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How To Rent Out A House Successfully: The Ultimate Guide

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Are you considering renting out your house? Maybe you have a different investment property that you’re considering renting out for the first time. As you decide to take on the role of landlord, you need to know that you’re going to have lots of new responsibilities as a result.

Naturally, you don’t want to go through this in a sink or swim way because a rental property is a horrible place to sink. That’s why you’re here now. You want to know how to successfully rent out your home in a way that will be easier on you and better for your lifestyle.

Quick Navigation
Before Becoming a Landlord
How Close Are You?
What is the Law of the Land?
Where to Find Tenants
Screen Tenants Before Approving Them
Poor Credit Isn’t Always an Automatic “No”
Decide How Much Rent to Charge
Don’t Forget to Check Comparables
Be Willing to Enforce Timely Rent Payments
Consequences of Letting Payments Slide
Consider Customizing the Lease
The Lease Protects You, Too
Spell Everything Out in Detail
Remember Property Insurance
Be Ready to Conduct an Eviction Process
Consider a Property Management Company
Learning How to Rent Out a House

Before Becoming A Landlord

When it comes to how to rent out a house, there are several things you need to know before you take the plunge to become a landlord. Let’s say that you’ve already decided that you’re going to do it, but you’re still unsure. Ask yourself these questions to be as prepared as possible for this journey into real estate investment.

How Close Are You?


If you’re going to embrace being a landlord, the ideal situation means that you’re going to live fairly close to the home you’re renting out. There’s a good reason for this, especially when you get that phone call at 3 am saying that the heater went out in the dead of winter.

You’re also going to want to live close by so you can monitor the property. That means checking on the unit regularly to see if any repairs need to be made and to ensure everything is in working order. Just remember, let your tenants know before you show up at the front door. You may own it, but they live there, so be sure to show them some respect.

For those of you that are not close by your rental property, you need to ensure you have a property management company available for your tenants to reach out to when there are issues. The company would be responsible for all of the things a landlord would normally do when you can’t be there.

What Is The Law Of The Land?

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Do you know what the landlord-tenant laws for your state or region say when it comes to how to rent out a house? It’s a good idea to make sure you know what you can legally request, so you don’t overstep your bounds. That means that you need to do your homework because if you ask for a nonrefundable deposit and it’s illegal, you could land yourself in hot water.

The laws also cover things like property access, the required amount of time for eviction notices, and security deposits. Laws don’t stop there. They extend to the federal level, and you need to be aware of those laws, too.

There are anti-discrimination laws that are so much more than being against racism or sexism. Landlords are often unaware of these laws, or if they do, they tend to ignore them. They assume that as long as they’re not racist or sexist, it’s not a big deal. Fair-housing laws exist for a reason, so make sure you are acquainted with them to keep that from coming back to bite you.

Where To Find Tenants

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There are plenty of places to find potential tenants. You can post ads in online classifieds or simply spread the word. Thanks to social media platforms, you can probably even find a tenant using that as your preferred method when it comes to how to rent out a house.

To help you sort through the tenants, have them fill out an application as part of the process. It should ask for basic information like their name, previous landlords or other references, as well as their employer’s contact information and salary.

Having all of this information gets you started on the screening process. You don’t want to approve a tenant based purely on a piece of paper, but it is enough to get the ball rolling on how to rent out a house. If references don’t speak well of the tenant, you may want to put them in the discard pile instead of continuing forward.

Screen Tenants Before Approving Them


You might think that’s an obvious thing, but if you don’t take the time to screen your potential tenants properly, you may be setting yourself up for some major problems. That means you need to do a background check as well as a credit check.

These types of checks are easy to do online and are a critical part of the approval process. Don’t forget the human element, though, because there are exceptions to every rule. As an example, you may have a rental property that a family wants to rent, but the couple’s credit scores are really low.

Poor Credit Isn’t Always An Automatic “No”


At first glance, you might think, nope, that’s a bad idea. Here’s the thing about that. It is entirely possible that the low credit score could be a result of someone having lost a job and therefore losing income. That’s a quick way to send someone’s credit score way downhill faster than the speed of light.

If that same person finally has a solid job, it is possible that they could be fantastic candidates for becoming tenants in your rental property. With that said, don’t neglect to call references and do a complete interview to get to know the person that will be living on your property 

Decide How Much Rent To Charge

You don’t want to overcharge because if you do, you’re probably not going to get much in the way of tenant applications. You also don’t want to undercharge because you have your own financial obligations to take care of.

The best way to decide how much rent to charge is going to be to consider the mortgage payment if there is a mortgage. In an ideal situation, you should also tack on an extra hundred or two hundred dollars to create a positive cash flow, so you have some extra money to put away in case of emergencies.

Don’t Forget To Check Comparables

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You’ll also want to check with whatever is available in your market for rentals. You may find rents that are lower or higher depending on what is out there, but the rent for your property should reflect comparable costs. If you owe more on the house than it is worth, you may end up having to ask for a lesser amount than what would cover the mortgage to have any hope of renting out the property.

Once you decide what your rent is going to be, you need to know how that applies to your potential tenants. Do you expect them to make double or triple the amount? What will you do to ensure your tenants pay the rent on time every month? What will the consequences be if they don’t?

Be Willing To Enforce Timely Rent Payments

Paying rent on time seems like something that makes you scratch your head about why we’re saying this, but it’s a real thing. It means that you need to keep your relationship with your tenants entirely professional.

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Even if you’re the type of person that likes to be friendly with everyone, you really should draw the line with tenants. Getting too close can result in letting them slide on their rent until you realize that they are several months behind.

Consequences Of Letting Payments Slide


Letting payments slide will hurt you if you are paying on a mortgage with the rent payment. It is going to leave you struggling to make the mortgage payments and putting you in potential financial turmoil. You don’t want that, so you want to be firm with your tenants while still maintaining a respectful attitude towards them.

Remember, having a good, professional relationship with your tenants is going to go a long way to making sure you receive the rent check on time every single month. It will also make life easier for you when you get those calls at odd hours to check on things that break.

Consider Customizing The Lease

You can go forward with a lease in one of two ways. You can pick a standard lease to use, or you can customize the lease to include the terms you want. A standard lease can be found on legal sites if you don’t have a lawyer available to create one for you.

A word of warning when it comes to choosing standard leases – they may not be entirely suitable for your state’s laws. For that reason, you’re going to want to find a lawyer that is at least willing to go through the document to make sure it is legally binding.

Customizing a lease can also be done and is usually a better option for most people. That does require a real estate attorney to help you with the document, but once it’s done, you’re ready to go. Customization includes things such as allowed pets, what types of pets, and any other rules or regulations that need to be followed like leash laws.

The Lease Protects You, Too


Not only does the lease tell your tenant what to expect, but it also protects you as a landlord. Your lease should comply with all of the necessary laws in your area to limit your own liability. Inside of a lease, you’re also going to explain who is responsible for the various areas of the house.

Are you responsible for fixing an issue with the house? Is the tenant responsible? What about regular maintenance like mowing the lawn? Who is supposed to take care of that? Are there any other rules about smoking or noise levels?

Spell Everything Out In Detail


By having details spelled out in a lease, you and your tenant know where responsibility falls. It also allows the tenant to have a plumbing issue fixed even if you’re not there. Of course, if you do allow your tenants to take care of issues without prior approval, you’re probably going to want to include a clause that limits the amount you’re willing to spend.

Eviction terms also give you an out if the tenant is not paying rent on time or causing problems in the home that go against pre-determined regulations. It’s a real problem that some landlords can face, so having everything in a written lease agreement makes life easier for everyone.

Remember Property Insurance

There are multiple types of insurance available, and you’re going to have to get the correct insurance that covers your rental property. Rental properties don’t get the same insurance as a house that you’re living in and claiming as a primary residence.

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Rental insurance is not the same as home owner’s insurance. Instead, rental insurance is meant to cover the structure, any medical expenses associated with damages to the tenants while they live there, legal costs if any legal procedures are required, and the loss of the income should the property be in need of repairs.

As the landlord, it is important to note that you are not responsible for the tenant’s belongings. What happens to them is not anything you need to concern yourself with. It would be good business, though, to mention that to the tenant and encourage getting renter’s insurance. That kind of insurance will cover them if they need it.

Be Ready To Conduct An Eviction Process

Evictions happen in almost every landlord’s life because, at some point, you will have that tenant that is going to force your hand. You don’t want to kick someone out because it will make their life harder, but at the same time, you don’t want to put your income in jeopardy either.

It’s a tough situation to be in for sure. When it happens, and it will, you’ll need a licensed real estate attorney to get the process started. You can’t just waltz into your rental property and forcibly kick them to the curb. It doesn’t work that way.

Eviction is a legal process that requires you to complete a court filing and have law enforcement accompany you to remove the tenant. Only a law enforcement officer can actually physically force someone else out of your property if they don’t want to leave.

The process also isn’t cheap. Evictions can cost several hundred dollars at a minimum and may end up costing much more. At the very least, it’s another reason you want to create a positive cash flow so you can cover these expenses should they come up.

Consider A Property Management Company

If you would prefer to have a hands-off approach with the property and the tenant, then you may want to consider a property management company. Going this route means that the company will be responsible for providing the services you would normally handle.

Management typically includes everything from finding the tenant to managing problems that crop up with the property. They will be responsible for collecting monthly rent and late fees as well as dealing with things like evictions. There is a given emotional distance which is important in maintaining a business relationship.

You don’t want to go with just any company to manage your property. What you do want is a company that is licensed to act as a property manager. You can check with your local real estate agent or with the National Association of Residential Property Managers.

Learning How To Rent Out A House

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There is a learning curve, but you can do it successfully with the right mindset. If you want to have an active role with your property and your tenants, then a landlord may be exactly what you want to do. On the other hand, if you want to be less involved, a property management company may be a better choice.

Remember to put funds away if and when you can so you can pull them out for that inevitable rainy day. Whatever you decide to do, you’re going to want to be properly prepared to go forward with any other costs that will come from your rental once you decide to rent your house out.

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Positive Cash Flow In Real Estate 101: Definitive Guide

Building wealth is not an easy concept for most people to grasp. You’ve probably heard a lot and read plenty about investing, but a lot of it sounds like it is out of reach. Like most people, you likely also feel like you have to have money to make money.

While the unfortunate cycle is true, it’s also something that can be broken by following different investing strategies. When it comes to real estate, generating a positive cash flow can be exceptionally difficult, so we’re going to try to simplify the things that you’ll need to do to get started.

Quick Navigation
Defining Positive Cash Flow
Why Positive Cash Flow Is Important
You Could Be a Landlord
At the End of the Line

Defining Positive Cash Flow

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Positive cash flow is more than just generating profits. In business, you need to have money to pay employees, buy new assets, and cover associated costs. That money comes from money that had been invested into your venture or money that has come in via sales or other receivables.

Cash flow refers to the amount of money going into and out of your business to keep it running. A positive cash flow means that your business is bringing in more money than you’re putting out. A negative cash flow is where your business is making less money than you need to cover your base operating expenses.

Profitability is something that is typically measured at the end of a fiscal year. It is the leftover funds that remain after every single expense has been paid. If there are funds left after breaking even, then you turned a profit. If you’re short on funds for the year, then you’ve experienced losses.

Why Positive Cash Flow Is Important

When it comes to real estate, positive cash flow is critical to keep the real estate business moving. There is a constant influx of money as well as an outflow as people buy and sell all the time. It’s one business that seems to have a steady movement which is why people are tempted to invest in real estate.

Creating a positive cash flow is different from your household income. It seems a little counterintuitive, but you have to look at them as two different things. One is all about the money that you have to live off of, and the other is all about your business.

As housing needs change over time, you may also experience negative cash flow from time to time. When you have positive cash flow most of the time, it's assurance that you can make it through the bad times without worrying about meeting obligations.

Understanding Household Income


The gap continues to grow and become more significant between the levels of income a person is liable to make. It doesn’t help that the median annual household income was $60,336 back in 2017. According to the U.S. Census Bureau, that marks the fifth year where there was an increase in household income for the entire nation.


While that sounds promising up front, there is so much more to be considered. You’ve got areas across the country that skew that number to make it seem so much higher than it is. Also, when you take into account inflation, the country is experiencing the highs in income that were last seen in 2007.


The recession hit in 2008 and household income took a sharp drop over the following years. As recent as 2012, the total median household income was between $54,000 and $55,000. Over time, the economy has bounced back, but inflation keeps people living paycheck to paycheck.

Simply having a living wage is hard, so what is someone to do to begin to generate a positive cash flow when funds are limited?

Understanding Real Estate Leverage


Real estate offers you more leverage than most other investment opportunities. You can invest without having to pay the entire mortgage cost. Let’s put it another way - imagine that you’re buying stocks. To buy, you have to pay the whole amount up front, right?


It doesn’t work that way with real estate. You only have to pay a percentage of the home to be in complete and total control of the property and all of its associated assets. This, again, relies on creditworthiness as well as your debt-to-income ratio, but you may qualify for a mortgage with a minimum percentage down.


Real estate flippers use this leverage to take out multiple mortgages that are also known as home equity loans to put down another payment on a different property. The options at this point are to either rent the property out to a tenant or to sell the property for a profit.


As long as you have a tenant in your property or you’re selling properties, you stand to have a positive cash flow and a self-sustaining, budding real estate business in the making. It will take some time, but it can be done with wise investments and good financial sense.

Leasing With an Option to Buy


When you have no money to speak of that you could use to begin investing in real estate, this is the first option you want to explore. To go this route, you need to find a seller that is willing to lease their property to you with exclusive permission to buy it after a pre-determined amount of time.

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Going this way means that you don’t have a closing to attend, but you do have a contractual obligation to make payments and eventually purchase the property. The next step would be to find what is called a tenant buyer.


A tenant-buyer is someone whom you grant the exclusive right to Option a given property for a price for a limited amount of time. There is typically a non-refundable deposit for this opportunity, and that deposit is yours. 


The tenant buyer then pays a set amount on a monthly basis. Typically, this should be between $100-$200 higher than the leased agreement you have with the buyer. It’s for two reasons. One, you build up money to cover any unexpected expenses if the tenant-buyer ends up leaving and tearing up the house.


The second reason is that if you don’t need to use the funds to cover expenses left by the tenant-buyer, then that money becomes yours. Keep in mind that with this approach, there is more risk involved, but it’s a decent starting point if you don’t have money to use up front.

Option a Property Instead


This method is a little trickier, but it can work wonders to make you some quick cash if done correctly. With an Option, the seller gets to continue living in their home until you’ve decided to buy it. You are also not responsible for making monthly payments in this scenario. Here’s how it all works.


Motivated sellers live in the home, taking care of payments and maintenance until the home is sold. This is a situation that may occur if they simply want to sell but don’t want to deal with typical real estate transactions, closing costs, etc.


Instead, these sellers simply want to get out of their home for a variety of reasons. One of those reasons is foreclosure. You can choose to Option a house that is behind on their payments if you can buy it in a shorter amount of time.


The other way to Option a property is to get a set time frame to buy a seller’s house and then find a buyer that is willing to pay more than you have the Option set at. Going this route will get people that are either paying in cash, or they can qualify for a loan on their own.

Wholesale Sales


You may think that it’s impossible to sell a home or buy a home at a wholesale price, but that’s not entirely accurate. It will take more work on your part to find them, but going this route can gain you lots of money very quickly.


The success of investing in real estate this way can also depend on whether or not you have extra cash to make it happen. Money isn’t always required, though, so it could work even if you don’t have money available.


Your focus here is on foreclosures that belong to banks. The way it works is that you have to accurately appraise a property value and buy it low to then sell at a higher price. The beauty of this technique is that you don’t necessarily have to fix anything either.


It’s not unheard of to do this with private sellers without money, but you’ll be more successful with money and going to a bank. Banks do require proof that you have funds available before considering your offer, so this may be a step better left for once you do have a positive cash flow coming in.

Up-and-Coming Neighborhoods


This may or may not be limited by your finances, but it is certainly limited by your credit score. If your credit is excellent, you may be able to invest in budding markets and flipping houses. That means identifying new areas that are just starting to build themselves up.


Over at Forbes, there is a neat tip that gives you an idea of how to figure that out. The author says that he would ask new and young residents where they moved. More often than not, they would mention a neighborhood that he was unaware of.


The follow-up question was whether or not more young people were moving into that same area. When the answer was yes, it signified an investment opportunity. Property values rise as earning power does, so with this group of people, demand increases while wages do, too.


If you can get approved for a home loan and flip the house for a higher amount quickly, you’ll start to make money back and therefore generate positive cash flow. Now, there is always the risk that you won’t be able to sell it right away, so you’re best off with having some cash to pay the mortgage while you’re biding your time.

Real Estate Investment Groups


Working with a real estate investment group is a great starting point for a beginner investor. You do need to have access to some sort of financing which again relies on creditworthiness and debt-to-income ratio.

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Getting involved with a real estate investment group also means you don’t have to be a landlord, so the mundane tasks become something you don’t need to worry about. It’s also a great choice because you will still receive some sort of income.


According to Investopedia, real estate investment groups are like mutual funds. A company will build or buy apartments or condos. That same company then allows investors to buy the units by going through the company. The company then handles the day-to-day operations like managing the units, maintenance, advertising, and taking care of the tenants. 


The company keeps a percentage while the remainder belongs to the investors. This kind of arrangement makes it incredibly safe for anyone to get involved in real estate investment. In a properly run real estate investment group, a company will also pool the rent to maintain coverage even if there are the occasional empty units.

You Could Be a Landlord

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For some people, this is the way to go. You do need some capital up front for financing as well as maintenance costs that you’ll have to cover before renting out a property. You also need to make sure you have extra funds for those times that the unit sits vacant and to pay for repairs that a tenant will eventually need.


Rental properties are an excellent source of income assuming everything works the way you want it to. On the other hand, maintaining them also demands more of your time and energy unless you decide to hire a property management company to oversee your property. If you do that, then you’ll also lose a portion of your cash to the company.

Of course, on the bright side, if the property is completely paid off, then the majority of the rental fee goes in your pocket. If you want to go the rental property route, then you do need to be prepared to do it as a long-term investment.


Another perk of having a rental property is that real estate tends to appreciate over time. That means that at some point, you will be the proud owner of a valuable asset. Even when the housing bubble burst back all those years ago, the dip did not last and had since continued to increase.

At the End of the Line

Even if you start with nothing, your cash flow will increase as you advance in real estate investment. Your life will also improve as you move forward with the positive cash flow because you’ll have a greater amount of money to pull from as needed.


Your debt-to-income ratio will also improve because your income will grow while your debt remains manageable under your ever-changing revenue. That means your creditworthiness will also improve because you’ll have the cash to manage your personal debt.


Understand that true mastery in real estate investment is not a get rich quick scheme. People that try for that tend to be disappointed because it takes more work than they thought. Don’t forget that the first check you get might be on the smaller side, but it’s a start.


Take the time to learn the business and make it work for you. Just give yourself some grace and don’t expect the impossible. Soon enough, you’ll be a real estate investment pro.

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8 Questions to Ask When Buying a House

You’ve started looking into what it takes to buy a home, but you’re not sure about the nitty-gritty details. That’s when you start trying to figure out what questions to ask when buying a house.

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What Questions To Ask When Buying A House?
1. What Is the Home’s History?
2. How Much Can I Afford?
3. Am I Fiscally Prepared?
4. What Should I Offer?
5. What Makes My Offer More Appealing?
6. Can I DIY My Way Through the Offer Process?
7. What Are My Mortgage Options?
8. What Exactly Are Closing Costs?
A Few Final Thoughts and Questions

What Questions To Ask When Buying A House?

There is some specific information you shouldn’t bypass to keep you feeling in control to know you’re making the right decision when you find the house you want. Ask questions, get answers, and ideally, you’re going to end up with the right house for the right price, too.

1. What Is the Home’s History?


This question is an important one to ask because looks can be deceiving. What if the previous owners had painted over a water damaged wall instead of taking care of the problems and only did it to make it look good? What if there was mold under a perfectly plastered wall because they didn’t take care of the issue?

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Those things happen, and they’re painful to fix after the fact. Because of that, it’s good to know the history of the house. You always want to request what is called the Comprehensive Loss Underwriting Exchange report because it contains any and all claims that may have been filed.

Couple that with a quality home inspection and you’re going to be better off getting the whole picture of what comes with the house. Of course, if it’s a brand new home, you shouldn’t have the mold issue to worry about, but still, don’t skimp on the 

2. How Much Can I Afford?


This is among the trickier questions to ask when buying a house. You may get approved for a higher amount than you can comfortably afford, so this becomes a case of just-because-you-can-doesn’t-mean-you-should. 

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If you haven’t been pre-approved before looking, then chances are you don’t know what you can afford. There’s nothing wrong with not knowing as it is a common misconception among potential home buyers.

On the other hand, if you do know what you’ve been pre-approved for, then you also need to consider any other payments that may pop up as a result of buying a home. Examples include possible renovations or installation of flooring that you weren’t planning to do.

Appliances can also impact affordability. Consider whether or not you want to or need to purchase appliances when you buy a house. If you include them in your budget, then you’ll be ready to handle the expenses even if they are unexpected.

3. Am I Fiscally Prepared?


To be fiscally or financially prepared, you need to know if you can close on the home of your choice. That’s where getting pre-approved on a home purchase along with having good credit becomes critical to finalizing your decision.

A preapproval shows both you and the seller that you’re serious about buying a home and that you have the financial capacity to handle a house payment. A credit score is especially important, too, in getting pre-approved because specific issues on your credit can automatically disqualify you for a mortgage.

When in doubt, one of the first things you do is to get your credit report in order. That means checking for anything that could impact your credit like debt collections or other outstanding issues.

4. What Should I Offer?


Knowing how much to offer may be a little more than a guessing game. If you don’t offer enough, you could very well lose the house to another offer. If you offer too much, then you may pay more than you needed to purchase the home.

You'll need the experience and expertise of your real estate agent when you're trying to figure out how much to offer. Your agent should be able to tell you the selling prices that other homes in the neighborhood are going for. You’ll want to compare homes that are similar, look at their lower and higher market values, and come up with a comparable offer.

Pricing the home correctly will give you a better chance at having your offer accepted. It also gives you the opportunity to be prepared to counteroffer if necessary. Having someone guide you through the process will help, so you know when to make an offer or to keep looking.

5. What Makes My Offer More Appealing?


Depending on how competitive the market is, you may have to get creative on how to make your offer stand out. That can include writing a personal letter or note to the seller that talks about why you want the home. Maybe you’re a grandmotherly type that wants to live in the same neighborhood as the grandkids. Telling the seller your story might be what tips acceptance in your favor.

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If the market is extremely competitive, it’s not unheard of to include hard-to-get tickets to a game or show as part of the offer. Some potential buyers will even wine and dine the sellers in order to attempt to gain their favor. 

Do keep in mind, though, that in some cases, actions like these may very well turn off your seller, so use your judgment wisely and consider your audience. You’ll also want to check the law because in some cases, doing this can also be illegal in some places.

6. Can I DIY My Way Through the Offer Process?


The answer to this is pretty much a no. While there are templates online that are supposed to make the offer process easier, it’s really not the best way to move forward. Remember, there are area-specific laws that are made to guide the entire process, and those forms don’t always take that into consideration.

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Once an offer is accepted, the seller is legally bound to follow through with the acceptance as long as all applicable laws are followed. It’s also important to know that in many states the law says that you have to work with a lawyer to complete the paperwork.

From a legal standpoint, you’ll fare much better if you use someone that is knowledgeable in real estate transactions. Having a good real estate agent can ensure that you have access to everyone and everything you need.

7. What Are My Mortgage Options?


There are several different options when it comes to picking which mortgage is right for you, but to pick your best choice, you need to know the jargon, so it makes sense when you hear it. Since everything can be so overwhelming, it helps if you at least have a loan officer that can navigate the rough waters for you.

There is a lot of information to take in and understand from terms, rates, and various other types of mortgages like the ones available from the VA or for first-time home buyers. It’s enough to make your head spin.

With all of that said, make sure you have a loan officer that knows all of this information. Do some research and find one that can give you the best information, so you end up picking the best mortgage with the lowest payment. It can mean the difference of thousands of dollars in savings for you.

8. What Exactly Are Closing Costs?


First off, closing is the time that you meet with brokers, realtors, and anyone else involved to sign the paperwork, saying that you are buying the house. When you sign the paperwork, you’re also committing to how the other associated costs are going to be paid by either the seller or buyer.

As an example, there are sometimes attorney fees that need to be paid at the close of a deal. There are also fees or commissions that must be paid to the realtor for the job they did in helping you find the home.

Don’t forget title insurance or mortgage insurance as required. Keep in mind that, in most instances, if you put down less than 20% of the total cost of your mortgage loan, you’ll have to purchase mortgage insurance which is also due at closing.

A Few Final Thoughts and Questions

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There are several other questions to ask when buying a house, but they’re a little more outside-the-box as opposed to the ones previously presented. Ask if there are pets buried in the backyard, so you don’t find unpleasant surprises. 

You may also want to ask if the house is haunted or was home to a murder or suicide which can lower the property cost. It isn’t required to disclose something like that, so asking may be the only way to find out.

Don’t forget to request warranty documentation along with any other paperwork about infestations or water damage, too. Once you ask all the questions and get answers, you’ll feel great knowing that you have all of the information you possibly need to make the right decisions when buying a house.

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How To Avoid Capital Gains Tax

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If you’ve never heard of it before, there is such a thing as capital gains tax. It is a separate tax from other types of taxes like sales tax, property tax, payroll tax, and income tax. Capital gains tax specifically affects people that work with investment assets.

Sounds clear as mud, right? Stay with us, and you’ll see that it’s not nearly as complicated as it might seem. You will also learn how to avoid capital gains tax or deal with it if you can’t avoid paying the necessary taxes.

Quick Navigation
First, the Basics of Capital Gains Tax
What Are Capital Gains?
What Are Capital Gains Tax Rates?
How Are Capital Gains Taxed?
Long-Term Gains
Short-Term Gains
Do You Pay Capital Gains Tax When You Sell Your Home?
How Can You Offset Capital Gains?
A Few Last Tips on How to Avoid Capital Gains Tax
Savvy Investors and Capital Gains Taxes

First, The Basics Of Capital Gains Tax

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Capital gains tax rates can be extremely high with rates as much as nearly 40% of the capital gains, so it is no wonder that people want to avoid the tax if possible. Before we get into that, let’s start by getting into what capital gains are and how the tax rate is applied.

What Are Capital Gains?

We begin by setting the stage with this simple scenario. Imagine buying a car that you paid $$ for. It may have been a fixer-upper or a classic car that needed some TLC. You undergo the improvements and pay another $ in repairs making the total money that you have put out a full $$$ for this car.


You decide that same year that you’re going to sell the car and ask $$$ for the sale price which is $$ more than you have in the vehicle. If you sell the car at your asking price, then your capital gain is $$ in that single transaction. That money is taxable under capital gains tax law.


The situation is similar with stocks that are sold in less than a year for short-term gains as well as long-term gains. The only difference is that if you have capital gains as a result of selling stock and then take those gains and invest them into an IRA or a 401k, you won’t have to pay taxes right away.

What Are Capital Gains Tax Rates?

There are a couple of different categories that capital gains fall into – short-term and long-term. Short-term gains are a result of assets that are in your possession for less than a year from the time of acquisition. Long-term gains are assets that you have had for a year or longer.


Short-term gains are typically taxed the same way your income is taxed depending on your total taxable income. If you have less taxable income, your tax rate goes down or vice versa, with the tax rate topping out at almost 40%. The car in the above scenario would have been considered short-term capital gains.


Long-term gains would be reflected in a transaction that happens to an asset that you have had for a year or longer. To give you an example of how that would work, imagine that you purchased stock several years ago for a set price. You decided to sell that stock and the resulting difference is $10,000 in capital gains. Because you owned the stock for longer than a year, you qualify for a lower tax rate.

How Are Capital Gains Taxed?

Capital gains are taxed according to your taxable income. That means that the taxes you can expect to pay are a reflection of the tax bracket that you fall into according to the IRS.

Long-Term Gains


As per the Tax Policy Center, “Taxpayers in the 10 and 15 percent tax bracket pay no tax on long-term gains on most assets; taxpayers in the 25-, 28-, 33-, or 35- percent income tax brackets face a 15 percent rate on long-term capital gains. For those in the top 39.6 percent bracket for ordinary income, the rate is 20 percent.”

The numbers are important to recognize because depending on which tax bracket you fall into, you may very well not have to pay capital gains tax on long-term gains. For reduced tax rates, you want to sell your assets after you have owned them for a year.

Short-Term Gains


As stated earlier, short-term gains are taxed as ordinary income with a 3.8% tax on investment income if your income is more than $ as a single taxpayer or $$ for married filing jointly. Investment income includes things like dividends that are issued to stockholders.

Do You Pay Capital Gains Tax When You Sell Your Home?

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The good news for homeowners that are looking to sell their homes is that in most situations, your home sale is exempt from capital gains tax laws. There are specific conditions that you have to meet to exclude any capital gains from being taxed when it comes to selling your home.


First, you have to own your home for a minimum of two years in the previous five years leading up to the sale. Your home also has to have been your primary residence for a minimum of two years during that same five-year time frame. You also can’t have sold another home during the previous two years and excluded that gain to avoid the tax.


Full stop that means that you can’t use a rental property that you’re selling as an asset that you can claim an exemption on unless you lived there previously. If you’re investing in a rental property that you have no intention of living in, and then you sell it, there is no avoiding that capital gains tax. The only exception, known as a 1031 exchange, is if you roll the proceeds into a similar investment within six months of the sale date.

How Can You Offset Capital Gains?

Capital losses are one of the keys here when it comes to learning how to avoid capital gains tax. Capital losses can offset your capital gains because things that go up must come down. This especially applies to investors when you consider the way stocks can play against each other.


Imagine that you’ve received $$$ in long-term gains as a result of selling a stock. You also sold another stock but have $$ in losses from that sale. That means that the only amount that you can expect to pay capital gains taxes is on the $ difference between the gains and losses as a result of selling both stocks in the same calendar year.


On the other hand, capital losses can roll forward into another year if they’re over $ in a calendar year. In other words, if you sell a stock that results in $$$ in losses, and you sell another stock that results in $$ in gains, you can match losses for that year. 


The remaining $$ can be rolled over into losses for the next year and every year provided that the losses that continue to roll over are more than $ each calendar year. For investors, this is a key approach when it comes to how to avoid capital gains tax.

A Few Last Tips On How To Avoid Capital Gains Tax

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There are a few other ways to avoid paying some of the tax if not all of the tax. It depends on your circumstances and what you’re willing to do.

As an example, you can also sell when your total taxable income is low. Having a lower income means your capital gains tax is also decreased. Choosing to sell long-term assets when your income is lower is fiscally smart because it saves you money.


Reduce your taxable income where you can, too. That means you need to get as many credits and deductions as possible prior to filing your income tax return. Credits and deductions include donations to non-profit organizations, IRA or 401k contributions, or even otherwise expensive medical procedures that need to be done. Dental work, anyone?

Savvy Investors And Capital Gains Taxes

There are many different ways when it comes to how to avoid capital gains tax. Savvy investors know the loopholes and work to keep as much of their income as possible, but don’t misunderstand that it is easy to do.


Sure, there are certain approaches that are easier like selling low-performing stocks or claiming the primary residence exclusion, but there are many other complex approaches, too. Take the time to research ways to avoid the tax and learn all you can. After all, you earned your money, and you deserve to keep it.

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What Lies Ahead For The Capital Gains Tax?

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