Blog :: 11-2018

What is leverage in real estate, and how do I use it?

Defined, “leverage” is the “borrowed capital for (an investment), expecting the profits made to be greater than the interest payable”. So, what is leverage in real estate? Essentially, leverage in real estate is the loan used to buy property, and the amount of potential profit earned during ownership. The amount of leverage you have in real estate depends on several factors: how much cash you’ve invested in the property (think down payment or repair costs), the amount of the loan and interest rate, and the appreciation in property value (the more appreciation, the more your investment is worth and the more profit you will gain from selling it).

In other words, someone that invests a small amount of money in a property and has more liquid assets to invest in something else generally has more leverage than someone who invests a large amount of money and cannot invest in anything else (their entire investment would be in one place, in this case, the property they purchased). Additionally, if both people have equal amounts of liquid assets available for the purchase of real property, the person with the smaller cash investment would see a greater percentage return on that investment.

As an example, take a piece of real estate that will sell for $100,000. Investor A could pay all cash and investor B could put 20% down (or $20,000) and take out a loan for the remaining 80% (or $80,000). If we assume the house appreciates by 10%, investor A (the all cash buyer) would have made a profit on their initial investment of 10% ($10,000 profit divided by $100,000 initial investment). Conversely, investor B (the buyer who used leverage) would have had a 50% gain on their original investment ($10,000 profit divided by $20,000 initial investment). Additionally, investor A would now have $80,000 less cash to invest than investor B because he has $80,000 more cash tied up in this property.

(Scroll down for risks in using leverage)

Leverage works great in an up market, as in the example above; however, it can be risky in a down market. Taking the same example above, if there were a downturn in the housing market and a 10% decline in the home value, the all cash investor has lost 10% of their initial investment, while the leveraged buyer has lost 50% of their initial investment.

As such, it is wiser and more advantageous to use leverage in the real estate market over a sustained period of time (generally five or more years) because historically, real estate has been shown to increase in value over the long-term. It is much riskier to use leverage over a short-term period of time because the market is much less predictable from year to year, than from decade to decade.

Have more questions? Contact us! We're always happy to help you fully understand your options.

 

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Open House Update :: November 11

Join us this weekend in Piedmont for an open house at this NEW LISTING: a beautiful and highly energy efficient home!

7418 N Williams Ave, Portland (map/directions)
Listed at $450k
Open House: Sunday, 11/11, 1 - 3p

A beautiful 3-bedroom, 2.1-bathroom home in NE Portland's Piedmont neighborhood, near parks, restaurants, and shops. This home lives bright and airy thanks to an open living room/dining area, warm fireplace, beautiful kitchen, & powder bathroom on the main floor. Upstairs there's plenty of room for visiting guests thanks to two well-sized bedrooms and a full guest bathroom. Create your own master bedroom sanctuary with its own bathroom including a dual vanity and walk-in closet. The deck and fully fenced backyard is a perfect spot to enjoy warmer mornings with a cup of coffee - or to build a snowman in the winter. Listed by: Claire Paris of PGR

Look forward to seeing you this weekend! Can't make it to an open house? Give us a call to schedule a viewing ASAP at 503-998-4878.

 

Follow our Facebook events page, or visit our Instagram or Twitter feeds to see the most current open house updates and details.

Join us on Tuesdays at 1p for our "Dear Claire" Facebook Live series. Subscribe to our YouTube channel today to help us reach our goal of 100 subscribers.

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Is it cheaper to remodel my home or move to a new home?

A lot of factors can affect a decision of whether to remodel your home or buy a new (or already-renovated) home. What is the most cost-effective option to upgrade your house? How difficult is it to get a home equity line of credit? How difficult will it be to sell my house? Can I afford a new house?

The thought of moving into a new house may seem overwhelming, but in most cases, moving into a new house is easier and more cost-effective than remodeling your home. There are several different reasons for this, the biggest being that mortgage loans tend to be easier to qualify for and are usually at a lower, fixed rate than home equity lines of credit.

Home equity lines of credit tend to be higher and at a variable rate, similar to a credit card. So, unless you have a substantial cash savings to pull from, a major renovation or remodeling home project (such as a bathroom or kitchen) may not be a great option for you. In these instances, buying a new home that already has the upgrades you are looking for is probably smarter.

To find out what types of loans and interest rates that you may qualify for, it’s best to contact your local lender or credit union. They’ll be able to help you understand your loan options, and what you may qualify for, including home equity lines of credit, should you choose to go that route.

For those who have enough cash savings to cover remodeling costs, it’s best to compare the out of pocket costs verses potential home value increase. To do this, answer the following questions as accurately as possible:

(scroll below for 3 questions to ask before you renovate)

  1. How much money will my renovation cost? This includes contractor time, labor, and materials. It’s best to get estimates from at least two or three contractors who are licensed and bonded, and who have a good reputation in the community. Be sure to tell the contractor exactly what type of materials you’d like to use in your renovation (i.e. quartz counters vs. granite counters, type of wood and style of cabinetry, carpeting vs. laminate vs. wood floors, etc.) so they can estimate material costs more accurately.
  2. How much value will this renovation add to my home? The best way to find out the potential added value now verses after remodeling is to consult an experienced real estate expert who is familiar with your area or neighborhood. A Realtor can help you find out what your current home value is, and what your home may be worth after the renovations have been completed.
  3. Given this information, is remodeling my home the best investment of my cash? If the renovation cost is higher than the potential increase in home value, then it’s probably better to move than to remodel. If, on the other hand, the renovation will add a significant amount of value to your house that outweighs the cost of the remodel, then it’s probably better to renovate.

Have more questions? Contact us! We're always happy to help you fully understand your options.

 

Follow our Facebook events page, or visit our Instagram or Twitter feeds to see the most current open house updates and details.

Join us on Tuesdays at 1pm PST for our "Dear Claire" Facebook Live series. Subscribe to our YouTube channel today to help us reach our goal of 100 subscribers.

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How to Remove a Name From a Mortgage or Deed

We get a lot of questions about how to remove someone from a mortgage and/or deed, and if it's possible to do so without refinancing or selling your home. First, let’s go over the difference between your liability on a mortgage vs. your liability on a deed. 

When you finance your home mortgage jointly with another person, the lender is accounting for both of your assets, liabilities, and income. Your risk as borrowers is also looked at jointly, and your future liability on the home loan is equal. If, at some point, you want to remove one person from the mortgage loan (this commonly happens in divorce or breakup situations), the other person would have to re-qualify for the loan separately. In order to do this, you would have to either refinance (change the terms of your mortgage loan, including who is liable to pay the loan back), or sell your home and remove both parties’ liability to pay the loan back. 

(Scroll down for how to remove a name from a deed)

A deed, on the other hand, is vastly different from a mortgage. A deed is not a loan liability, but rather proof of ownership and legal right to property. To remove someone from a deed, there are two ways to do this (other than refinancing or selling your home): by mutual agreement, or by legal recourse. If either of these scenarios applies, then you can remove someone from a deed by going through a title company and re-recording the deed with the county in one party’s name.

Keep in mind, however, that removing someone from a deed will not remove that person’s liability to pay the mortgage back if that person is also on the loan. If the person being removed from the deed is not on the loan, then it would make sense to remove that party from the deed as well. However, if that person is also on the mortgage loan, it would not make sense to remove that party from the deed alone, as it does not remove the liability of paying the loan back; the loan liability would remain, but the person removed from the deed would no longer have a legal right to the property. 

So, in short, you can remove someone from a deed if all parties agree, or if it’s been legally mandated, without refinancing your mortgage or selling your home. However, you cannot remove someone from a mortgage loan without refinancing or selling.

Have more questions? Contact us! We're always happy to help you fully understand your options.

 

Follow our Facebook events page, or visit our Instagram or Twitter feeds to see the most current open house updates and details.

Join us on Tuesdays at 1p for our "Dear Claire" Facebook Live series. Subscribe to our YouTube channel today to help us reach our goal of 100 subscribers.

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Open House Update :: November 3

Join us this weekend in Piedmont for an open house at this NEW LISTING: a beautiful and highly energy efficient home!

7418 N Williams Ave, Portland (map/directions)
Listed at $450k
Open House: Saturday, 11/3, 1 - 3p

A beautiful 3-bedroom, 2.1-bathroom home in NE Portland's Piedmont neighborhood, near parks, restaurants, and shops. This home lives bright and airy thanks to an open living room/dining area, warm fireplace, beautiful kitchen, & powder bathroom on the main floor. Upstairs there's plenty of room for visiting guests thanks to two well-sized bedrooms and a full guest bathroom. Create your own master bedroom sanctuary with its own bathroom including a dual vanity and walk-in closet. The deck and fully fenced backyard is a perfect spot to enjoy warmer mornings with a cup of coffee - or to build a snowman in the winter. Listed by: Claire Paris of PGR

Look forward to seeing you this weekend! Can't make it to an open house? Give us a call to schedule a viewing ASAP at 503-998-4878.

 

Follow our Facebook events page, or visit our Instagram or Twitter feeds to see the most current open house updates and details.

Join us on Tuesdays at 1p for our "Dear Claire" Facebook Live series. Subscribe to our YouTube channel today to help us reach our goal of 100 subscribers.

facebook // instagram // pinterest // twitter // youtube