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Probate Real Estate Investing Niche Secrets Unlocked

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Image from Pixabay

By Tamera Aragon

Are you scratching your head – Probate Real Estate Investing – What exactly is that? Probate is the court supervised legal process that includes determining the validity of your will, gathering assets (including real estate), paying debts, taxes, and the expenses of will administration, and then distributing the remaining assets to those persons entitled to them. This process commonly takes a few months to a year. “Probate” real estate investing provides opportunities for discounted properties because the person who is left to handle the assets often must sell the real estate they were left with.

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Benefits Of Investing In Probate Properties

There are many 5 main benefits for why this is a good niche to consider as a real estate investor.

Bargain Basement Prices: The probate market is full of tremendous properties you can snap up for 30% to 50% below market value. Resell quickly and capture a lifetime of gains within days. It’s the ultimate buy low/sell high scenario.

Huge Inventory: There are almost 6 million estates in probate, with assets worth trillions of dollars. Every type of real estate – from houses to beach front motels – are in probate.

Buyer’s Market: Purchasing property out of an estate assures you of a highly motivated seller. Most beneficiaries are anxious to sell the house (and other unwanted assets) so that they can pay off debts attached to the estate that must all be settled before the estate can be distributed.

Image from Pixabay

All Kinds of Treasures: in addition to real estate you’ll find, classic cars, fine jewelry, antiques, art, toys, collectibles, and much more enter into probate every day. Millions of items. And they can sit there for years unless you rescue them.

It’s a Investing Secret: Few people know how to find and purchase property from an estate. Even the beneficiaries don’t know how to sell. That means, you’ll be the first one on the scene because you have little or no competition from other buyer’s – plus you’re helping anxious sellers.

Disadvantages Of Investing In Probate Properties

No real estate investing niche or specialty is without its own set of unique risks. Probate investing does have a few cons I want to share with you. So what are downsides of this niche?

Finding Leads Is Time Consuming: Most counties you have to go to the court house and read through files to get probate leads and information this information is not available on line or from leads lists to purchase.

Executors Can Be Difficult To Talk With: The executor is usually a very close relative to the person that just died: wife, mother, father, sister and they are mourning their loss and can be difficult to talk with. One has to be very sensitive to the situation.

All Heirs Of The Will Need To Agree: Many times there are many heirs of a will and getting them to all agree to sell to you at the price you want may be challenging.

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Market Conditions For Probate Investing

Good Market Conditions

  • Property is located in a flat or declining market
  • Large City where there are more options
  • In a city where there is a good % of retired and elderly population

Bad Market Conditions

  • In an up market
  • Small town
  • In a city where there is a very small % of retired and elderly population

Steps Involved For Investing In Probate Properties

Image from Pixabay

  1. Get a newspaper and look at the legal notice section that lists the announcements of an estate. This is where the administrator, personal representative, executor is named (depending on the state you are in, the above will be one of the names for the person in charge of the estate).
  2. Get a file number on any probate case from the ad
  3. Contact govt office and find out where probates are filed in area where person lived.
  4. Take file number (s) and go to the county office where probates are filed.
  5. Go the office where probates are filed and ask, for example, “Where do I find information on case number 2454059i843” – The case number you took from the newspaper. They will direct you where to go and who to talk to.
  6. Go to the file room and ask to view the file in question.
    The above process is to get you to the file room and to get you talking with someone and building some type of rapport. Once you are directed to the files and know how to look through them, follow these next steps.
  7. You will need to look for aged files, at least 2 to 3 months old because these will be the files that have an inventory sheet that will tell you in one minute if the case has any real estate.
  8. Once you have a file with real estate you will need to get the contact information for the PR (PERSONAL REPRESENTATIVE), it is all in the file.
  9. You will next need to identify all the heirs of the estate and gather all their names and addresses in case you will need to contact them in the future.
  10. Once you have gathered this information, you will send personal hand written letters to the PR
  11. After one letter, wait 1 week and call the PR to see where they are at with the situation.
  12. If it is determined the seller is motivated, and if local, you will want to meet all heirs to finalize contract. If not local, mail the contract with a nice cover letter.
  13. Negotiate and Sign Contract
  14. Sell or Rent Property for profit

Image from Pixabay

Where To Find Probate Property Leads

  1. Probate Attorneys
  2. Newspaper
  3. Local Government Office

TAMERA ARAGON

Tamera Aragon is a professional online entrepreneur and has bought and sold over 300 properties, establishing her as an expert in the real estate investing field. Since 2003, she has purchased over 10 million dollars in real estate and currently holds properties all over the world. Tamera’s focus is on the booming Foreclosure market, buying Pre-foreclosures, REOs and Short Sales. Tamera who is a noted Author, Success Trainer, Speaker & Coach, shows her passion for helping others with the 17 websites she has created and several specialized products to support fellow investors throughout the world. When Tamara is not busy running her website, she is very involved with her Fiji joint ventures and investments. Tamera Aragon is one of the few trainers and coaches who is really “doing it” successfully in today’s market. Tamera’s experience has earned her a solid reputation in the industry as well as the respect and friendship of many of the top national real estate investment and internet marketing experts. Tamera Aragon believes her success has garnered her the financial freedom to fully enjoy her marriage and spend quality time with her children.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

Inflation, Tappable Equity, and Home Value Trends

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Image from Pixabay

By Rick Tobin

Historically, rising inflation trends have benefited real estate better than almost any other asset class because property values are usually an exceptional hedge against inflation. This is partly due to the fact that annual home prices tend to rise in value at least as high as the annual published Consumer Price Index (CPI) numbers.

However, inflation rates that are much higher than more typical annual inflation rates near 2% to 3% can cause concern for the financial markets and Federal Reserve. As we’re seeing now, the Fed plans to keep raising interest rates to combat or neutralize inflation rates that are well above historical norms.

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The true inflation rates in 2022 are at or above the published inflation rates back in 1981 when the Fed pushed the US Prime Rate up to 21.5% for the most creditworthy borrowers and the average 30-year fixed mortgage rate was in the 16% and 17% rate range. Back in the late 1970s and early 1980s, rising energy costs were the root cause of inflation just like $5 to $7+ gasoline prices per gallon in 2022.

All-Time Record High Tappable Equity

Image from Pixabay

In the first quarter of 2022, the collective amount of equity money that homeowners with mortgages on their properties could pull out of their homes while still retaining at least 20% equity rose by a staggering $1.2 trillion, according to Black Knight, a mortgage software and analytics company.

Mortgage holders’ tappable equity was up 34% in just one year between April 2021 and April 2022, which was a whopping $2.8 trillion in new equity gains.

Nationally, the tappable equity that homeowners could access for cash reached a record high amount of $11 trillion. By comparison, this $11 trillion dollar amount was two times as large as the previous peak high back in 2006 shortly before the last major housing market bubble burst that became more readily apparent in late 2007 and 2008.

This amount of tappable equity for property owners reached an average amount of $207,000 in tappable equity per homeowner. If and when mortgage rates increase to an average closer to 7% or 8% plus in the near future, then home values may start declining and the tappable equity amounts available to homeowners for cash-out mortgages or reverse mortgages will decline as well.

All-Time Record High Consumer Debts

The March 2022 consumer credit report issued by the Federal Reserve reached a record high $52.435 billion dollars for monthly consumer debt spending. This $52 billion plus number was more than double the expected $25 billion dollar spending amount expectation and the biggest surge in revolving credit on record. In April 2022, the consumer spending numbers surpassed $38 billion, which was the #2 all-time monthly high.

Image from Pixabay

For just credit card spending alone, March 2022 were the highest credit card spending numbers ever at $25.6 billion. The following month in April, credit card debt figures exceeded $17.8 billion, which was the 2nd highest credit card charge month in US history.

While many people are complaining about mortgage rates reaching 5% and 6% in the first half of 2022, these rates are still relatively cheap when compared with 25% to 35% credit card rates and mortgage rates from past decades that had 30-year fixed rate averages as follows:

● 1980s: 12.7% average 30-year fixed mortgage rates
● 1990s: 8.12%
● 2000s: 6.29%

In the 2nd half of 2022, it’s more likely that many borrowers will fondly look back at 5% and 6% fixed rates as “relatively cheap” if the Federal Reserve does follow through with their threats to increase rates upwards of 10 times over the next year in order to “contain inflation” while punishing consumers at the same time who struggle with record consumer debt (mortgages, student loans, credit cards, automobile loans, etc.).

Financially Insolvent Government Entitlement Programs

There are published reports by the Trustees of both Social Security and Medicare about how the two programs are potentially on pace towards financial insolvency in the not-too-distant future. The Social Security Trustees claim that their retirement program may not be able to fully guarantee all benefits as soon as 13 years from now in 2035. Over the next decade, Social Security is calculated based upon current income and expense numbers to run budget deficits of almost $2.5 trillion dollars.

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As per the Trustee’s published report linked below, it’s claimed that the Social Security Disability Insurance (SSDI) trust fund may deplete its reserves as early as 2034.
Social Security report link: https://www.ssa.gov/OACT/TR/2022/tr2022.pdf

If and when the Social Security trust fund starts operating with cash-flow deficits, all beneficiaries, or Americans who receive the Social Security benefits, may be faced with an across-the-board benefits cut of 20% as suggested by the Trustees. For many Americans who struggle to get by on 100% of their Social Security benefits, the threat of a possible future reduction in amounts of 20% or more can be quite scary to think about.

The average Social Security benefit paid out nationwide in 2022 is estimated to be $1,657 per month or $19,884 per year. A 20% reduction in monthly benefits without using future inflation adjustments would be equivalent to a reduction of $331.40 per month in benefits and a new lower monthly payment amount of $1,325.60.

The Medicare Hospital Insurance (HI) trust fund is also on track to exhaust its cash reserves over the next six years by 2028, as predicted by the Medicare Trustees in their own gloomy report that’s linked here: https://www.cms.gov/files/document/2022-medicare-trustees-report.pdf

Let Your Money Work For You

Image from Pixabay

As noted in my past published articles, the bulk of a homeowner family’s overall net worth comes from the equity in their primary residence. The average US homeowner at retirement age has approximately 83% of their overall net worth tied up in the equity in their home and pays monthly expenses from just the remaining 17% of overall net worth that is held in checking, savings, or pension accounts.

While inflation usually is beneficial to pushing up real estate values at a rapid annual pace, inflation is also devastating to the value of the dollar in your pocket as purchasing powers decline. Inflation for real estate does have a ceiling level at which it becomes detrimental to housing values if the Fed starts doubling or tripling mortgage rates to slow down the inflation rates.

Equity in properties isn’t so easy to access to buy food, gas, clothing, or to pay your utilities as having cash on hand. If and when future government entitlement benefits decrease and inheritance and property taxes may increase, then being self-sufficient while earning monthly income from tenants in your rental properties or by pulling cash out of your properties near peak highs may go a long way towards allowing you to maintain the same standard of living that you’ve been accustomed to over the years.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

The Advantages of Commercial Real Estate Investing

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Image from Pixabay

Investment has long been a great way to grow your wealth but often comes with a high barrier of entry. Not only can it be difficult to learn about the various types of investments and how they can work for you but it can also be difficult to find a way to make that initial foray. Investing in the stock market or a start-up can be simpler to do but both bring a high level of risk. If you’re looking for a safer, long-term investment that can bring you regular income, you might be looking to invest in commercial real estate.
The Basics

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Unlike some forms of investment, this is tangible and is considered to be a hard asset. When you make this kind of investment, you can expect to be rewarded in one of two ways: appreciation, which happens when the value of the building or property increases over time, and income gained by renting the space out. These investments tend to be long-term, as it takes far more effort to buy and sell a large building than to trade or sell stocks. When making investments of this type, you’re not looking to make a quick buck, but are thinking about the long haul.
How It Makes You Money

Commercial real estate is a limited resource, which means that it will always be in demand. Companies need offices or manufacturing space, individuals need apartments and entrepreneurs need restaurant or store space. All of those people will pay for that space, and that’s where the first source of income comes from. A well-located building with modern spaces will fetch top dollar from all of these renters, and that income is regular and can be counted on.

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Appreciation is the other source of financial reward but takes longer to build. With this, you’re looking farther down the road, to the point where you can sell that property. This can be a great return on investment if you look at demographics and market patterns. Buying a property for a low price in an area that will boom in a few years means that, as long as you maintain the building, you can sell at a profit.

Commercial real estate can be a very powerful investment tool, as long as you do your research. It boasts potential for high returns and also offers the advantage of a regular income, which many other investments do not. Because of these reasons, this can be a great way to start investing and making money right away.

Contact Vista Capital Solutions today to start exploring our wide range of financing options for commercial real estate.

Biden’s Plan May Incentivize the Construction of New Housing

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By Stephanie Mojica

U.S. President Joe Biden has amped up his efforts to increase affordable housing in the country in response to the housing shortage, multiple media outlets reported. Biden’s plan, which was unveiled on Monday, May 16, 2022, may incentivize real estate investors to build more multi-family housing and steer them away from purchasing single-family homes, according to The Wall Street Journal.

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Home prices and inflation, as well as several years of hampered home construction, have contributed to Biden’s plan, per Scotsman Guide. However, it could take up to five years for the plan to become reality.

Since the 1970s, it has been increasingly difficult to build affordable housing due to costs and zoning regulations, The Wall Street Journal reported. “Tiny homes” are a rapidly growing trend, but many cities have next-to-impossible requirements for permits, parking, and the like.

A modern custom built luxury house in a residential neighborhood. This high end home is very nicely landscaped property.

Under Biden’s plan, a number of reforms and new initiatives could take place, including:

  • Rewarding jurisdictions that relax their zoning and land use requirements.
  • Improving the benefits of the Low Income Housing Tax Credit (LIHTC) program, which is geared toward affordable rental housing.
  • Encouraging state, local, and tribal governments to use some of their COVID-19 funds to create more affordable housing units.
  • Developing new types of mortgages and improving existing programs to allow more flexibility.
  • Increasing the number of owner-occupants in single family homes.
  • Discouraging investors from purchasing single-family homes, which critics say is driving up housing prices to the point where everyday people cannot afford to buy a home of their own.
  • Increasing financing for investors who pursue developing and rehabbing multi-family properties.

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Also, members of the Biden administration say they are meeting with stakeholders in the building industry to find out what it will take to complete more homes by the end of 2022. The increased price of building materials as well as labor shortages have been blamed for the dramatic decrease of new construction in 2022.

Equity Rich, Cash Poor

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Image from Pixabay

By Rick Tobin

As of February 2022, there was an estimated $10 trillion dollars’ worth of tappable equity in residential properties that owners can access by way of cash-out loans, home equity lines of credit, and/or reverse mortgages with no required monthly payments. The average US homeowner who retires has approximately 83% of their net worth tied up in home equity and pays their monthly expenses from just 17% of their overall net worth found in savings, checking, and/ or pension accounts.

The typical homeowner has the bulk of their individual or family net worth tied up in the equity in their primary residence where they live. It’s estimated that close to 37% of all US households live in residential properties (one-to-four units) that are free and clear with no mortgage debt. This number is approximately 5.5% higher than 10 years ago.

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For those Americans who are fortunate to own their own home, the massive equity gains over the past several years have likely more than offset their rising monthly living expenses. This is especially true in states like California where the median price home statewide reached close to $850,000 in March 2022. Many homeowners gained more than $120,000 in new equity gains in 12 months or less.

Rising Inflation

Inflation severely damages the purchasing power of the dollar as we’ve all seen firsthand in recent years. Many consumer product prices have risen as much as 10% to 50% over the past year alone, sadly.

Image from Pixabay

Historically, real estate has proven to be an exceptional hedge against inflation as property values tend to rise right alongside or above published inflation rate numbers like a buoy with a rising tide. In March 2022, the published annual inflation rate reached 8.5%. This was the highest inflation rate in more than 40 years dating back to December 1981.

Between December 1980 and December 1981, the Federal Reserve raised the US Prime Rate to as high as 21.5% for the most creditworthy borrowers and 30-year fixed mortgage rates hovered in the 16% to 17%+ range in order to combat or quash those high inflation rates. Here in 2022, the Federal Reserve will likely raise rates significantly yet again like back in the early 1980s in order to slow down these incredibly high inflation rates that are actually much higher than the published rates.

Falling Cash Supply

Some financial planners or wealth advisors suggest that their clients maintain at least a three month supply of “emergency” cash reserves for their clients. More than half of Americans (or 51%) surveyed had less than a three months’ worth of expense supply, according to Bankrate’s July 2021 Emergency Savings Survey. This total included 1 in 4 respondents (or 25%) who said that they had no emergency cash fund supply at all.

Image from Pixabay

A more recent January 2022 survey conducted by Bankrate found that some 56% of Americans did not have $1,000 in cash savings available to access for emergency expenses. As a result of minimal cash reserves available for many people, they are likely to use credit cards, take out personal or mortgage loans, or borrow funds from family or friends to cover their daily expenses.

Lower cash reserves also adversely affect people who are planning to lease a home. For tenants, they may need enough cash to cover moving expenses and to put up the first and last months’ rent and/or security deposit money.

For home buyer prospects, they may need at least 3% to 5%+ of the proposed purchase price to qualify for the conforming or FHA loans. With the median home nationwide priced near $400,000 in the 1st quarter of 2022, many buyers will need somewhere between $12,000 and $20,000 for the down payment and additional funds for closing costs unless the seller or other family members are gifting them some of the funds.

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With mortgage rates continuing to rise in recent times, the bigger challenge for many home buyer prospects is coming up with enough of a cash down payment rather than qualifying for a monthly mortgage payment that’s a few hundred dollars more per month today than several months ago.

Homeownership Trends

Let’s review some eye-opening numbers associated with housing trends across the nation as per the US Census Bureau and Statista:

  • The national homeownership rate is 64.8%.
  • There are over 79 million owner-occupied homes in the US as per Statista.
  • Approximately 65% of homes are owner-occupied and 35% are rented or vacant.
  • Real estate prices have increased at least 73% nationwide since 2000.
  • An estimated one-third (33%) of all home buyers are first-time buyers.

Mortgage Debt vs. Unsecured Debt

Debt can be like an anchor holding us back. Yet, some debt is better than others like seen with mortgage debt secured by an appreciating property. Other forms of debt such as unsecured credit cards with annual rates and fees that may be within the 20% to 30%+ range can be especially bad. The higher the rate for the debt, the longer it will take to pay it off unless the borrower later files for bankruptcy protection.

Image from Pixabay

The average American has close to $6,200 in outstanding or unpaid credit card balances, according to data released by the Federal Reserve and Bankrate. Many borrowers pay the minimum monthly payment. If so, it may take them on average more than 30 years to pay off the credit card balance in full.

With a 30-year fixed rate mortgage that may be priced near 3% to 7% (or 20%+ lower than some credit cards), the mortgage principal or loan amount decreases as the years go by and the property value is more likely than not to rise as much as the annual published inflation rate. If so, the home value may increase $50,000, $100,000, $200,000, or $300,000+ per year, depending upon the region and latest economic trends.

If inflation rates continue at a sky-high rate, then real estate investments may still be your best option as the purchasing power of the dollar rapidly falls. The future equity gains from real estate will then allow you to pay off consumer debts like credit cards, school loans, and car loans at a faster pace while your net worth compounds and grows.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Married couple allegedly tried to steal Boulder properties with forged deeds

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Image from Pixabay

By Stephanie Mojica

A married couple allegedly tried to steal seven properties from a now-deceased real estate investor, according to MSN and Yahoo! Finance. On Friday, May 13, one of the suspects pleaded guilty to two criminal charges in connection with the scheme.

Savuth Yin, 27, and Yulisa Yin, 24, of the Boulder, Colo. area were charged with multiple crimes in connection with their alleged scheme, which falsified 14 quit claim deeds, court records show.

Savuth Yin pleaded guilty to possessing a defaced firearm and attempted theft, MSN reported. He could serve up to 13 ½ years behind bars, according to Yahoo! Finance.

Charges against Yulisa Yin are still pending.

The legal property owner, 77-year-old Fred Oelke, was found dead in his Boulder area home in September 2021, authorities say. The cause of his death was “undetermined” and none of the Yins’ criminal charges are in connection with it, according to court records.

However, a spokeswoman with the Boulder County District Attorney’s Office told MSN in an email interview that Oelke’s death was “suspicious” and is still being investigated. She further added that while the charges against the Yins are not related to Oelke’s death, no one has been eliminated or identified as a suspect in it.

Image from Pixabay

Someone called a funeral home claiming to be a relative of Oelke’s and asking for his body to be cremated as soon as possible, Yahoo! Finance reported. Keys, property-related documents, and vehicle titles disappeared from Oelke’s home after his death, court records show. Oelke’s tenants say they received calls, purportedly from his relatives, demanding they move out of their homes.

The properties the Yins allegedly tried to steal were worth nearly $3 million, per MSN. Oelke was the couple’s landlord.

The Yins allegedly forged signatures and faked the names of notaries to claim the properties for themselves under the name Nathaniel Turner in the months before Oelke’s death, Yahoo! Finance reported.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

Live Seminar – A Market Poised for Growth

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LIVE Investor Seminar

Learn About A Market Poised For Growth!

OUR NEXT LIVE SEMINAR at the Marriott Hotel in Burbank will be on June 8, 2022, and you won’t want to miss it! We will be providing real estate investors with valuable and timely information, such as:

  • Using 1031 Exchange to Increase your cash flow
  • Impact of rising interest rates and what it means for your next move
  • Increased foreign investment and how they’re affecting the current state of the market
  • 8-12% average rates of return on Airbnb STR’s
  • Rise of Albuquerque, NM as a growing haven for fresh real estate investment
Newly Constructed Amazon Distribution Facility in Albuquerque, NM

7 Newly Constructed Netflix Studios in Albuquerque, NM

In fact, Albuquerque, NM is the source of new projects for our Investors. With relationships with key developers, TFS will bring exclusive off-market deals, ranging from SFR / STR’s to Multi-Family and Commercial Assets. With Amazon, Facebook, Netflix, and Apple all active in this market, Albuquerque is poised for immense growth.

Join our LIVE Seminar

Los Angeles Marriott Burbank
2500 N. Hollywood Way, Burbank, CA

Wednesday | June 8th

Lunch Session: 11:30 AM – 1:00 PM
Dinner Session: 6:30 PM – 8:00 PM

Each session will feature the same key information! Reply to this email with your name and phone number to sign up or give us a call at 626-551-4326.

EMAIL: [email protected]

Actual Pictures of Investors’ Homes

Additionally, we will be sharing information about our new fully-managed short term rental Airbnb opportunities in the following hot markets:

  • Indianapolis, IN
  • Joshua Tree, CA
  • Las Vegas, NV
  • Scottsdale, AZ
  • Albuquerque, NM

Each Airbnb investment play 1) offers an average net cash flow of 6-12%, 2) is a fully-managed experience, and 3) will feature in-house designers set to help you ensure your investment succeeds. We will also discuss the streamlined listing process for Airbnbs and some of the tax benefits for this form of real estate.

Our trained real estate professionals will be talking about all this and more at our upcoming seminar – and again, you will NOT want to miss it.

Join our LIVE Seminar

Los Angeles Marriott Burbank
2500 N. Hollywood Way, Burbank, CA

Wednesday | June 8th

Lunch Session: 11:30 AM – 1:00 PM
Dinner Session: 6:30 PM – 8:00 PM

Each session will feature the same key information! Reply to this email with your name and phone number to sign up or give us a call at 626-551-4326.

EMAIL: [email protected]

TFS Properties, Inc. specializes in 1031 Tax-Deferred Exchanges. When the time comes for you to upgrade your real estate investments, it is important to work with specialists having the experience & relationships to help you find the best solution and properties for your individual circumstances. For a complimentary consultation, feel free to contact us at your convenience.

TFS Properties (CA DRE#: 01953354)

Real Property Easements, An Overview. the Purpose & the Risks? (Part 2)

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Image from Pixabay

By Dan Harkey
c 949 533 8315 e [email protected]

Real estate development patterns on a going-forward basis:

Laws have changed, sometimes dramatically, as we have experienced in California. California leadership has recently passed multiple laws to modify the nature of housing occupancy by the public. The changes include urban and suburban housing. The goal is to replace single-family buildings with high-density stack-and-pack cluster apartments and homes. Parking requirements and setbacks have been eliminated to pack them in.

Image from Pixabay

Many developers prefer high-density or cluster zoning and housing to maximize density, space, and profits. Cluster housing was initially defined as housing placement near each other, reducing individual land parcels and yard space to increasing open space and common area amenities. Larger areas of open space within the development form a buffer for adjacent land uses- additionally, cluster housing with homeowner associations would be responsible for the infrastructure maintenance.

There is a distinction between the written physical layouts or placement of easements and written usage agreements memorializing rights and responsibilities between the parties. A well-written agreement is designed to understand the terms and conditions and enforce them among the parties.

A part of centralized development planning is to determine the need and locations of property usage easements. They will be plotted and engineered as part of the approval and development process.

Suburban areas have historically consisted primarily of low-density residential, commercial, and industrial communities away from urban areas but within commuting distance for employment. Suburban communities have had their own political and governmental services jurisdictions.

Populations grew in suburbs because people wanted autonomy from the tightly controlled rules and hectic and congested lifestyles in densely populated urban settings. Suburbs usually provide an overall higher standard of living for a comparable income than the metro or urban lifestyle. Traffic congestion, commercial corridors, shopping, schooling, environmental issues, and freedoms that go with more land and open space make it worth the cost for people to commute into a city for work.

Image from Pixabay

Past President Obama issued a regulation known as AFFH (Affirmatively Furthering Fair Housing). The objective is to create progressive mini-urban cities within the suburbs. The objective was to have suburbs swallowed up by larger cities. These new mini cities would be subject to federal regulations and mandates taking control of zoning and development. This includes eliminating single-family zoning and forcing the building of medium to high-density low-income housing, thereby creating mini-urban-styled downtowns.

Eliminating local government control is the plan to destroy the suburban lifestyle.

Affirmatively Furthering Fair Housing (AFFH) works by holding the development process hostage to the U.S Department of Housing and Urban Development (HUD’s) Community Development Block Grants and federal-planning demands. Suburbs will be prohibited from receiving millions of dollars in HUD grants unless they eliminate single-family zoning, install low and moderate-cost housing, and consolidate and densify commercial and residential districts into stack-and-pack neighborhoods. Highway funds are also planned to be withheld for failure to comply.

Any objections by a local municipality will get municipal leaders of the suburbs sued for discrimination by civil rights groups and by the federal government.

The current administration has reactivated and placed Obama’s AFFH strategy a high priority.

Municipalities commonly use a tool of extortion to gain easements on specifically targeted properties. When the owner applies to process a tentative tract map, the city planners frequently condition the approval to include easements that have little or no benefit to the property owner. In many cases, property owners are even required to pay for the improvements. An “eminent domain action” is frequently used to force property owners to sell their property or allow specified easements. I refer to this as “easement by extortion.” In many cases, property owners are forced to pay for the improvements

In many cases, multiple parties who own adjacent properties, shopping centers, retail centers, industrial, and historic registry facades all require written easement agreements for mutual benefits to protect the interest of all participants. Examples include easements for parking, reciprocal access of ingress/egress corridors, access for installation and maintenance of utilities, operation and management of common areas, and many others.

https://www.nps.gov/tps/tax-incentives/taxdocs/easements-historic-properties.pdf

Actual case studies:

1) Two adjacent property owners who were friends owned and occupied two separate contiguous industrial parcels. The properties are in Gardena, CA. Each land parcel was 40 ft wide by 100 ft deep. The property owner on the right side wanted to build a zero-lot-line building structure that was 40 in width. A zero-lot-line means that the property was initially built-up to the property line with no setbacks. The left-side property owner agreed to construct his building only 30 feet wide so that there would be 10 feet available for ingress/egress of automobiles for use by both properties. The actual physical location for ingress/egress was only 10 feet of the left-side property. The right-side property possessed no other method of entry other than his left neighbor’s property. No written agreements existed, but merely two good old boys who agreed with a handshake and hopefully an occasional cold beer at the local Kelsey’s bar.

An argument and litigation for a prescriptive easement right would be justified since the buildings were built in the 1960s. The original owners and subsequent owners have operated that way ever since.

The right-side property owner owned his property free and clear. The left-side property owner had the first lien of $300,000. A lender suggested that the property owners hire a civil engineer and a lawyer to draft a reciprocal usage easement for ingress/egress. The owners must submit the plans and agreement to the building and planning department for approval. Upon city approval, the reciprocal easement agreement could be recorded. Once the contract was signed and recorded, the easement would remain on the property title.

In this fact-specific case, the problem was that the newly drafted easement would be recorded in the first lien position on the right-side property but as a second lien position on the left-side property. The left-side property’s recorded easement would be in a second lien position behind a $300,000 first trust deed lender. If the borrower on the left side defaulted on his loan and the property was lost in foreclosure, the recorded usage easement would be foreclosed, extinguished, or ceased. Subsequent owners would be damaged and have no right of access. Lack of access for automobile ingress/egress would drastically diminish the functionality and desirability, and the value would be severely affected.

Image from Pixabay

2) An auto body and fender shop fronted on a busy street but had no direct access to the auto storage yard. Entry into the repair shop was available only through an alleyway. All the properties along the street have the same issue and potential risk.

The lender’s task in processing and underwriting a requested loan was to verify that the alley right-of-way was either a publicly owned street or a written reciprocal easement agreement signed and approved by the property owners who required continued access through the alleyway. The recorded easement was verified that it existed and did run with the land. Risk abated.

Image from Pixabay

3) A barbershop operator had the chance to purchase the real property at the location of his operating business. The location was an A+ situated at the entry to a regional shopping mall. Part of the lender’s processing and underwriting staff’s task was to verify a reciprocal parking easement agreement for all the tenants in the shopping center and the inline retail shops near the entry. The recorded easement was verified and did, in fact, run-with-the-land. Risk abated.

4) A small shopping owner and adjacent church struck an informal deal to use each other’s parking. An informal letter arrangement was arranged between two property owners who mutually benefited by being able to use the other owner’s property. The informal agreement does not run with the land. The arrangements are usually for a specified time and are cancellable with a 30/60/90-day notice. Although Sunday mornings were problematic, a large church occupied one side of the street, with marginally adequate parking. Church attendees were able to use the available parking across the street. There is a shopping center across the street with semi-adequate parking, although Saturdays are problematic. A letter agreement was drawn up for common usage of parking rather than an easement. The agreement specifically spelled out the terms of times for needed use of both parties and was cancellable by either party with a 60 days’ notice. There is an unsolved risk because of the informal nature of the agreement.

5) Land loan. A lender made a commercial loan on a vacant parcel adjacent to a large shopping center. The parcel was located strategically at the most prominent entry to the shopping center.

Image from Pixabay

An appraisal was obtained that reflected values as a developed small commercial for drive-through fast food or coffee establishment.

The parcels necessitated every square inch for development with little flexibility. Parking was adequate because it was adjacent to the large shopping center with no prohibitions on the number of spaces. There were no parking easements, but there was also no prohibition.

The borrower’s attorneys drafted an agreement. The principal property owner made a deal with the largest shopping center tenant to place prominent entrance monument signage on the subject parcel without the knowledge of the land lenders. The property owner/borrower attempted to strongarm the land lender into signing it the subordination agreement making the land lender’s first lien junior to the signage easement.

Image from Pixabay

What a preposterous and foolish request! But the borrower/owner of the property was looking for a fool of a lender. How about a massive unforeseen risk for a lender? The lender rightly refused the request.

If the lender had agreed to sign the subordination and allowed a colossal monument sign in the middle of the vacant commercial parcel, the parcel value would have plummeted to a small park to donate to the local municipality as a feel-good exercise.

Understanding easements in relation to real estate ownership and development is full of complex issues. Civil engineers and land planning lawyers specializing in this section of real estate law should assist in drawing the property boundaries, alignments, and applications for municipal approvals. Work with a title company to have the easements recorded and insured. Assess the benefits and risks. Do not circumvent best practices.

Thank You

Dan Harkey

This article is an overview for a general educational purpose only. The information presented should not be relied upon without the advice of counsel.

Dan Harkey is a contributing author to Weekly Real Estate News and is a Business & Financial Consultant. He can be contacted at 949-533-8315 or [email protected].

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Real Property Easements, An Overview. the Purpose & the Risks? (Part 1)

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Image from Pixabay

By Dan Harkey

c 949 533 8315 e [email protected]

This overview of real property easements has relevance to property owners, real estate agents & brokers, mortgage agents & lenders, insurance agents & brokers, escrow officers, and title insurers.

What are real property easements?

An easement is a non-possessory right conveyed from one property owner (#1) to another property owner (#2) to use, enter, or cross over a parcel (or a portion) that is owned by the party (#1). Non-possessory means that party (#2) possesses a right to use, enter, or cross but does not own or have no property ownership claims. claims of ownership to the property.

A non-possessory interest in a property restricts its free use because it is an encumbrance on the property. The non-possessory interest (easement) is generally recorded against the property in municipal public records and serves to cloud the title.

There are two types of possessory interest: freehold and leasehold estates.

Fee ownership Interests are generally subject to certain easements such as utilities and public rights of way.

“A public right of way easement gives the public or organization the right to access and use property in specific situations for limited purposes. A right of way is an easement that established the freedom to use a pathway or road on another person’s property without conferring ownership.”

Easements generally run with the land into perpetuity (for all time) unless expired or canceled by the parties. They may be expressed, implied, by necessity, or by prescription.

https://www.forbes.com/advisor/mortgages/what-is-an-easement/

https://www.lorman.com/resources/easements-in-california-creation-of-easements-16986

https://www.clta.org/page/article6/A-Legal-Introduction-to-Easements.htm

What are reciprocal usage easements?

Reciprocal easements are non-possessory interests conveyed between two or more property owners. An agreement establishes the terms for easements, restrictions, and covenants between two or more different parties. The agreement is mutual between two or more parties to benefit each other, usually equally.

Using the example above, property owner (#1) may use the owner’s (#2) property. Reciprocally owner (#2) may use the owner’s (#1s) property. You scratch my back, and I will scratch yours for mutually beneficial purposes.

https://www.davis-stirling.com/HOME/reciprocal-easements-defined

What are reciprocal easement agreements?

Image from Pixabay

https://www.coxcastle.com/news-and-publications/2013/fall-2013-retail-perspectives-newsletter/understanding-reciprocal-easement-agreements#:~:text=Typically%2C%20reciprocal%20easement%20agreements %20(%22,as%20an%20integrated%20shopping%20center.

https://www.contractscounsel.com/t/us/reciprocal-easement-agreement

Consider two adjacent commercial parcels, each with 20,000 square feet of land. One land parcel has a local grocery store, and the other has a restaurant. The owners structured a reciprocal easement agreement to allow both parcels to provide entry to commercial supply trucks and for parking. With the building footprint, required setbacks, and parking, there is not enough room for large trucks to deliver supplies without overlapping parcels.

What are prescriptive easements?

Conflicts and litigation may arise to prove what may be referred to as claimed rights to pass over a property. A “prescriptive easement” is a “claim of possessory right to pass” across another person’s real property that was acquired by continued use without permission of the owner for a legally defined period. Usually, a claimant has the burden of proof of the elements necessary to establish that the easement has been created over time by prescription (California Code of Civil Procedures 321). In California, a claimant is required to adequately prove that they have possessed the prescriptive easement by continuous use for at least five years. Other states have similar regulations.

The statutory time for prescriptive easements varies from state to state. Each claim is fact-specific, with the possibility of winning some and losing some. Proving the claimant’s rights can take time, resulting in litigation and being fraught with the risk of losing. All this frustration could have been avoided with well-documented agreements.

The issue of exclusive vs. non-exclusive easements must also be proved-up. Will the easement run with the land and bind all future owners? In California, 2d 872 (2002). California Civil Code 1104 provides that a transfer of real property passes all easements attached thereto.

There are many types of easements for dozens of different purposes:

https://en.wikipedia.org/wiki/Easement

Are easements transferable from one party to another?

Image from Pexels

Most easements are recorded and are a matter of public record. When a property is transferred to another party the easements are transferred and remain on title. An easement generally remains with the property.

https://www.findlaw.com/realestate/land-use-laws/easements-and-transfer-of-land.html

Why should property owners, real estate brokers, and lenders make such a big deal about easements? What’s so important?

Owners, realtors, and lenders should be aware of the vast reservoir of property usage limitations caused by property easements limiting property usage and reducing a property’s development potential and value.

“Easements are like having a giant network of squid-like tentacles on your property that you can’t touch, see, or hear but had seriously better handle. Failure to deal with each easement (tentacle) could result in catastrophic consequences, including diminished property value and limited or total inability to develop the property.”

Easements are clouds on the title. An easement is an encumbrance against a property referenced by agreements and claims to enforce rights and obligations. Whether recorded or not, the easement still reflects a clouded title.

When a realtor or lender drives up to a property, they may admire the beauty and tranquility of the setting. The home elevation, topography, floorplan, panoramic views, and hardscape are outstanding. The property location may be the best. Selling the sizzle is appropriate but limited to the realtor’s spectacle performance and buyer’s immediate response. But there is a large prohibitive easement for a neighborhood storm drain running across the yard where the purchaser planned on placing a nice swimming pool. They were not disclosed of the storm drain easement.

Legal risks for an agent may be devastating. “I am the buyer’s agent. I did not read the preliminary title report, ask the title company for copies of all easements, nor ask them to chart out all easement placements on the property.” But the buyer’s confession that they did not read the preliminary title report does suggest a breach of fiduciary duty and constructive fraud. Failure to disclose was felony stupid.

Image from Pexels

“Constructive fraud comprises of any act or omission or concealment involving a breach of legal or equitable duty, trust or confidence which results in damage to another, even though the conduct is not otherwise fraudulent.” Salahuddin vs. Valley of California, Inc. (1994).

Constructive fraud means that fraud was created because any reasonable real estate fiduciary should possess this knowledge or know about these facts/circumstances. Failure to disclose constructive fraud.

What lurks underneath the ground is a web of easements that limit land usage, building size, and economic feasibility, inhibiting overall value. A 100,000 sq ft parcel may only have 10,000 square feet of a buildable pad because of restrictive easements.

A 20,000-square-foot property that appears to be worth $100 per foot, but 80% has limited use because of restrictive easements. Only 20% of the parcel is buildable. A buyer may not be willing to pay $100 per square foot for 20,000 of land when only 4,000 square feet are buildable.

Risk and liability flash red for the principal parties and their agents:

Image from Pixabay

Knowledge is the key. On any transaction, the parties should obtain a preliminary title report, obtain written copies of all easements, and request a survey performed by the title company to determine survey boundaries and potential adverse effects on the property. An appraiser will be interested in the results.

Principal buyers and their agents will decide what easements are appropriate and acceptable and what easements are not. Accepting the property as-is, renegotiating the price, or outright rejecting the purchase are possible options.

History:

Image from Pixabay

Many buildings that were constructed in the earlier part of this century, before the 1960s, lacked adequate parking and, in most cases, lacked formal agreements about common on-site usage for ingress/egress for walking and automobiles. In property law, ingress/egress refers to the rights of a person to pass over a real property for entry, leaving, and return across the property.

Familiar transportation sources were walking, bicycles, horseback, and horse-drawn carriages. Building growth clustered around the center of town was standard. The advancement of the automobile, which made transportation more flexible, had not yet matured. The requirement for expanded parking areas had not matured.

In days gone by, two or more property owners might verbally agree that they would build adjacent buildings and use a small portion of one of the land parcels for ingress/egress, as oral agreements tend to do. Many old verbal agreements have gone wrong, as oral agreements tend to do. Handshake agreements broke down, and conflicts arose with future ownership. Problems also arose when descendants and partners disagreed with the interpretation and or benefits of the original verbal easement agreement.

https://www.findlaw.com/realestate/land-use-laws/express-and-implied-easements.html

Municipalities, property owners, and lawyers began memorializing the agreements in written form. At the same time, the creation of municipal planning departments and zoning ordinances came into being. Owners were then required to hire civil engineers to draft a written placement of physical easements and obtain approval from the municipality. It is common practice to hire a land planning lawyer to handle the application process for various approvals with the respective city planning department.

Upon approval by the city, the agreements and drawing of physical placement of the easements encumbering the property were generally recorded in public records. The objective was for the recorded agreements to provide public notice that the easement existed and would bind all future owners in perpetuity.

Many older structures were built prior to creating and enforcing building and zoning ordinances. Zoning ordinances were adopted in California as early as the 1920s and have continued to evolve. Prohibitions related to setbacks, height & density restrictions, floor area ratios, required parking, deed restrictions, necessary amenities, and acceptable building materials all have occurred over time. Laws have been passed that now control aspects of ownership.

(to be continued…)

This article is an overview for a general educational purpose only. The information presented should not be relied upon without the advice of counsel.

Dan Harkey is a contributing author to Weekly Real Estate News and is a Business & Financial Consultant. He can be contacted at 949-533-8315 or [email protected].

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

Cash-out mortgage refinancing: How it works and when it’s the right option

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Image from Pexels

By Zach Wichter
Special Submission from Bankrate.com

What is cash-out refinancing?

Cash-out refinancing replaces your current home loan with a bigger mortgage, allowing you to take advantage of the equity you’ve built up in your home and access the difference between the two mortgages (your current one and the new one) in cash. The cash can go toward virtually any purpose, such as home remodeling, consolidating high-interest debt or other financial goals.

How a cash-out refinance works

The process for a cash-out refinance is similar to a rate-and-term refinance of a mortgage, in which you simply replace your existing loan with a new one for the same amount, usually at a lower interest rate or for a shorter loan term, or both. In a cash-out refinance, you can do the same, and also withdraw a portion of your home’s equity in a lump sum.

“Cash-out refinancing is beneficial if you can reduce the interest rate on your primary mortgage and make good use of the funds you take out,” says Greg McBride, CFA, Bankrate chief financial analyst.

For example, say the remaining balance on your current mortgage is $100,000 and your home is currently worth $300,000. In this case, you have $200,000 in home equity. Let’s assume that refinancing your current mortgage means you can get a lower interest rate, and you’ll use the cash to renovate your kitchen and bathrooms.

Since lenders generally require you to maintain at least 20 percent equity in your home (though there are exceptions) after a cash-out refinance, you’ll need to have at least $60,000 in home equity, or be able to borrow up to $140,000 in cash. You’ll also need to pay for closing costs like the appraisal fee, so the final amount could be less.

You tend to pay more in interest after completing a cash-out refinance because you’re increasing the loan amount, and like other loans, you’ll have to pay for closing costs. Otherwise, the steps to do this kind of refinance should be similar to when you first got your mortgage: Submit an application after selecting a lender, provide necessary documentation and wait for an approval, then wait out the closing.

How to prepare for a cash-out refinance

Here’s how you might prepare for a cash-out refinance:

1. Determine the lender’s minimum requirements

Mortgage lenders have different qualifying requirements for cash-out refinancing, and most have a minimum credit score — the higher, the better. The other typical requirements include a debt-to-income ratio below a certain percentage and at least 20 percent equity in your home. As you explore your options, take note of the requirements.

Image from Pexels

2. Calculate the exact amount you need

If you’re considering a cash-out refinance, you’re likely in need of funds for a specific purpose. If you aren’t sure what that is, it can be helpful to nail that down so you borrow only as much as you need. For instance, if you plan to use the cash to consolidate debt, then gather your personal loan and credit card statements or information about other debt obligations, and add up what you owe. If the cash is to be used for renovations, consult with a few contractors to get estimates for both labor and materials ahead of time.

3. Have your information ready when you apply

Once you’ve shopped around for a few lenders to ensure you get the best rate and terms, prepare all of your financial information related to your income, assets and debt for the application. Keep in mind you might need to submit additional documentation as the lender evaluates your application.

What’s the point of a cash-out refinance?

Considerations before cash-out refinancing

  • You can’t tap 100 percent of your equity: Most lenders require you to maintain at least 20 percent equity in your home in a cash-out refinance. One exception is a VA cash-out refinance, which allows you to withdraw all of your equity.
  • You could end up with a very different loan: Since you’re replacing your existing mortgage with a new loan, the terms of the loan could change. For instance, you might have a higher or lower interest rate (and monthly payments), or a longer or shorter loan term.
  • You’ll need to have your home appraised: Lenders typically require an appraisal for conventional cash-out refinances, since the amount you can borrow depends on how much equity you have.
  • You’ll pay closing costs: Like with your first mortgage, cash-out refinances come with closing costs, which cover lender fees, the appraisal and other expenses. It’s important to consider what a cash-out refinance could cost you because the fees might not be worth it, especially if you’re not borrowing a large amount.
  • The cash won’t land in your bank account right away: Lenders are required to give you three days after closing to back out of the refinance if you want to. For this reason, you’ll need to wait a few days before you receive the funds.

How much money can I get from a cash-out refinance?

Image from Pexels

While lenders typically allow homeowners to borrow up to 80 percent of the home’s value, the threshold can vary depending on your credit score and type of mortgage, as well as the type of property attached to the loan (for example, a single-family, duplex or three- or four-unit property). Lenders who offer loans insured by the Federal Housing Administration, or FHA, sometimes offer an FHA cash-out refinance that allows you to borrow as much as 85 percent of the value of your home. As noted, cash-out refinance loans guaranteed by the U.S. Department of Veterans Affairs (VA) are available for up to 100 percent of the home’s value.

What are the fees for a cash-out refinance?

Expect to pay about 3 to 5 percent of the new loan amount for closing costs to do a cash-out refinance. These closing costs can include lender origination fees and an appraisal fee to assess the home’s current value. Shop around with multiple lenders to ensure you’re getting the most competitive rates and terms.

You might be able to roll the loan costs into your new mortgage to avoid upfront closing costs, but you’ll likely pay a higher interest rate. Plus, taking out another 30-year loan or refinancing at a higher interest rate might mean you pay more in total interest. Crunch the numbers with Bankrate’s refinance calculator to gauge whether the math works in your favor.

Pros and cons of cash-out refinance

Before you decide to go through with a cash out refinance, it’s important to consider the pros and cons of cash out refinancing.

Image from Pixabay

Some of the advantages include:

  • You can lower your rate: This is the most common reason most borrowers refinance, and it makes sense for cash-out refinancing as well because you want to pay as little interest as possible when taking on a larger loan.
  • Your cost to borrow could be lower: Cash-out refinancing is often a less expensive form of financing because mortgage refinance rates are typically lower than rates on personal loans (like a home improvement loan) or credit cards. Even with closing costs, this can be especially advantageous when you need a significant amount of money.
  • You can improve your credit: If you do a cash-out refinance and use the funds to pay off debt, you could see a boost to your credit score if your credit utilization ratio drops. Credit utilization, or how much you’re borrowing compared to what’s available to you, is a critical factor in your score.
  • You can take advantage of tax deductions: If you plan to use the funds for home improvements and the project meets IRS eligibility requirements, you could take advantage of the interest deduction at tax time.

Some of the drawbacks of cash out refinances are

  • Your rate might go up: A general rule of thumb is to refinance to improve your financial situation and get a lower rate. If cash-out refinancing increases your rate, it’s probably not a smart move.
  • You might need to pay PMI: Some lenders let you withdraw up to 90 percent of your home’s equity, but doing so might mean paying for private mortgage insurance, or PMI, until you’re back below the 80 percent equity threshold. That can add to your overall borrowing costs.
  • You could be making payments for decades: If you’re using a cash-out refinance to consolidate debt, make sure you’re not prolonging debt repayment over decades when you could have paid it off much sooner and at a lower total cost otherwise. “Keep in mind that the repayment on whatever cash you take out is being spread over 30 years, so paying off higher-cost credit card debt with a cash-out refinance may not yield the savings you’re thinking,” McBride says. “Using the cash out for home improvements is a more prudent use.”
  • You have a greater risk of losing your home: No matter how you use a cash-out refinance, failing to repay the loan means you could wind up losing it to foreclosure. Don’t take out more cash than you absolutely need, and ensure you’re using it for a purpose that will ultimately improve your finances instead of worsening your situation.
  • You might be tempted to use your home as a piggy bank: Tapping your home’s equity to pay for things like vacations indicates a lack of discipline with your spending. If you’re struggling with getting your debt or spending habits under control, consider seeking help through a nonprofit credit counseling agency.

Cash-out refinancing and your taxes

Image from Pexels

A cash-out refinance might be eligible for mortgage interest tax deductions so long as you’re using the money to improve your property. Some acceptable home improvement projects might include:

  • Adding a swimming pool or hot tub to your backyard
  • Constructing a new bedroom or bathroom
  • Erecting a fence around your home
  • Enhancing your roof to make it more effective against the elements
  • Replacing windows with storm windows
  • Setting up a central air conditioning or heating system
  • Installing a home security system

In general, the improvements should add value to your home or make it more accessible. Check with a tax professional to see whether your project is eligible.

Is a cash-out refinance right for you?

Cash-out refinancing can be a good idea for many people.

Mortgages currently have among the lowest interest rates of any type of loan. The collateral involved — your home — means that lenders take on relatively little risk and can afford to keep interest rates low. This is especially true in today’s low-rate environment.

Image from Pixabay

That means that cash out refinancing is one of the cheapest ways to pay for large expenses. Most homeowners use the proceeds for the following reasons:

  • Home improvement projects: Homeowners who use the funds from a cash-out refinance for home improvements can deduct the mortgage interest from their taxes if these projects substantially increase the home’s value.
  • Investment purposes: Cash-out refinances offer homeowners access to capital to help build their retirement savings or purchase an investment property.
  • High-interest debt consolidation: Refinance rates tend to be lower compared to other forms of debt like credit cards. The proceeds from a cash-out refinance allow you to pay these debts off and pay the loan back with one, lower-cost monthly payment instead.
  • Child’s college education: Education is expensive, so tapping into home equity to pay for college can make sense if the refinance rate is much lower than the rate for a student loan.

Cash-out refinancing vs. home equity loan

Image from Pixabay

Both a cash-out refinance and a home equity loan allow borrowers to tap their home’s equity, but there are some major differences. As noted, cash-out refinancing involves taking out a new loan for a higher amount, paying off the existing one and obtaining the difference in cash. A home equity loan, in contrast, is a second mortgage — it doesn’t replace your first mortgage — and can sometimes have a higher interest rate compared to a cash-out refinance.

Alternatives to cash-out refinancing

In addition to a home equity loan, consider these other options:

HELOC

A home equity line of credit, or HELOC, allows you to borrow money when you need to with a revolving line of credit, similar to a credit card. This can be useful if you need the money over a few years for a renovation project spread out over time. HELOC interest rates are variable and change with the prime rate.

Personal loan

A personal loan is a shorter-term loan that provides funds for virtually any purpose. Personal loan interest rates vary widely and can depend on your credit, but the money borrowed is typically repaid with a monthly payment, like a mortgage.

Reverse mortgage

A reverse mortgage allows homeowners aged 62 and up to withdraw cash from their homes, and the balance does not have to be repaid as long as the borrower lives in and maintains the home and pays their property taxes and homeowners insurance.

Learn more:

ZACH WICHTER
Mortgage reporter

Zach Wichter is a mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.