What happens when you break a lease?

You need to move before your lease is up. The idea itself may make you break out in a cold sweat. You’ve always heard that it is a terrible idea to break a lease, but why?

Is it expensive? Does it affect your credit? What if you have a good reason?

Don’t want to lease anymore? See how much homes for sale in your area by signing up for Zumbly.

Keep reading to find out all about what happens when you break a lease. The consequences might not be as dire as you first thought.

Related: Best Real Estate Tech Startups

How Do Leases Work?

a sign that says rent

Leases can be long-term or short-term. Year-long and 6-month leases are common, but some can run for several years and others can be month-to-month. Sometimes a lease will start out for a year and then turn into month-to-month at the end of that year.

Even if the lease is month-to-month, your landlord will still require notice when you want to move. Usually, you have to alert them at least 30 days before your next payment is due. In other words, you usually can’t give notice for partial months.

What happens if you need to leave your lease early? This will depend on the terms of your lease.

Make Sure You Read the Lease

First up is to find out what your lease says. There are general guidelines that most leases follow, but they are not all exactly the same.

To find out what happens when you break your lease, look for the “lease termination” or “early release” section. Some leases may state this is not possible, but even so, you may have options.

Related: House Hacking: Live for free with an Airbnb Investment Property

Potential Consequences of Breaking a Lease

With prices going up leasing can get very expensive. Here’s an infographic showing renting prices skyrocketing.

Source: Apartment List

Let’s look at some common consequences that you could face for breaking a lease early.

Fines

Most commonly, breaking a lease will cost you money. When you break a lease, the landlord loses money, so most contracts are set up so that you take the financial hit rather than them.

Some leases contain a set fee you have to pay to break the lease. In many cases, this fee is quite expensive to deter you from breaking it. Plus, the fee makes it worth it for the landlord if you decide to break your lease anyway. The fee you pay will cover their expenses to find a new tenant and make up for any lost income.

In other cases, you may have to agree to continue to pay rent until a new tenant is found. The landlord is also obligated to make a reasonable attempt to find a new tenant, but it could still take a month or two, or even longer.

A Lawsuit

By breaking a lease, you’re breaking a legal contract. This means that the landlord has the right to bring a lawsuit against you if you don’t handle things well.

Most of the time, this doesn’t happen, especially if you’ve been a good tenant. Your landlord typically won’t want to waste time in court any more than you do.

The best way to ensure that this doesn’t happen is to abide by your contract and follow whatever the landlord is willing to agree to allow you to do.

Sick of leasing? See how much homes for sale in your area go for on Airbnb by signing up for Zumbly.

Trouble Renting Anew

Many landlords will call up your previous landlords to get an idea of your track record. Discovering that you’ve broken a lease makes them wary of renting to you. They don’t want you to do the same thing to them.

This is where good communication with your landlord can make a difference. Explain your situation. Get on their good side. Then when a potential new landlord calls up, they’ll have only good things to say about you.

A Credit Hit

It’s also possible that your credit score could take a hit if you break your lease. However, this usually happens in cases where the tenant doesn’t pay the required fees. Then those fees become an unpaid debt that can be sent to collections and appears on your report.

Don’t want to lease anymore? See how much homes for sale in your area go for on Airbnb by signing up for Zumbly.

Break a Lease with No Consequences

a plate breaking

There are a few instances when you can break a lease and not be held responsible in the eyes of the law. These include:

Active Military Members

All states have laws that allow tenants to get out of their lease if they enter military service or are deployed before the lease ends. As soon as the tenant receives word of their deployment, they are to give notice to the landlord along with a copy of the orders.

Month-to-month leases then end 30 days after the next rent payment is due. Longer leases end on the last day of the month after the month in which you give notice. For example, if you give notice on April 14th, your lease will end on the last day of May.

Domestic Violence Victim

Not all states recognize being a domestic violence victim as a legal reason to break your lease, but many do. You usually have to provide at least 30 days’ notice and something that proves you’ve been a victim of domestic violence within the last 3 to 6 months. A protective order or something of the like will do.

Breach of Quiet Enjoyment

Landlords have the duty to ensure that you have a peaceful, safe place to live, known as “quiet enjoyment.”

Many landlord behaviors can be considered breaching the tenant’s quiet enjoyment. These include:

  • Entering the premises without warning
  • Allowing illegal activity (or engaging in it) on the premises
  • Not addressing the poor or dangerous behavior of other tenants under the landlord’s control

Of course, what constitutes a breach of quiet enjoyment is subjective. For that reason, you shouldn’t just break your lease citing this as your reason. Consult with an attorney first to see if you genuinely have a case and learn how to proceed legally.

Constructive Eviction

The law also gives tenants the right to livable housing. In legal terms, this is called the implied warranty of habitability. Basically, the landlord is responsible for providing a decent place to live. Standards include:

  • A structurally sound building
  • Functioning electrical, plumbing, heating, and other systems
  • Addressing known environmental hazards (mold, asbestos, lead paint dust, etc.)
  • Addressing rodent or insect infestations

Though the list of what it covers differs, almost all states give tenants this implied warranty of habitability. Landlords cannot ask you to waive these rights or put anything in the lease contract negating any part of this. Even if they do, and you sign it, that piece of paper will not be legally recognized.

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If the landlord fails to fulfill this duty, they have in essence “evicted” you. They cannot force you to live in a subpar home. You can then break your lease and claim constructive eviction.

Again, don’t do this on a whim. Talk to an attorney first, not only do the laws differ from state to state, but the conditions for constructive eviction can also be subjective. For example, you cannot see one rat and claim that the unit is infested with rodents, and you must leave immediately.

Ask Nicely

Asking nicely isn’t a legally recognized method of getting out of your lease, but it can be effective and is worth the try. Particularly if you have been a good tenant, your landlord may be willing to work with you if you need to break your lease.

Conversely, if you’ve been a horrible tenant, your landlord might be thrilled to get rid of you, but let’s hope that’s not the case.

Leasing is cool and all, but buying a home is where it’s at. See how much homes for sale in your area go for on Airbnb by signing up for Zumbly.

How to Get on the Landlord’s Good Side

There are a few tricks you can use to get on your landlord’s good side and make them more willing to work with you. Let’s look at a few tips here.

Give Notice

As soon as you know that you need to move, notify your landlord. Giving them a couple of months’ notice is far more helpful than only a couple of weeks.

Pay for Advertising/Find a New Tenant

Additionally, you can offer to help fill your place. It’s not always easy to find a new tenant, and advertising is one of the costs the landlord can incur. Being proactive and taking that task off their plate will make them more willing to work with you.

Plus, remember that we mentioned you might have to pay rent until a new tenant is found? Offering to help find a new tenant ultimately is good for you too. Marketing your apartment will probably be far cheaper than paying rent for a couple of months or more.

Clean the Property

Give the property a deep clean and keep it picked up and clutter-free. It will be easier for the landlord to find a new tenant if they have a nice-looking property to show.

On top of that, be willing to allow the landlord to show the apartment while you’re still there. With luck, you can time your move-out date with a new tenant’s move-in date, and you won’t have to pay much extra.

Related: How much does it cost to build a house?

A Home of Your Own

Now you know what happens when you break a lease. At the very least, you’ll have to pay your landlord’s expenses for finding a new tenant. In other cases, you’ll have to pay the rent for the remainder of your contract.

Regardless, it is all money down the drain. In fact, renting is always money down the drain. You’re helping somebody else pay off their mortgage rather than working on paying off your own.

If you want to find a great home then sign up for Zumbly.

Renting is nice for when you know, you’ll be moving around a bit. But nothing beats having a home of your own. When it’s time to leave, you get to sell it and recoup some of those monthly expenses. With a rental, you’ll get your deposit back if you’re lucky. If you have to break your lease, you could be on the hook for a lot more money.

What is a Good Cap Rate for Rental Properties in 2020?

As a real estate investor, it’s important to know at all times if your investments are profitable. If you don’t, then you can quickly dig yourself a hole that could be extremely difficult or impossible to get out of.

While this can seem daunting, particularly if you’re new to real estate investing, it doesn’t have to be, and in this article we’ll be talking about how you can figure out the return on investment for your properties using the cap rate method.

Here at Zumbly, we know a thing or two about smart real estate investments. In this article we’ll be talking about how you can figure out the return on investment for your properties using the cap rate method.

Related: How much does it cost to build a house in 2020?

What is Cap Rate?

The cap rate, or capitalization rate, is a term used by real estate investors to indicate the rate of return that is expected to be generated on a real estate investment. This is based on the income which the property is estimated to generate for the investor.

Knowing your cap rate is vital because it helps you to see whether a property will generate a worthwhile return for the time and funds which you have invested in it. This number is displayed as a percentage, and it’s generally a reliable way of estimating your return on investment.

Determining the cap rate for rental properties is a great way for investors to compare different real estate investments. If there are two buildings on the market at completely different prices, it can be difficult to determine which constitutes the better investments.

A building that costs $600,000 is not necessarily a better investment than one that costs $700,000 just because its purchase price is lower.

Rather it is important to understand how much of a return on investment each building is likely to produce and comparing two cap rates can help an investor make this determination.

Cap rate can also be a good starting point for investors looking to break into the world of real estate.

The cap rate for rental properties is also a useful tool for evaluating a property’s profitability over time. If a property’s net operating income rises while its market value remains the same, its cap rate will rise.

For an investment property to remain profitable as time goes by, its net operating income must increase either at the same rate as its market value or at a greater rate.

The cap rate is a strong measure of whether a property is becoming more or less profitable.

Related: The Ultimate Beginner’s Guide On How To Find Investment Properties Using Zumbly

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How Do You Calculate Cap Rate?

There are a few different ways to calculate the cap rate for your investment property, but we’re going to talk about one of the most common and easiest formulas which you can use.

Cap rate = Net operating income / current market value

The “net operating income” is the expected annual income which will be generated by the property. So, for example, if you planned to purchase a property which would rent for $2,000 per month, then your net operating income would be $24,000, but you also need to take expenses into account.

This means you need to deduct anything required for the upkeep of the property such as insurance, taxes, property management fees, and estimated maintenance costs from this number.

While it can be tough to budget for everything, some people set aside 1% of the total property value for maintenance costs every year. Once you have your net operating income figured out, divide it by the current market value of the property to get your cap rate.

As an example of cap rate, let’s assume that you’re looking to buy a million dollar property, which you estimate will return you $70,000 per year.

$70,000 / $1 million = 7% cap rate

This formula is an easy way to compare similar investment opportunities, basically letting you know which all-cash purchase will yield a larger return for you. For example, if there are two pieces of property in the same neighborhood, look at their cap rate to decide which one makes more sense for you. 

Just remember, a cap rate isn’t the only indicator of a good or bad investment. Let’s say you buy a piece of property for $1 million, expecting to make $100,000 per year from renting it. This would give you a cap rate of 10%. That sounds great, but if the local housing market changes and the value of the property increases to $1.5 million, you would be left with a cap rate of 6.6%, which is significantly lower. 

In a situation like this, selling the property and collecting the immediate profits would be a better investment than renting it out in hopes of an ongoing profit. 

Of course, there are even more factors involved in a situation like this, including an increase in income levels or the expense levels going down. These also have a big part in how smart an investment is, not just cap rate. 

What’s an Income Level and How Does it Affect My Investment?

As we mentioned earlier, the income level of a property is another factor to consider when debating a real estate investment. So if you know the cap rate of properties in the area of your investment property, you can use that information to then determine the net income your property will need to generate for the investment to feel worth it. 

Find out for yourself by multiplying the property’s asking price by the cap rate of similar properties in the neighborhood. This will give you the recommended net income level. 

NET INCOME / ASKING PRICE = CAP RATE FOR NET INCOME

Here’s an example. If you bought a property for $400,000 in an area where most homes have an 8% cap rate, the recommended income level could be found by multiplying 400,000 by .08. This gives you $32,000. This means that the property would have to generate $32,000 per year to get an 8% cap rate. 

Unfortunately, rental rates cannot be set based on the cap rate. Instead, they must be based on market rates and other rentals in the area. So if you can only rent out the property for around $2,300 a month, that means you’d make a net profit of $27,600 before expenses. According to this equation, the property may not be worth investing in. 

Cap Rate Examples

Aerial view nice house with pool

Let’s assume you have $10,000,000 to invest and 10-year treasury bonds are yielding 3% annually. This means you could invest all $10,000,000 into treasuries, considered a very safe investment, and spend your days at the beach collecting checks.

But what if you were presented with an opportunity to sell your treasuries and instead invest in a class A office building with multiple tenants?

A quick way to evaluate this potential investment property relative to your safe treasury investment is to compare the cap rate.

Suppose the acquisition cap rate on the investment property was 5%. This means that the risk premium over the risk-free rate is 2%.

This 2% risk reflects all of the additional risk you assume over and above the risk-free treasuries, which takes into account factors such as:

  • Diversity of the tenants
  • Age of the property
  • Underlying economic fundamentals of the region including population growth, employment growth, and inventory of comparable on the market.

When you take all these items and break them out, it’s easy to see their relationship with the risk-free rate and the overall cap rate.

It is important to note that the actual percentage of each risk factor of a cap rate and ultimately the cap rate itself are subjective and depend on your own business judgment and experience.

Is cashing in your treasuries and investing in an office building at a 5% acquisition cap rate a good decision?

Well, it depends on how risk averse you are. An extra 2% yield on your investment may or may not be worth the additional risk inherent in the property.

Perhaps you’re able to secure favorable financing terms and using this leverage, you could increase your return from 5% to 8%. If you are a more aggressive investor, this might be appealing to you.

On the other hand, you might want the safety and security that treasuries provide, and a 3% yield is adequate compensation for this downside protection.

Related: House Hacking: Live for free with an Airbnb Investment Property

How Cap Rates Affect Interest Rates

One of the most complex and least intuitive parts of understanding cap rates is their relationship with interest rates.

Often in real estate, cap rates for rental properties may shift without any change to the actual property or surrounding area but only as a result of a change in interest rates.

That is because investing in real estate property is largely driven by the amount of debt that can be borrowed to purchase a property and resulting spread between the interest rate and the cap rate. The larger the spread, the better the potential return.

This makes sense if you think of the interest rate as the cost of money, and the cap rate as the value of that same money when invested in the property.

Artificially adjusted interest rates (such as those set by the Federal Reserve) can artificially impact cap rates.

Imagine a stabilized apartment building which was purchased for $10 million and generates $750,000 in NOI each year (7.5% Cap Rate.

The property was financed with $6million of debt at a 5.0% interest rate, which costs roughly $386,000 per year.

This would make the levered yield 9.1%

Now, imagine that a few years have passed. Nothing has changed about the deal, but the interest rate on a new loan with the exact same terms as the original has increased from 5.0% to 6.0%.

This would increase the cost of the debt service to roughly $430,000 per year. In order to achieve the same levered yield of 9.1%, a buyer would only be willing to pay $9,516,000 for the same property.

The property value has decreased by nearly $500,000 and the cap rate has increased from 7.50% to 7.88%, even though nothing changed about the property itself.

The implication for the cap rate increase is that the risk of the investment also increased, but in reality, this doesn’t seem like the case. After all, you’re still dealing with the same asset in the same market, all that changed was the interest rate.

Going back to the fundamentals of finance, you’ll recall that the return on any investment can be broken into two parts: the risk-free rate of return, which is usually defined as the rate of return on the US Treasury note, and the risk premium which is the extra money you’re getting paid to compensate you for the additional risk you’re taking on.

This principle holds true for asset values across the economy. If the risk-free rate of return increases, then the amount of money you would be willing to pay for an asset that generates an additional risk premium would decrease accordingly.

What is a Good Cap Rate for Rental Properties?

What is a good cap rate?

The short answer is that it depends on how you’re using the cap rate.

The concept of a “good” cap rate is more subjective than objective.

If for nothing else, capitalization rates have become synonymous with risk more than anything else. Therefore, in order to determine a good cap rate for rental properties, you must first identify how much risk you are comfortable exposing yourself to.

According to Entrepreneur, “Different cap rates represent different levels of risk.  Low cap rates imply lower risk, higher cap rates imply higher risk.” Therefore, you shouldn’t be asking yourself “what is a good capitalization rate,” but rather “what’s the right cap rate in proportion to the amount of risk you are willing to tolerate?”

An investment property cap rate may sound simple, but its implications are heavily weighted. After all, those that can accurately estimate a property’s cap rate stand a better chance at realizing success.

In the example given earlier, investing in a 10-year treasury bond would be a good fit for investors looking for a more stable, passive experience.

While investing in a class A building with multiple tenants is a good fit for the more entrepreneurial investors. The potential returns are bigger if everything goes well. But there’s also the potential for lower returns or even losses.

Generally speaking, to answer the question “what is a good cap rate:” a cap rate that falls between 4 percent and 12 percent is typical and considered to be a good cap rate. 

However, it does depend on the demand, the available inventory in the area and the specific type of property. What is a good cap rate can be subjective and various real estate investors with dissimilar investing strategies look at it differently.

For example, a 4 percent cap rate may be the norm in high-demand areas such as in and around large metropolitan areas and high-cost areas like Southern California and New York City.

In contrast, a lower-demand area like a rural neighborhood or an up-and-coming neighborhood that is in the process of gentrification, you may see a cap rate of 10 percent or higher.

Typically, buyers want a high cap rate, meaning the purchase price is relatively low in comparison to the NOI. However, a higher cap rate typically means more risk and a lower cap rate represents lower risk. A property with a high cap rate may be located in an area where there isn’t much opportunity for increasing the rent rates or where property appreciation isn’t on a scale with other areas. An investor needs to weigh the risks and determine an appropriate cap rate for their investment goals.

So, how do you know if your cap rate is good or not? Unfortunately, the answer to this question is debatable, but most people look to have a cap rate that is somewhere between 4% and 12%.

While you might be tempted to call it a day if your investment falls within the “acceptable” cap rate range, there is a bit more to it than that, unfortunately. There are actually a number of factors which might cause you to pump the breaks on an investment, even if the cap rate is arguably decent.

It also depends how you are using a cap rate. While when you’re looking to invest in property, you want the home to have a higher cap rate, meaning your initial investment will be lower. If you’re looking to sell, you want a lower cap rate, meaning the value of your property will be higher.

Related: 10 Best Real Estate Investor Websites in 2019

What Impacts the Cap Rate?

Not all properties are created equal, and there are some other factors that could impact your cap rate assessment. Here’s a short list of some things to look out for if your calculated cap rate is too good to be true.

Asset Type Impacts Cap Rate

What kind of property are you investing in? A commercial property would likely warrant a much larger cap rate, because if the economy tanks you could be sitting on a sizable amount of debt with no one to rent your space.

A residential property would likely be a safer bet because people always need housing. A slightly lower cap rate may be acceptable here if the property shows potential.

Location Impacts Cap Rate

Location is everything in real estate. So, before you decide a property is a great deal because of its cap rate you should evaluate where it is located. How difficult will it be to rent this property consistently? Are there enough jobs here to support a healthy rental economy?

Here are some cities in the United States with the highest cap rates, ensuring they are safe investments for 2020. 

Pittsburgh, PA

Traditional Cap Rate: 3.4%

Median Property Price: $280,800

Traditional Rental Income: $1,240

Price to Rent Ratio: 16

Cathedral City, CA

Traditional Cap Rate: 3.2%

Median Property Price: $342,000

Traditional Rental Income: $1,920

Price to Rent Ratio: 15

Detroit, MI

Traditional Cap Rate: 2.9%

Median Property Price: $168,700

Traditional Rental Income: $1,030

Price to Rent Ratio: 14

Palm Springs, CA

Traditional Cap Rate: 2.9%

Median Property Price: $610,000

Traditional Rental Income: $2,940

Price to Rent Ratio: 17

Baltimore, MD

Traditional Cap Rate: 2.9%

Median Property Price: $250,500

Traditional Rental Income: $1,540

Price to Rent Ratio: 14

Your Rental Strategy Impacts Cap Rate

What kind of rental is this? If you’re purchasing the property as a high dollar vacation rental, then your average rent will be much higher, but you might also pay more in maintenance costs than you would with a long term rental.

You should also make sure to factor in that your rental could end up sitting empty in the offseason, even if it’s in an otherwise attractive location, lowering your annual income.

Supply and Demand Impacts Cap Rate

Have you checked how many other properties are for rent in the area you plan to invest in? While your chosen rental may look like a great deal, it might not actually be if there are too many other properties to compete with.

Other landlords will continually drop their prices to stay competitive, and you could end up with either an empty property or one that is rented far beneath what you thought you were going to actually get for it. Buyer beware.

Related: House Hacking Real Estate with an Airbnb Investment Property

Why are Cap Rates Important?

Cap rates are important for making sure that you aren’t taking on debt for an asset that won’t be able to pay for itself. It’s easy to get fooled into thinking that you’ve picked up a great deal, but there could be a very good reason that the property has been on the market for a year with no takers.

Using the cap rate method also allows you to easily compare properties to each other. If you’ve been eyeing more than one rental for your portfolio, then the cap rate could be the deciding factor that helps you see which properties earn more money for you.

If you’re purchasing properties with financing, then the cap rate is also valuable for determining how long it will take you to own the property free and clear.

In closing, the cap rate formula is a great tool for real estate investors that’s both easy to use and useful for seeing the bigger picture. You owe it to yourself to take advantage of every tool you have to make sure that your investments are successful. Don’t ignore cap rates or you may quickly come to regret your new “asset”.

Click here to find out how Zumbly can help you find the perfect rental property, perfect cap rate and all.

Related: How Does Rent to Own Work in 2019?

How to Make an Offer when Buying a House

Finding the home of your dreams is very exciting. However, in today’s seller’s market, it can be very challenging to make an offer that sticks.

Homes are moving very quickly, and many areas are seeing multiple offers on attractive homes. How do you make a strong offer on a home, and how do you make your offer stand out from others?

Fortunately, there are several strategies you can employ. Here’s what you need to know about how to make an offer on a house.

Related: How Much Does It Cost To Build A House In 2019?

Be Sure You’re Financially Pre-Approved

Any home seller will want to know that the offer you’re making has real money to back it up. Perhaps you have a full-cash offer – if so, that’s great!

If you don’t, though, you want the seller to know that you’re in good financial shape and are highly likely to be approved for a mortgage. The best way to do that is to provide your pre-approval letter or make sure your offer states you have one.

Getting pre-approved takes some time, so it should be done before you begin looking for homes. The lender will need to look at your credit history and receive proof of your income and other financial details.

Once you’re pre-approved, you’ll receive a letter letting you know the mortgage you’re likely to get. The letter is good for 60-90 days.

Related: Mezzanine Loans – Everything you need to know.

Move Quickly

In most markets, you don’t have time to wait and decide on an offer after you’ve seen a few more homes. The real estate market has fewer homes available than buyers who want to purchase, so you have to act quickly once you find a home you love.

Many properties receive offers on the very first day they’re listed, so be sure your buyer’s agent is on top of the listing market and shows you homes right away. If you can see yourself living there, make an offer immediately.

There are a few markets that are buyer’s markets, such as Las Vegas, NV or Portland, OR. If you’re in one of those markets, you may have more time to think about your decision.

Decide What Price to Offer

Working with an experienced buyer’s agent is a great way to get proper advice on the offer price. Perhaps you want to offer the asking price, or maybe your agent thinks the price is high and that you might get a lower number approved.

There’s a chance your agent will recommend you come in above the asking price if your market is particularly competitive. Of course, sellers are likely to choose the highest available offer, although sometimes other factors come into play.

If you know something about the seller’s situation, you can take that into account as well. Are they super motivated to sell, or do they have plenty of time? That can affect your offer.

Related: What is a Good Cap Rate for Rental Properties in 2019?

Decide on Contingencies

Contingencies in your offer protect you by allowing you to back out of the sale if something goes wrong. One of the most common is an inspection contingency, where the seller is required to give you time to hire a home inspector. If the home inspector finds problems that are more than you want to deal with, you can walk away from the sale free and clear.

Having an inspection contingency is an important protection, but you may want to include others as well. Talk to your realtor to determine what makes the most sense for a home in your market.

Of course, a seller will favor an offer with fewer contingencies, but don’t skip them without giving it a lot of thought. You could easily end up with a problematic home you can’t get out from under.

Related: House Hacking: Live for free with an Airbnb Investment Property.

Put in the Written Offer

Once you’ve decided to make an offer and what price you want to use, it’s time to submit a written offer. Remember that the offer is a legally binding document, so you should be sure of the price and conditions you’ve set.

The offer will have a variety of details, including the price, contingencies, and the amount of earnest money you’re offering. The earnest money is a good-faith deposit that helps show you’re serious about the sale.

The seller will keep the earnest money if you violate the sales contract, but if all goes well, it will be applied toward the price of the home.

Related: How Much Does It Cost To Build A House In 2019?

Include a Letter With Your Offer

If you’re in a competitive market, you may want to use a letter to give some personal information about you and why you’re interested in the home.

Share why you’re in love with the house, and talk about how much you’d enjoy living there. You can also share other information that might sway the seller in your favor. For instance, if you have a larger-than-usual down payment, that can encourage the seller to choose your offer since the mortgage is less of a concern.

The goal is to show your personality, how much you care for the property, and to point out how well qualified you are to buy the home.

Be Ready for a Counter Offer and Negotiation

Sometimes the seller will accept your offer as it stands, and other times they will reject it in favor of another offer. Those are the two outcomes most home buyers are ready for.

But what if they counteroffer? Sometimes this catches buyers off guard, and they aren’t sure how to respond. Your agent should be able to give you some great tips about how to answer a counter offer.

One of the keys is to know what the seller wants most from the deal. Are they looking for speed? Maybe you can shorten the time-frame for closing to avoid paying more.

Are they interested in certainty? Remind them that you’re pre-approved and offer to increase the earnest money rather than the price.

Once you work your way through the counteroffer and negotiation, you’ll hopefully end up with an accepted offer.

Are you looking for a house that’s really worth what you are paying for, and even more? Whether you’re a first time homebuyer, a traditional real estate investor, or looking for a home to put on AirBnB as a side hustle, Zumbly’s algorithm has got your back.

Buy smarter with Zumbly today.

Related: The Ultimate Beginner’s Guide On How To Find Investment Properties Using Zumbly.

Video: The Zumbly Difference.

Mezzanine Loans – Everything you need to know

While a Mezzanine loan is much more complex than the standard types of funding, in some cases, it can be quite useful. If you run a business, real estate related or otherwise, then you should make sure that you at least understand all of the options available to you, and while you may not opt to go for Mezzanine funding, you should still have a basic understanding of it.

So, in this article, we’ll be talking about Mezzanine loans. We’ll explain what they are, how they’re structured, and we’ll talk about the benefits of this funding type. This should give you a good understanding of the process and allow you to decide whether a Mezzanine loan is right for you.

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What is a Mezzanine loan?

You are likely already familiar with debt and equity financing, but you may be less familiar with Mezzanine financing, which lands somewhere in the middle. This confusing, yet useful funding option can provide you flexible financing without losing your equity.

While debt financing, such as what you’d see with a commercial property mortgage, operates on the basis that the lender will be recovering their investment via a monthly payment and interest, and equity financing requires that the financer take on a huge sum of risk by investing in the project itself, the Mezzanine loan offers a happy medium. Escrow on residential can close within 21 days. Due to higher risk of Mezanine loans, it may take longer than what typical residential mortage loans take.

While the exact arrangement can vary based on what the parties involved agree on, in general, it offers both the risk and reward aspect of an equity investment, while offering the predictable return of a debt financing agreement.

That’s because with a Mezzanine loan you will still be paying interest to the lender, but the terms will be much more flexible. The lender will also have the option of obtaining equity in your project, either as a guarantee should you default on your loan, or as a bonus later should the terms allow for it.

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What are the benefits of a Mezzanine loan?

While a Mezzanine loan is not right for every occasion, it does have some distinct benefits over other loan types. We’ve already discussed how that for the lender, these loans are often more reliable in terms of repayment and balancing risk and reward, but what about for the borrower?

For the borrower, a Mezzanine loan is often a good way to secure funding if you are lacking in collateral. It’s also very flexible, and it can offer repayment schedules which may better suit the needs of your project.

This includes the ability to roll interest payments into the loan’s balance if you don’t have the funds to pay up at that particular time, something that traditional funding just doesn’t offer.

Quick growing projects often also enjoy the fact that the loan interest is tax deductible, and that they can often refinance rather quickly, moving that debt into a standard loan type that carries a more attractive interest rate.

However, having Mezzanine investors onboard your project can also open doors for other more traditional funding options. Mezzanine lenders are long-term investors, and this looks good to creditors, who will then extend you further credit in other ways.


What are the Disadvantages of a Mezzanine loan?

Every funding type has downsides, and for a Mezzanine loan, you have to look out for many things before signing on the dotted line. For starters, this may not be the most cost-effective way to secure your financing, and you may end up paying a hefty premium for the privilege of flexibility.

Lenders can also be incredibly picky with their requirements, and a deal like this may take several months to set up, so proceed with caution. There is also usually a stipulation which allows you to lose control of the project, at least in part, if things go south.

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How are Mezzanine loans structured?

While the structure of these loans can vary, the most common structure of a Mezzanine loan goes something like this.

Let’s say that an investor offers you mezzanine financing for commercial property development. You gain flexible lending, which allows you to expand and build more units, on top of what your traditional lender has offered.

The investor is then promised 10% per year in interest payments for the loan, and if you default, then this will convert to an equity interest. However, in some cases, they can also be offered an option to purchase equity at a later date, or other scenarios as agreed upon.

Keep in mind that Mezzanine loans are typically quite large, and you’ll most likely be looking at a funding amount of around $10 million before anyone will bother to sign a deal like this with you. While in some cases, you may find someone willing to do it for $2-5 million, these deals are normally too expensive to be worthwhile.

When should you consider using Mezzanine funding?

In most cases, Mezzanine funding will not be the main funding for a project. Instead, they are typically used as a means to squeeze out more funding from additional avenues. You could think of them as part of your funding stack rather than your primary source of financing.

Mezzanine funding is a popular choice for acquiring capital for growth, such as for the construction of new facilities or properties. Or, it’s often also utilized for shareholder buyouts, acquisitions, and refinancing opportunities.

Conclusion

In closing, Mezzanine funding is complicated, and you should make sure that you have the appropriate legal help if you want to go through with this type of deal. It’s not for everyone, and it certainly is not something to approach without full knowledge of the subject.

While there are plenty of reasons to use Mezzanine financing options, there are also plenty of cons which you should be afraid of. If you’re not careful, then you could end up making a costly mistake.

This article is intended to provide you with a basic understanding of the process, but there’s a lot more to learn about Mezzanine loans before you jump in with both feet.

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