independence and security. You can account for the hassle of ownership by following a regular maintenance and repair schedule, or hiring someone to do it for you. Over time, market appreciation and mortgage pay down will add to your net worth.

    5 Ways to Prepare for your Home Sale

    5 Ways to Prepare for your Home Sale

    (all under $1000!)

     

     

    If you’ve got a year or two before you’re selling your house in Vermont, then go ahead and tackle some bigger projects. Update the countertops, redo the old carpeting, paint the exterior, etc. But for this post, we’re talking about things that you can do pretty quickly, and for not a whole lot of money. 

    (Author’s note: This was written to people selling houses. But items 2-5 apply to homeowners as well, and you’ve probably already done the first item. These will help you enjoy your home, keep it ready for resale, and allow you to look past some relatively inexpensive cures when buying your home in Vermont.)

     

    The truth is that it almost always costs a little money to get your house in top form for a quick, best -sale (bonus: these tips will help your escrow close more smoothly, meaning less stress, less uncertainty, and less “yuck” factor.)

     

    1. Get a professional home inspection, including a radon test, (and, if you’re on well and/or septic), get the water tested and the septic tank pumped and inspected. Who knows what you’ll find on that report. Maybe nothing. Maybe your house is like one of those people who exercises all the time, has great genes, and eats a plant-based diet. Kind of annoyingly perfect.

     

    If that’s the case, then we’d have documentation from a third party to back that up. Sometimes the report itself is enough to give a buyer peace of mind.

     

    But more often, things will come up. Usually little things. Usually things that if you really think about it you might have thought needed to be addressed anyway. Then, here’s the fun part, you just get those things fixed and updated. It’s as easy as that!

     

    2. Clean the H out of your house. I mean EVERYTHING. Dust the baseboards, clean the oven (there’s a button for that on the oven, so that’s not really that hard…), get rid of the cobwebs in the basement, mop the floors. Everything. And then keep it spotless. 

     

    If you’re like many people, cleaning your house isn’t your favorite thing. Hire a cleaner. Simply getting some help once a week or every couple of weeks will make a humongous difference. Between cleanings, it’ll be a lot easier to spot clean or pick things up before showings

     

    Plus, you’ll probably really like not having to wipe down a bathtub. And your house will look awesome.

     

    3. Paint the interior. Ok, maybe you don’t need to paint every room. But if it’s been two or three years since a room or hallway has been painted, just do it. It’s stunning the difference that a coat of paint (yes, it may take only one coat, if you’re not changing colors) makes.

     

    Painting is one of those homeowner skills that seems easy. Be honest with yourself. If you stink at painting, or your edges look like the silhouette of a mountain range (you know who you are!), get a professional. True, that’ll cost more than $1000, but it’s worth it.

     

    And on paint...color trends change over time. Light is always a good choice. White is always a good choice. Stay away from the dark greens and dark reds that were popular in the 1990s and early 2000s. And please stay away from pastels. If white walls are boring to you, pick one wall in a room as an accent with a more fun color. But, honestly, you can liven up a room with a colorful print or painting just as easily, and you’ll be much less likely to hear a buyer say, “I just don’t know about that color!”

     

    4. Update your lighting. Again, fashions and styles change. If it’s been 10 years since you have changed light fixtures, you now have permission to change them. This isn’t the place to be super cheap (says a guy who’s been called cheap before. ) Yes, I know you can buy a $10 ceiling fixture from a hardware store. But don’t. I mean, if that’s truly all your budget allows, then do it. You’ll be able to find stylish fixtures for $40-$50, or more.

     

    As an exception--if your house is older and has older (but cool) lights, keep them. Here I’m talking the 1930 Craftsman lights or period wall sconces.

     

    Chrome and brushed nickel are popular now. Rubbed bronze, brass, and gold look dated. Track lighting works, but not the ones from 1980. Your Green Light Real Estate agent can give you honest advice on what looks good and what needs updating. We also work with interior designers and stagers whose ideas and visions will blow you away! 

     

    And while you’re at it, spend another $100 and replace any switches, outlets, and cover plates that are old or dirty. Plain white ones from the hardware store work just fine here.

     

    5. Tie up any loose ends around your house. Just about everyone has a list in their head containing repair or updates they’ve always wanted to do, or projects that need to be finished. NOW is the time to do that. 

     

    That might mean hiring a contractor or a handy person. Maybe you took the project as far as you could go, and then realized you were a tiny bit in over your head. (I’m looking at you, baseboards that didn’t get coped, but instead only butt jointed). 

     

    Common things to fix include loose caulk, cracked tiles, dangling wires, stains on carpet, unpainted patch jobs, etc. Usually these are little things. But we’re all busy. While it might take a contractor a couple hours to finish, it might take you a full day. Which means Saturday. Which means you miss a day with your family or hanging with your friends. Which feels REALLY expensive. 

     

    So, commit to doing it, or commit to getting someone to do it. Either way, that “to do list” needs to get done.

     

    Taking on these five relatively inexpensive repairs and improvements will reap huge rewards when you sell your home in Vermont. Routinely, we see that homes with few inspection concerns, updated lighting and paint, no deferred-maintenance, and that are super clean sell faster. They sell for higher prices. And they are much more of a “sure thing” when they get into contract. 

     

    For more information or, for a personalized pre-selling walk through with a real estate professional, call, text, or email Green Light Real Estate, right here in Montpelier.