How to Manage Your ADU as a Rental Unit

SOURCE: Freddie Mac
Building an accessory dwelling unit (ADU) can be a worthwhile investment for homeowners looking to increase their property value and generate rental income, while contributing to the supply of affordable housing. Here’s what you need to know about building, managing and maintaining an ADU as a rental property.

Characteristics and Benefits of ADUs

An ADU is an additional residential unit located on the property of a single-family home. These living spaces can be attached to the primary residence or completely detached and can be used for various purposes like housing family members and guests, or renting out to tenants.

ADUs have become more popular in recent years, particularly in areas with limited housing supply and high demand for affordable units. ADUs offer a promising return on investment for property owners looking to earn passive income and can help alleviate the housing shortage.

Before you Build

If you’re considering adding an ADU to your home, you’ll need to do some upfront research on the applicable building codes, regulations and zoning laws. Ordinances and policies vary by location and can change frequently as ADUs become more popular. You may consider consulting an attorney to make sure you understand any federal, state or local laws involved if you plan to rent out your ADU.

You should also think about how you plan to pay for any construction or renovation projects needed for your ADU. Create a construction budget and explore financing options. You may consider refinancing your current mortgage loan to help cover upfront costs for your ADU project.

Renting and Managing Your ADU

Once your ADU project is complete, it’s time to start thinking like a landlord. Before your ADU is move-in ready, you’ll need to:

1. Set a competitive rental rate: Factors such as location, amenities and the length of the lease will all play a part in determining how much you should charge for rent. Do your research to understand local demand, rental trends and market rates for similar listings in the area.

2. Draft a comprehensive lease agreement: Set clearly defined expectations for yourself and your future tenants, including details such as rent amount, payment due dates, late fees, security deposit amount and occupancy rules. If you’re a first-time landlord, you might begin by reviewing sample lease agreements online, but keep in mind you’ll want to customize the lease to your specific property. Ask yourself:

   • Which utilities will tenants be responsible for?

   • Where will tenants park?

   • Are pets allowed?

   • How will maintenance requests be handled?

   • Which spaces on the property, if any, will be shared?

3. Screen prospective tenants: Before inviting a tenant to live on your property, you’ll want to conduct a thorough screening process while keeping in mind relevant laws and guidelines to avoid discriminatory practices and ensure a fair and equal housing opportunity. This process may include background checks, reviewing recent pay stubs, checking references and analyzing credit reports. You may consider exploring local programs or property management services that may be able to assist you with tenant placement.

Whether you’re looking for a way to increase your property value or provide affordable housing, adding an ADU can be a rewarding investment. While navigating zoning laws, renovation budgets and landlord responsibilities may seem a bit daunting at first, there are many resources available to guide you through the process if you decide to build and rent out an ADU.

SOURCE: Freddie Mac

8 Things to Consider When Buying a House: How Many Have You Done?

SOURCE: Realtor
There are a lot of things to consider when buying a house. Are you ready for this? Emotionally? Financially?

If you’re finally ready to get serious and buy a house, you feel primed to start poring over listings and spending your weekends open-house hopping. Exciting!

But all that excitement can cause you to rush into things just a little bit too fast. Hold on! Wait a second! Before you buy, you’re going to need to do some considering.

Things to consider when buying a house

While you might feel prepared for this next giant step, just remember—there’s a lot of planning and prep work that goes into this purchase, even before you start to look at homes. So make sure you’ve got all your mallards in a row first!

From checking on your credit score to see if you can score a mortgage to amassing the down payment, use this checklist of things to consider when buying a house to figure out if there are any things you may have missed.

1. Crunch your numbers

First, ask yourself not if you’re ready emotionally—because it sounds like you are—but ready financially, says Kristen Robinson, senior vice president at Fidelity Investments. A perfect place to start is at our Home Affordability Calculator, where you can punch in your income, desired location, and other factors to see if your expectations jibe with reality. Good luck!

2. Know your credit score

Your mortgage’s interest rate—and, as a result, the size of your monthly payments—will be directly related to your credit or FICO score, essentially a summary of how reliably you’ve been paying off your debts.

“If you’ve had too many problems or late payments leading up to the purchase of a home, your score could be lower, and you might get a higher mortgage rate,” says Ali Vafai, president of The Money Source, a national lender and servicer. Many major lenders require a score of at least 620 for a mortgage, but if you find out you’re below that or want to boost your score, now is the time to get started, since it can take months to take effect.

3. Amass a down payment

Most mortgage lenders require a cash down payment of 5% to 20% of the price of a home. If you don’t have this kind of cash lying around, it’s high time to start a saving goal for the next few months. You can start by putting off buying any big-ticket items, fancy vacations or other extravagances. This is a new home we’re talking about, remember? You can also explore other ways to come up with a down payment fast—like borrowing from your IRA or even getting a gift from your parents (lucky you).

4. Get educated

The most important thing to consider when buying a house? The nuts and bolts of how it works. Consider taking advantage of local home-buying seminars, often offered by banks or nonprofits. Such resources will explain aspects of a home loan, like the criteria lenders use to evaluate a borrower, the documentation buyers will need to provide and what each portion of a mortgage payment goes toward. Even better: these seminars are usually free.

5. Interview at least three real estate agents

Just about everyone knows a real estate agent or five, which explains why 52% of home buyers find their agent through a friend. But don’t just settle for the first agent to cross your path—remember, a house is a huge purchase, the stakes are high. In the same way you’d want to thoroughly vet a surgeon before upcoming surgery, you want to consider who you work with when buying a house. Here are some questions to ask a real estate agent before deciding which one is right for you.

A real estate agent can also help in the education department, according to Christine Lutz, director of residential brokerage for Chicago-based Kinzie Real Estate Group. “An agent will often have relationships with lenders that buyers can work with to determine a budget and down payment percentage and get pre-approved for a mortgage.”

6. Go mortgage shopping

In the same way you wouldn’t buy the first house you set foot in, you shouldn’t commit to the very first mortgage you meet, either.

“Mortgages are not one-size-fits-all,” says Scott Haymore, head of mortgage pricing and secondary markets at TD Bank. He advises buyers to find a lender they trust and to discuss their financial situation. A lender will then help buyers “understand what financing options are available.”

7. Ballpark your closing costs

Buyers sometimes forget, amid their scramble to make a down payment and monthly mortgage fees, that that’s not everything they need to pay for. Another sizable chunk are closing costs, and they’re no small chunk of change, ranging from 3% to 6% of the purchase price thanks to taxes, transfer fees, and other expenses. So, make sure to budget for this expense too, just so you aren’t blindsided come closing time.

8. Ponder the future

Home buyers sometimes think of the purchase “inside a vacuum,” says Jeremy Hallett, CEO of Quotacy.com. That’s why he advises “making sure you have a will in place. Buyers should also consider a term life policy that runs at least 20 years and would pay off the home if something tragic happened—$20 a month buys a $500,000 policy.”

Robinson adds that before buying a home, you should have “an emergency fund established with enough money to cover three to six months of living in case you’re faced with an unexpected financial hardship. Considering your retirement savings is also important; you should continue making contributions towards your future.”

SOURCE: Realtor

Equity Is a Game Changer for Homeowners Looking To Sell

SOURCE: Keeping Current Matters
If you’re a homeowner, you might be torn on whether or not to sell your house right now. Maybe that’s because you don’t want to take on a higher mortgage rate on your next home. If that’s your biggest hurdle, understanding your equity may be exactly what you need to help you feel more comfortable making your move.

What Equity Is and How It Works

Equity is the current value of your home minus what you owe on the loan. And recently, that equity has been growing far faster than you may expect.

Over the last few years, home prices rose dramatically, and that gave your equity a big boost very quickly. While the market has started to normalize, there’s still an imbalance between the number of homes available for sale and the number of buyers looking to make a purchase. And it’s because homes are in such high demand that prices are back on the rise today. Rob Barber, CEO of ATTOM, a property data provider, explains:

“Equity levels were high even during the recent downturn, and now they are going back up and better than ever.”

How Equity Benefits You in Today’s Market

With today’s affordability challenges, that equity can be a game changer when you move. Here’s why. Based on data from ATTOM and the Census, nearly two-thirds (68.7%) of homeowners have either paid off their mortgages or have at least 50% equity (see chart below):

That means roughly 70% have a tremendous amount of equity right now.

Once you sell your house, you can use your equity to help with your next purchase. It could be some (if not all) of what you’ll need for your next down payment. It may even be enough to allow you to put a considerably larger down payment on your next home, so you don’t have to finance quite as much. And, if you’ve been in your current house for years, you may have even built up enough equity to pay in all cash. If that’s true for you, you’d be able to avoid borrowing altogether, so you wouldn’t have to worry about today’s mortgage rates.

How To Find Out How Much Equity You Have

The best way to learn how much you have is to reach out to a trusted real estate agent for a Professional Equity Assessment Report (PEAR).

Bottom Line

If you’re planning to make a move, the equity you’ve gained can make a big impact. To find out just how much equity you have in your current home and how you can use it to fuel your next purchase, connect with me so I can support you through the process.

SOURCE: Keeping Current Matters

The Passive House: What It Is and Why You Should Care

SOURCE: Houzz

If you don’t understand passive design, you could be throwing money out the window

The term “passive” is getting thrown around almost as frequently as the word “green” these days. But what does it actually mean? And how does the all-encompassing adjective differ from the measurable standards of the capitalized Passive House?

I’ve mentioned before that the truth of green building is in the details. Here’s how to understand the vocabulary and the implied meanings in the world of passive design.

Decoding What People Say

“This house was designed with passive solar principles” means the orientation of the house and the placement of windows have been used to gain heat through natural daylight. Perhaps shading for hot summers was also considered. These are the first and most fundamental steps toward reducing the energy consumption of a house.

“This house was designed to Passive House principles” means that the architect and builder, of their own accord, decided to pursue a set of measurable building standards that promote low-energy consumption. The term originated from Germany’s Passivhaus.

“This house is a certified Passive House” means that in addition to the house’s being designed and built to the Passive House standard, it has successfully undergone a certification process. Certification is managed by various entities all over the world. The original was the Passivhaus Institute in Germany, which is still widely regarded as the “gold standard” and most stringent set of performance metrics available. In the U.S. there is a second certifying institute, Phius, which has created a separate standard with similar and slightly less demanding criteria. Both of these certification paths require that project teams submit proof of performance and require third party accountability.

So, what is the Passive House standard, anyway?

Contrary to the impression the word may give, passive homes are anything but lazy. A house designed to take advantage of the solar heat streaming through a window is actively saving energy. Taking it a step further, and into the realm of the Passive House building standard, a house can be designed to work hard in every season to maintain a comfortable and healthy indoor living environment, without consuming superfluous energy.

A home built to the Passive House standard is one that remains comfortable through all seasons without employing an active heating or cooling system.

Depending on your country and the localized standards, a project must meet maximum annual energy consumption limits to be considered. Historically, and still in Europe, this was 15 kilowatt-hours per square meter each year. The U.S. standard has since made changes to that limit in an attempt to address specific climate zones.

However, as an order of magnitude, we’re talking about 60% to 70%, sometimes even more, in energy savings relative to conventional buildings.

How can that be possible? Well, in a Passive House, all of the energy that would be needed to heat or cool the building is no longer needed. Let me explain.

We Passive House architects start out with a compact building shape. You’ll notice that most Passive Houses are essentially a box in form. We can then add visual intrigue by using unconditioned outdoor rooms and covered spaces to break up the facade. This compact box core, however, is essential and is the basis of any concept of efficiency.

In the winter passive solar design takes as much heat as possible from the sun. This means orienting the house toward the sun’s path and making sure that the winter sun’s low angle is able to penetrate as much of the inside of the home as possible.

We add to that the heat that is created in the house just from people being there. (You’d be surprised at how much heat is generated from normal daily activities, like cooking, cleaning, using the computer and running home appliances.)

We use mechanical ventilation to keep the air fresh, heating the incoming air with the exhaust air. And we use dehumidifiers to maintain healthy moisture levels and prevent mold.

In the summer, we take advantage of shading devices and the high summer sun angle. In this way we can stop the sun from reaching windows, floors and walls, helping to keep them cool.

Then we make sure not to let heat pass through the building’s skin by designing a sealed and insulated building envelope.

This photo shows rock-wool insulation. Unlike LEED, the Passive House standard does not require that you use natural or recycled materials. Certification is based on energy performance alone.

Not only do the walls, slabs and roof need to be properly insulated, but so do all of the openings. High-quality windows are one of the biggest up-front expenses in a Passive House, but they contribute to a large portion of the energy savings.

We can insulate like crazy, but if we use subpar windows, all of the heat will exit through the glass. The building envelope, which is like its skin, is only as strong as its weakest point.

I often describe the building envelope as being like an inflated balloon. One hole in the balloon, and all the air will escape. It doesn’t matter how sturdy the rest of the balloon is.

So not only do we want to have a consistently insulated building envelope, but we also want to avoid any air leakages where hot air can escape in the winter or enter in the summer.

One way the Passive House standard verifies the absence of air leakages is with the Blower Door Test, in which the entire house is closed up and air is pumped inside. A gauge, shown here, then measures the air-flow rate relative to the volume of the house.

Tests like this, along with energy simulations, measure whether a home is built to the Passive House standard.

Whether or not a Passive House is valid without official certification is an ongoing discussion. Some professionals believe that certification is an added and redundant expense. Others say it adds transparency and verification to the whole process, keeping everyone accountable to goals. Some homeowners find it a necessary part of adding market value to their house. Others don’t see the point, especially if they are not intending to sell.

Above all, it is vital that you trust your project team and understand the entire situation. The word “passive” is not trademarked, as LEED is, so make sure you understand the context in which it is being used.

SOURCE: Houzz

First-Time Homebuyer Programs to Help You Afford a Mortgage

SOURCE: Realtor

Conventional wisdom says you need a 20% down payment to buy a house, but let’s face it: That sum can be daunting, particularly for first-time homebuyers who don’t have a pile of cash from a property they have just sold.

The good news is that the average down payment for first-time homebuyers can be as low as 3.5% depending on what type of mortgage you get or grants programs you are eligible to apply for.

Even still, coming up with a decent amount of cash when you’re first starting out can be tough. Thankfully, there are a number of first-time homebuyer programs aimed at helping you get a loan.

Don’t know where to start? No problem. To point you in the right direction, we’ve compiled a list of loan assistance programs you should check out if you qualify as a first-time homebuyer.

Who qualifies as a first-time homebuyer?

A first-time homebuyer is not just someone who’s never purchased a home before. You could qualify as a first-time homebuyer if you or your spouse haven’t owned a home in three years. The term also extends to recently divorced persons who have only owned a home jointly with a spouse.

There are some other limitations to who qualifies. You might not be eligible for one of these first-time homebuyer programs if your income exceeds a certain amount, you want to buy a more expensive property, or you plan to buy an investment or rental property.

Now that we have the fine print out of the way, let’s look into some first-time homebuyer assistance programs that might be perfect for you.

FHA loans

The Federal Housing Administration offers a program that allows first-time buyers to purchase a home with as little as 3.5% down. One caveat—and it can be a serious one—is the mortgage insurance requirement on an FHA loan.

Unlike a conventional loan, where you no longer have to pay mortgage insurance once you reach 20% equity in your home, FHA loans require you to pay mortgage insurance throughout the life of the loan at whatever the rate was when you first closed your loan, unless you refinance. Still, it’s hard to beat the low down payment for those who are short on ready cash.

VA loans

As a veteran or active service member of the United States military, you qualify for 100% financing with a VA loan, which means no down payment and no need to purchase private mortgage insurance. Most reservists, National Guard members, and spouses of military members who died while on active duty may also apply.

To qualify for a VA loan, you’ll need a certificate of eligibility and a good debt-to-income ratio, and you’ll have to meet VA and lender guidelines for credit score. Borrowers are responsible for paying a fee, but in certain situations (such as if you we disabled during your service) the fee can be waived.

USDA loans

Wait, the people who certify your beef can also help with your down payment? Yup! If you qualify for the U.S. Department of Agriculture’s Rural Development Guaranteed Housing Loan Program, you’ll receive 100% financing—no down payment necessary.

The properties must be in areas with a population below 35,000, so they are primarily rural areas, although some suburban areas could qualify.

These loans are available only to families demonstrating need—they are without current safe housing and have an adjusted income at or below the local limit. Keep in mind that the limit can be relatively high in pricey areas like California, where a $232,200 income (for a family of four) can get you a USDA loan in some counties.

National Homebuyers Fund

The National Homebuyers Fund provides down payment assistance in the form of a nonrepayable grant, for up to 5% of the loan amount. You read that right—you don’t have to pay back anything. The NHF offers two down payment assistance programs with different sets of requirements, but both are meant for low- to moderate-income earners.

The NHF Sapphire program is available in multiple states and has generous FICO score requirements (which is a good thing if you have a subpar credit score). Ask your mortgage lender if this program would be applicable to you.

Local programs

Many states and counties have a wide variety of down payment assistance programs for first-time buyers. For example, the Colorado Housing Finance Authority offers a portfolio loan that allows a consumer to pay only 3% down and has no mortgage insurance requirement. While this program is specific to Colorado, many other states have similar products.

While these programs provide only down payment assistance, David Hosterman, branch manager for Castle & Cooke Mortgage, in Denver, recommends checking with your real estate agent for assistance in getting seller concessions to help with closing costs.

“In many cases, consumers can get into a house with no money down,” he says, although he cautions that there are still out-of-pocket expenses associated with buying a property, such as an appraisal and home inspection.

Many of these local programs have specific requirements, such as for the buyer to complete a homebuying class before obtaining the grant.

To find more information about loan programs for which you are eligible, check with your lender to see what might be available in your area.

SOURCE: Realtor