how to finance investment property

How to Finance Investment Property.

You might find the perfect investment property, but before you can buy it you need to obtain financing. Many people will go to a bank and ask for a conventional loan with a repayment period of 25-30 years. Before doing so, however, you should analyze your credit history to check that you are a good credit risk. You have more options than simply relying on a conventional loan. For example, you could cash out the equity in your home or seek owner financing of the investment property.

Method 1 Obtaining a Conventional Loan.

1. Pull together a down payment. You can’t rely on mortgage insurance to cover your investment property. Accordingly, you will need a sizeable down payment, around 20-25%.

2. Consider a neighborhood bank. Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect. Local banks also may have a stronger interest in lending for local investment, so they are a good option.

You might not know anything about smaller lenders, so you should do as much research as possible. Ask people that you know whether they have ever done business with the bank.

You can also check online. Look for reviews.

3. Gather necessary paperwork. Before approaching a lender, you should pull together required paperwork. Doing so ahead of time will speed up the process. Get the following.

two months of bank statements, prior two months’ statements for investment accounts and retirement accounts, last two pay stubs.

information about self-employed income, such as last two year’s tax returns or business financial statements, driver’s license.

Social Security card, papers related to bankruptcy, divorce, or separation (if applicable).

4. Work with a mortgage broker. A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates. The broker can also try to negotiate better terms for you. Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.

Mortgage brokers don’t work for free. You typically will pay about 1% of the loan amount. For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.

You can ask other investors or a real estate agent for a referral to a broker. Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer.

5. Compare loans. If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing. You might be an experienced pro who has borrowed before. However, if you haven’t, then remember to consider the following when comparing loans.

Interest rates. An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money. Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.

Discount points. For some loans, you can pay points, which will lower your interest rate.

Loan term. This is the length of the loan. A shorter loan will cost more each month, but you will pay it off sooner and with less interest.

Origination charge. This amount of money covers document preparation, fees, and the costs of underwriting the loan.

6. Seek pre-approval. You should try to get pre-approved for a loan before searching for properties. Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved.

7. Don’t forget other team members. Purchasing investment property requires the expertise of many different professionals. You should begin assembling your team early—even before you get financing. You will probably need the help of the following people.

An accountant who can help you understand investment tax strategies.

A realtor who can help you sign an appropriate real estate contract.

An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.

An insurance agent.

Method 2 Using Other Finance Options.

1. Use the equity in your home. You might be able to use the equity in your current home to purchase an investment property. Generally, you can borrow around 80% of your home’s value. There are different ways you can tap the equity in your home, such as the following.

You could get a Home Equity Line of Credit (HELOC). A lender will approve you for a specific amount of credit, and you use your current home as collateral for the loan. The credit is available for a certain amount of time. At the end of this draw period, you must have paid back the loan.

You might also get a cash-out refinance. The lender will pay you the difference between the mortgage and the home’s value, but is usually limited to 80-90% of the home’s value. For example, if you have $20,000 remaining on your mortgage, but your home is valued at $220,000, then $200,000 could be available. You could get 80-90% of $200,000 ($160,000-180,000). This option usually has a lower interest rate than a HELOC.

Both a HELOC and a cash-out refinance put your home at risk if you can’t make repayments. For this reason, you should think carefully before tapping the equity in your home to finance investments.

2. Obtain a fix-and-flip loan. You might be able to get this type of loan if you want to purchase a property in order to renovate and then quickly sell. The loan will be short-term and is secured by the property. Fix-and-flip loans have high interest rates, so you need to renovate and sell quickly.

You might find it easier to qualify for a fix-and-flip loan compared to a conventional loan. However, lenders will still look at your credit history and income.

The lender will also want to know the estimated value after repair, which can impact whether they extend you a loan and the terms.

3. Research peer-to-peer lending sites. Peer-to-peer lending connects investors with lenders who are willing to lend. Two of the more well-known peer-to-peer lending sites are Prosper and LendingClub.

Peer-to-peer lenders will require that you complete an application. They look at your credit score and credit history. They may also have minimum credit scores in order to qualify.

You might not be able to get a large personal loan through peer-to-peer lending. However, small businesses can typically borrow more, so if you create an LLC then you might be able to borrow up to $100,000.

4. Find a business partner. You might not be able to secure a loan on your own, in which case you will need to consider other options. One option is to find a business partner who you can invest with.

You will want to screen any potential business partner, just as a bank would screen you. If you are counting on the partner to help pay for the loan, then you will need to check their credit history and employment.

You also need to consider how you will hold the investment property. For example, it might be best to create an LLC and to both be owners of the LLC. The LLC will then hold title to the investment property.

5. Consider owner financing. With owner financing, the owner lends you the money that you use to buy the property. Sometimes the owner will lend only a portion of the price, which you then supplement with a conventional loan. You should analyze the pros and cons of owner financing.

A benefit of owner financing is that an owner might be willing to lend if you don’t have perfect credit or a huge down payment available. You and the owner can work out loan terms that are acceptable to both of you.

Typically, the seller’s loan will be for a short period of time (such as five years). At the end of the term, you are obligated to pay off the loan with a “balloon payment.” This usually means you need to get a conventional loan to make this balloon payment. You should analyze your credit to see if you can qualify for a conventional loan in the near future.

See Owner Finance a Home for more information.

Method 3 Analyzing Your Credit Score.

1. Obtain a free copy of your credit report. Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report.[18] You are entitled to one free credit report each year from the three national Credit Reporting Agencies (CRAs). You shouldn’t contact the CRAs individually. Instead, you can get your free copy from all three using one of the following methods.

Complete the Annual Credit Report Request Form, which is available here: https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf. Once completed, submit the form to Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.

2. Find errors on your credit report. You should closely look at you credit reports to find any errors that might lower your credit score. If your score is below 740, then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. Look for the following errors.

credit information from an ex-spouse, credit information from someone with a similar name, address, Social Security Number, etc.

incorrect payment status (e.g., stating you are late when you aren’t), a delinquent account reported more than once.

old information that should have fallen off your credit report, an account inaccurately identified as closed by the lender.

failure to note when delinquencies have been remedied.

3. Consider whether you should fix certain problems. There may be negative information on your credit report that you want to fix. For example, you might want to pay an old collections account. However, you should think carefully before fixing certain problems.

Negative information must fall off your credit report after a certain amount of time. For example, an account in collections should fall off after seven years. If the account is six years old, you might want to wait and let it fall off rather than pay it off.

If you need help considering what to do, then you should consult with an attorney who can advise you.

4. Fix errors. You can correct errors by contacting each CRA online or by writing a letter. To protect yourself, you should probably do both. Mail your letter certified mail, return receipt requested.

The Federal Trade Commission has a sample letter you can use: https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report.

See Dispute Credit Report Errors for more information on how to fix errors.

December 15, 2019

How to Finance Investment Property

How to Finance Investment Property.

You might find the perfect investment property, but before you can buy it you need to obtain financing. Many people will go to a bank and ask for a conventional loan with a repayment period of 25-30 years. Before doing so, however, you should analyze your credit history to check that you are a good credit risk. You have more options than simply relying on a conventional loan. For example, you could cash out the equity in your home or seek owner financing of the investment property.

Method 1 Obtaining a Conventional Loan.

1. Pull together a down payment. You can’t rely on mortgage insurance to cover your investment property. Accordingly, you will need a sizeable down payment, around 20-25%.

2. Consider a neighborhood bank. Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect. Local banks also may have a stronger interest in lending for local investment, so they are a good option.

You might not know anything about smaller lenders, so you should do as much research as possible. Ask people that you know whether they have ever done business with the bank.

You can also check online. Look for reviews.

3. Gather necessary paperwork. Before approaching a lender, you should pull together required paperwork. Doing so ahead of time will speed up the process. Get the following.

two months of bank statements, prior two months’ statements for investment accounts and retirement accounts, last two pay stubs.

information about self-employed income, such as last two year’s tax returns or business financial statements, driver’s license.

Social Security card, papers related to bankruptcy, divorce, or separation (if applicable).

4. Work with a mortgage broker. A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates. The broker can also try to negotiate better terms for you. Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.

Mortgage brokers don’t work for free. You typically will pay about 1% of the loan amount. For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.

You can ask other investors or a real estate agent for a referral to a broker. Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer.

5. Compare loans. If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing. You might be an experienced pro who has borrowed before. However, if you haven’t, then remember to consider the following when comparing loans.

Interest rates. An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money. Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.

Discount points. For some loans, you can pay points, which will lower your interest rate.

Loan term. This is the length of the loan. A shorter loan will cost more each month, but you will pay it off sooner and with less interest.

Origination charge. This amount of money covers document preparation, fees, and the costs of underwriting the loan.

6. Seek pre-approval. You should try to get pre-approved for a loan before searching for properties. Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved.

7. Don’t forget other team members. Purchasing investment property requires the expertise of many different professionals. You should begin assembling your team early—even before you get financing. You will probably need the help of the following people.

An accountant who can help you understand investment tax strategies.

A realtor who can help you sign an appropriate real estate contract.

An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.

An insurance agent.

Method 2 Using Other Finance Options.

1. Use the equity in your home. You might be able to use the equity in your current home to purchase an investment property. Generally, you can borrow around 80% of your home’s value. There are different ways you can tap the equity in your home, such as the following.

You could get a Home Equity Line of Credit (HELOC). A lender will approve you for a specific amount of credit, and you use your current home as collateral for the loan. The credit is available for a certain amount of time. At the end of this draw period, you must have paid back the loan.

You might also get a cash-out refinance. The lender will pay you the difference between the mortgage and the home’s value, but is usually limited to 80-90% of the home’s value. For example, if you have $20,000 remaining on your mortgage, but your home is valued at $220,000, then $200,000 could be available. You could get 80-90% of $200,000 ($160,000-180,000). This option usually has a lower interest rate than a HELOC.

Both a HELOC and a cash-out refinance put your home at risk if you can’t make repayments. For this reason, you should think carefully before tapping the equity in your home to finance investments.

2. Obtain a fix-and-flip loan. You might be able to get this type of loan if you want to purchase a property in order to renovate and then quickly sell. The loan will be short-term and is secured by the property. Fix-and-flip loans have high interest rates, so you need to renovate and sell quickly.

You might find it easier to qualify for a fix-and-flip loan compared to a conventional loan. However, lenders will still look at your credit history and income.

The lender will also want to know the estimated value after repair, which can impact whether they extend you a loan and the terms.

3. Research peer-to-peer lending sites. Peer-to-peer lending connects investors with lenders who are willing to lend. Two of the more well-known peer-to-peer lending sites are Prosper and LendingClub.

Peer-to-peer lenders will require that you complete an application. They look at your credit score and credit history. They may also have minimum credit scores in order to qualify.

You might not be able to get a large personal loan through peer-to-peer lending. However, small businesses can typically borrow more, so if you create an LLC then you might be able to borrow up to $100,000.

4. Find a business partner. You might not be able to secure a loan on your own, in which case you will need to consider other options. One option is to find a business partner who you can invest with.

You will want to screen any potential business partner, just as a bank would screen you. If you are counting on the partner to help pay for the loan, then you will need to check their credit history and employment.

You also need to consider how you will hold the investment property. For example, it might be best to create an LLC and to both be owners of the LLC. The LLC will then hold title to the investment property.

5. Consider owner financing. With owner financing, the owner lends you the money that you use to buy the property. Sometimes the owner will lend only a portion of the price, which you then supplement with a conventional loan. You should analyze the pros and cons of owner financing.

A benefit of owner financing is that an owner might be willing to lend if you don’t have perfect credit or a huge down payment available. You and the owner can work out loan terms that are acceptable to both of you.

Typically, the seller’s loan will be for a short period of time (such as five years). At the end of the term, you are obligated to pay off the loan with a “balloon payment.” This usually means you need to get a conventional loan to make this balloon payment. You should analyze your credit to see if you can qualify for a conventional loan in the near future.

See Owner Finance a Home for more information.

Method 3 Analyzing Your Credit Score.

1. Obtain a free copy of your credit report. Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report.[18] You are entitled to one free credit report each year from the three national Credit Reporting Agencies (CRAs). You shouldn’t contact the CRAs individually. Instead, you can get your free copy from all three using one of the following methods.

Complete the Annual Credit Report Request Form, which is available here: https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf. Once completed, submit the form to Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.

2. Find errors on your credit report. You should closely look at you credit reports to find any errors that might lower your credit score. If your score is below 740, then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. Look for the following errors.

credit information from an ex-spouse, credit information from someone with a similar name, address, Social Security Number, etc.

incorrect payment status (e.g., stating you are late when you aren’t), a delinquent account reported more than once.

old information that should have fallen off your credit report, an account inaccurately identified as closed by the lender.

failure to note when delinquencies have been remedied.

3. Consider whether you should fix certain problems. There may be negative information on your credit report that you want to fix. For example, you might want to pay an old collections account. However, you should think carefully before fixing certain problems.

Negative information must fall off your credit report after a certain amount of time. For example, an account in collections should fall off after seven years. If the account is six years old, you might want to wait and let it fall off rather than pay it off.

If you need help considering what to do, then you should consult with an attorney who can advise you.

4. Fix errors. You can correct errors by contacting each CRA online or by writing a letter. To protect yourself, you should probably do both. Mail your letter certified mail, return receipt requested.

The Federal Trade Commission has a sample letter you can use: https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report.

See Dispute Credit Report Errors for more information on how to fix errors.

December 15, 2019

How to Finance Home Repairs.

How to Finance Home Repairs.

Paying out of pocket for repairs and renovations is one of the more unfortunate aspects of home ownership. Large, costly renovations may occasionally be necessary in order to get your home ready for sale, while emergency repairs pose the risk of draining your bank account with little warning. If you own a home or are thinking of buying one, it is immensely helpful to learn how to finance home repairs before they arise. The guide below covers a few of your options for paying for home repairs.

Steps.

1. Refinance your mortgage to obtain cash for home repairs. A popular way to pay for home repairs and renovations is through a "cash-out refi," which is simply a way of swapping your existing mortgage for a new one and converting some of your home equity to cash in the process. Your current mortgage lender can help you understand your options for refinancing. Note that liquidating your equity in this way will generally cause your monthly payments or mortgage term to increase.

2. Obtain a home equity line of credit. A home equity line of credit functions like a credit card, with an open-ended term, a credit limit, and a minimum monthly payment based on your outstanding balance. This type credit makes sense for financing home repairs or remodeling projects because these projects tend to increase your home equity anyway.

3. Seek out a second mortgage. A second mortgage can be an unattractive option as it can tend to overburden you with debt, but for home repairs with an end in sight they are helpful. A second mortgage is a loan secured on your accumulated equity. The interest rate will be higher because your primary mortgage lender is given preference over your new lender in case of insolvency; for this reason, try to keep the size of your second mortgage as small as possible.

4. Determine if you qualify for a government loan. In the United States, the Federal Housing Administration runs a loan program called Title 1 for homeowners with very little equity. These loans are made by banks and backed by the federal government, and can be used to finance essential repairs such as structural and electrical problems.

5. Use a credit card for small, emergency repairs. While credit cards typically carry higher interest rates than loans secured on your home equity, they make sense for funding small home repairs. A credit card is available for use immediately and requires no paperwork, unlike other financing options.

6. Borrow from your 401(k). Many employers allow borrowing from your 401(k) to fund home repairs and renovations. This option is low-hassle because the money is already yours, so there is no paperwork or credit check. However, you are required to pay the borrowed money back into your 401(k) before leaving the company.

Tips.

If performing home repairs yourself, it is best not to skimp on materials. Durable, high-quality materials may cost more upfront, but will generally last much longer and prevent you from having to repair or replace materials later.

Warnings.

Avoid entering into financing arrangements directly with the contractor performing the work. These types of deals often carry high interest rates and hidden fees.

December 03, 2019

how to finance home repairs

How to Finance Home Repairs.

Paying out of pocket for repairs and renovations is one of the more unfortunate aspects of home ownership. Large, costly renovations may occasionally be necessary in order to get your home ready for sale, while emergency repairs pose the risk of draining your bank account with little warning. If you own a home or are thinking of buying one, it is immensely helpful to learn how to finance home repairs before they arise. The guide below covers a few of your options for paying for home repairs.

Steps.

1. Refinance your mortgage to obtain cash for home repairs. A popular way to pay for home repairs and renovations is through a "cash-out refi," which is simply a way of swapping your existing mortgage for a new one and converting some of your home equity to cash in the process. Your current mortgage lender can help you understand your options for refinancing. Note that liquidating your equity in this way will generally cause your monthly payments or mortgage term to increase.

2. Obtain a home equity line of credit. A home equity line of credit functions like a credit card, with an open-ended term, a credit limit, and a minimum monthly payment based on your outstanding balance. This type credit makes sense for financing home repairs or remodeling projects because these projects tend to increase your home equity anyway.

3. Seek out a second mortgage. A second mortgage can be an unattractive option as it can tend to overburden you with debt, but for home repairs with an end in sight they are helpful. A second mortgage is a loan secured on your accumulated equity. The interest rate will be higher because your primary mortgage lender is given preference over your new lender in case of insolvency; for this reason, try to keep the size of your second mortgage as small as possible.

4. Determine if you qualify for a government loan. In the United States, the Federal Housing Administration runs a loan program called Title 1 for homeowners with very little equity. These loans are made by banks and backed by the federal government, and can be used to finance essential repairs such as structural and electrical problems.

5. Use a credit card for small, emergency repairs. While credit cards typically carry higher interest rates than loans secured on your home equity, they make sense for funding small home repairs. A credit card is available for use immediately and requires no paperwork, unlike other financing options.

6. Borrow from your 401(k). Many employers allow borrowing from your 401(k) to fund home repairs and renovations. This option is low-hassle because the money is already yours, so there is no paperwork or credit check. However, you are required to pay the borrowed money back into your 401(k) before leaving the company.

Tips.

If performing home repairs yourself, it is best not to skimp on materials. Durable, high-quality materials may cost more upfront, but will generally last much longer and prevent you from having to repair or replace materials later.

Warnings.

Avoid entering into financing arrangements directly with the contractor performing the work. These types of deals often carry high interest rates and hidden fees.

December 03, 2019

How to Work out a Rental Yield

How to Work out a Rental Yield.

Rental yield, essentially, tells you how much you can expect to earn from an investment property that you're renting out. It's typically expressed as a percentage of the cost of the property. You can use this figure to determine if a property you're thinking about buying would be a good investment or to understand your return on investment (ROI) in a property you already own. This figure is also helpful if you're trying to decide if a "buy-to-let" mortgage is affordable for you. To work out the rental yield, you need to know the total costs of buying and owning the property as well as the amount of rent you'll collect.

Method 1 Totaling Property Costs.
1. Calculate your yearly mortgage payments. If you have a mortgage on the property, total the mortgage payments you would make over the course of a year, including interest, taxes, and any associated fees. These payments are part of your cost of owning the property.
Even if you don't have a mortgage, you're likely still responsible for property taxes on the property. Those would also be considered part of your costs of ownership.
If you don't own the property yet, use an estimate of mortgage payments or get an offer from a mortgage company for the property and use that number instead.
2. Get a quote for insurance. If you rent out the property, you'll typically need landlord insurance, which may have different rates than homeowner's insurance. If you don't already own the property, a quote from a reputable insurer will help you estimate this cost.
In addition to landlord's insurance, you may also want to consider other types of insurance to cover damage to the property.
Rent insurance may also be available to you, which provides you some money in the event your tenant breaks their lease or needs to be evicted for nonpayment of rent.
3. Include any management fees or other property expenses. If you've hired a management company to run the property on your behalf, their fees are considered part of your costs. You may also have other property expenses or fees, depending on where the property is located.
For example, if you only own the building but not the land, you may have to pay rent for the land that the property sits on.
If you have a unit in an apartment building or condominium complex, you may also have association fees to consider.
Tip: Include in this category expenses you might incur in the event you have to advertise for a tenant. Fees for listing the property or doing background checks on tenants are also costs of owning and renting the property.
4. Estimate costs for repairs and maintenance. Over the course of the year, your tenant may have things break that need to be repaired. While you can't necessarily predict all of these expenses, you can typically come up with a reasonable estimate based on the age of the property and its fixtures.
You also want to consider major repairs that may be necessary in the event of a natural disaster or other event. While your insurance may cover some of this expense, you'll likely still have to pay a deductible.

Method 2 Determining Gross Rental Yield.
1. Total your yearly rental income. Evaluate how much you charge in rent, then multiply that amount to get the total rent you'll collect each year. If you collect weekly rent, multiply the weekly rent amount by 52. For monthly rent, multiply by 12.
For example, if you rent the property out for $500 a week, you would have an annual rental income of $26,000.
2. Find the current value of the property. If you plan to purchase the property this year, the value of the property would be equal to your purchase price. However, if you already own the property, use the most recent appraisal to determine the current value.
If you're looking at a property for sale, use the asking price as the value of the property, even if you think the asking price is too high and plan to make a lower bid on it.
3. Divide the rental income by the value to find the gross rental yield. Once you have those two figures, complete the equation. Your result will be a decimal value. Multiply that number by 100 to get a percentage.
For example, if your yearly rental income is $26,000 and the property is valued at $360,000, you have a gross rental yield of 7.2%. Gross rental yield is considered ideal if it's somewhere between 7 and 9%, so the gross rental yield for that property is good. Any lower than that, and you likely wouldn't have the cash flow in the event emergency repairs were needed.
Warning: While gross rental yield is easy to calculate, it doesn't take a lot of other factors into account that can affect the investment value of a property, such as the property's location, age, or condition.

Method 3 Calculating Net Rental Yield.
1. Start with your total yearly rental income. Just as when working out gross rental yield, you'll need the total rent you collect from the property in a year. Multiply weekly rent by 52 and monthly rent by 12 to find the annual amount.
For example, if you rented a condominium for $2,000 a month, your annual rental income would be $24,000.
Tip: Net rental yield is typically calculated at the end of the year, looking back at real numbers. If the property was vacant for any period during the year, don't include the rent you would have received for that time in your yearly rental income total.
2. Subtract your annual expenses from the rental income. For net rental yield, you'll also take into account the other costs of owning the property. Include all fees, mortgage payments, interest, taxes, insurance premiums, and other costs associated with the property for the year. Typically these will be monthly expenses, so don't forget to multiply them by 12 to get the annual total.
For example, suppose your annual rental income was $24,000 and the condominium unit cost you $900 a month to maintain. Your annual cost to own the property would be $10,800. When you subtract $10,800 from $24,000, you get $13,200.
3. Divide the result by the current value of the property. The current value of the property is not your mortgage payment, which likely includes interest, taxes, and other fees. Instead, look at the value of the most recent appraisal of the property. That's the amount you could likely sell the property for.
For example, suppose the condominium you own is worth $250,000. You have an annual rental income of $24,000 for the property, which decreased to $13,200 by the costs of owning the property. When you divide $13,200 by $250,000, you get 0.0528.
4. Multiply by 100 to find your net rental yield. Net rental yield, like gross rental yield, is expressed as a percentage of the value of the property. To get that percentage, take the decimal you got when you divided the annual rental income less costs by the current value of the property and multiply it by 100.
To continue the example, if you had annual rental income less costs of $13,200 divided by $250,000, you would have a net rental yield of 5.28%. This is considered a relatively low rental yield, but might still be sustainable depending on the location of the property or your reasons for owning it.

Community Q&A.

Question : When you say an acceptable yield is 7-9%, are you referring to the gross yield or the net yield?
Answer : A yield of 7 to 9% is considered a good yield regardless of whether it is a gross yield or a net yield. The net yield simply gives you more information about the actual cost of owning and managing the property. A property with a gross yield of 7 to 9% may have a much lower net yield, for example, if the property needed extensive renovations or repairs. In that case, it likely wouldn't be a worthwhile investment. However, a lower net yield might be acceptable depending on your reasons for owning the property and its location. For example, you might be willing to take a lower yield in a high-growth area where the property was rapidly appreciating in value.
Question : Does net yield include interest-only costs to the bank?
Answer : Net yield includes all costs of owning the property. If you have a mortgage on the property and are paying interest on that mortgage, those costs would be subtracted from your annual rental income along with all the other costs.
Question : What is the acceptable yield?
Answer : It depends on your goals. I'd say an acceptable average would be a 7-9% yield, but you may be happy taking as low as 4% if it's just supporting a pension, or if the property is located in an up-and-coming area where the value will increase significantly over time.
Question : Is there a good online calculator that will do this for me?
Answer : Excel or Google Docs can do this for you. Both are very good at it and keep track of it too. They both allow you to manipulate data to extract even more information.

Tips.

Work out your rental yield at least once a year. It will change depending on operating expenses and changes in the value of your property. Keeping tabs on your rental yield will help you determine when it's best to sell the property.
There are many real estate and finance companies that offer free rental yield calculators online. Simply search for "rental yield calculator" followed by the name of your country. The country name is necessary to ensure the calculator uses the same currency as you.

Warnings.

If you're comparing investment properties to buy, look at the property's past appreciation and potential to appreciate in the future as well as its rental yield. A high rental yield doesn't necessarily equate to a good investment if the property is in an undesirable area.

June 04, 2020

how to prepare your finances for a job leave

How to Prepare Your Finances for a Job Leave.

Working people depend on having an income to live. You need to pay for housing, food, health care and many other things. Nevertheless, there may come a time when you want to be able to leave your job. The most common reasons are either retirement or a temporary leave to change jobs or careers. Whatever your reason for wanting to leave work, you will need to make financial plans. You will need to set aside some savings and make changes to your spending. Your mortgage and insurance costs will be an important part of the picture as well. With adequate planning, you can make it happen.



Method 1 Setting a Target.

1. Choose a date. Some people may decide at the start of their career that they want to work to age 50, or 55, or some other number. If you would like to make this a goal, you need to set your target and then work toward it. Claiming to have a goal means nothing unless you take steps to get there, but your first step is to decide what you want.

2. Identify an event. Your target to leave your present job may be some event, such as reaching a particular level of expertise or the day your supervisor leaves. Some of these targeting events may be under your control, and some may not. The less certain the event, the more prepared you will need to be.

For example, you may have decided that you want to leave your present company if they ever sell out or merge with some other company. Since you cannot control something like this and may not know when it is coming, you should try to have some alternative source of employment at least in mind for when the time comes.

In the event of a maternity leave, you may not know for years exactly when it is coming, but then in the final nine months (or so) you will know almost exactly. You can plan in general to have some savings set aside, and then when you get pregnant you can begin making some specific last-minute preparations.

Sometimes, the "event" that triggers a temporary leave might be a long-term illness, either yours or someone you need to care for. This can come with almost no advance warning. You need to plan for the general contingency and make some emergency preparations.

3. Plan a savings target. This is probably the most controllable concept. You can sit down with a financial planner and decide how much money you would need to have in savings to allow yourself and your family to survive adequately without your income. Then work toward setting aside that amount of money. As time goes by and interest rates fluctuate, you may need to adjust your plans accordingly. However, setting the target and doing the work up front will help you be as prepared as you can be.

If your target is to retire early, financial experts recommend that your savings target should be about 25 times your annual salary. You will then be able to withdraw money at the rate of about 4% per year.

If you target is to be able to leave work temporarily to look for a new job or another reason, then your target will be whatever amount you need to meet your expenses for that time. For example, the average job search is approximately four to six months, so you should plan to have savings to cover your living costs for that long.



Method 2 Reaching Your Target.

1. Work with a financial adviser. If you want to plan for leaving your job, you should enlist the help of a qualified financial adviser. Someone with expertise in investing can help you decide how much you need to save and can help you find the best ways to invest. If you want some help with finding a qualified financial adviser, read Hire a Financial Advisor or Select a Financial Advisor.

2. Invest your savings carefully. Working with your financial adviser, you will want to do more than just place your earnings in a bank account. Simple savings accounts earn very low interest. You will do better to invest in bonds, stocks or other securities, in accordance with your adviser’s opinions.

Investing works best when you begin as early as possible. Your best ally when saving is time. Your interest compounds more effectively when you begin early.

If your focus is to be able to take a temporary leave at some time, then you may need to have your savings in a readily accessible account. Long-term IRA savings are good for retirement planning, but you may need to be able to withdraw money sooner. Work with your adviser to find the best investment or savings plans for your needs.

If you want to plan for a lengthy, temporary leave, such as for a maternity or family illness, you will want to have savings in some readily accessible account. A short-term bond or money market may be the best bet, or even a simple savings account that you earmark for such an emergency.

3. Cut your expenses as much as possible. Many people live their lives from month to month and use a great deal of their income. If you manage a budget this way, you will do fine from month to month, but you will greatly delay your savings plan. If your goal is to be able to leave work, you should begin by cutting expenses as much as possible.

To begin cutting expenses, start by listing them all. Then review how you spend your money over a one- to three-month period and identify the expenses that you believe you can live without. Perhaps you can reduce the number of times that you go out to dinner. Maybe you can cut some entertainment expenses.

Manage your utilities. Try to reduce some of your monthly expenses by reducing utility usage in your home. Manage the heat, turn off lights, and do what you can to save water. These sound like small steps, but over time they can all add up.

Cutting expenses is a powerful financial tool for any job leave, whether permanent/retirement or a temporary leave for illness, maternity or some other reason. You need to consider the absence from work as an overall change in your lifestyle.

4. Plan to spend some on your new job search. Part of setting your target, if you are anticipating leaving your current job, should be to have some savings available to spend on a search for a new one. You will need money for correspondence, printing resumes, travel, parking, and possibly one or two new interview suits. You should anticipate these costs, estimate the amount of money that you will need, and set this aside as part of your target savings.



Method 3 Handling Your Mortgage.

1. Recognize the importance of your mortgage. For most people, housing payments make up the largest expenses they have. If you are paying rent, rather than owning your residence, those monthly payments are effectively doing nothing for you. If possible, purchase a property and get a mortgage. In this way, your monthly payments will be building equity for you. At the end of your mortgage, you will own the property outright in your own name.

2. Aim for your target date. As much as possible, try to align your mortgage to your target retirement date. That is, if you are relatively young and just starting out, then you may want to get a 30 year mortgage to last the duration of your career. However, if you can afford the monthly payments of a shorter mortgage, you will be setting aside money toward your equity at a faster rate.

3. Refinance when possible. When mortgage interest rates go down, you should try to refinance. By refinancing, you will get a lower interest rate and reduce your monthly payments. You may also take that opportunity to refinance into a shorter term. For example, if you started out with a 30 year mortgage, you may be able to refinance to a 20-year or even 10-year mortgage, for roughly the same (or even lower) monthly payment amount. More of the money, that way, will be going to pay down the principal loan.

4. Downsize after retiring. When you do leave your job, whether for permanent retirement or as a temporary leave, you may want to consider changing your residence. Many retirees choose to move to a smaller house with a lower expenses and mortgage costs. You may also wish to move to a different part of the country with lower overall costs of living.



Method 4 Making Other Miscellaneous Arrrangements.

1. Investigate your employer's maternity leave benefits. Some employers will offer paid maternity leave for some period of time. Others may stick to the allotted unpaid leave that is required under the Family and Medical Leave Act, which allows up to 12 weeks of unpaid leave. However, many small employers are even exempt from this. You need to find out what policy your employer has, and use that information to help you determine what financial help you will need.

For a maternity leave, you can also investigate whether you can be covered under short term disability insurance. This could provide a portion of your salary during your leave. To investigate coverage, you should talk with your employer or human resources personnel, or your own insurance company.

2. Plan some alternative, temporary income. If you are out of work temporarily, either looking for a new job, on a maternity leave, caring for an ill family member or for some other reason, you may want to plan for some temporary work that you can do. Find something that gives you the flexibility that you need to go along with your leave, but still provides some income for you and your family. For example.

Even with a new baby or an ill family member, you can probably find some time to tutor a few students a week or teach music lessons (if you have that talent).

You might be able to do some freelance writing or editing.

3. Transfer your company-based savings plans. If you participated in an employer-based savings or retirement plan, you should transfer that plan when you leave. Your financial adviser may be able to help you set up a personal IRA, or you might talk to an investments adviser at your bank.

4. Collect any payout benefits. If your company allowed you to accrue vacation time or sick time, you might be able to cash that in and collect an additional payment in accordance with your contract. In some cases, this can be a valuable payoff amount.

In some cases, you may be able to collect a partial cash payout for unused sick or vacation days to provide some cash for a temporary emergency leave, such as a family illness or bereavement leave. Even if such a benefit is not standard, you may want to talk with your employer and come up with some creative possibilities.

If you are not aware whether or not you have such a benefit, contact your company’s human resources department and ask.

5. Maximize stock options, if any. If you were granted the option to purchase stock in the company, and you have not exercised that option to its fullest potential, you should do so before leaving. These options can often be very valuable and will not be available to you later.

Depending on your contract, you may have a set period of time to purchase such options upon your separation from the company.

6. Plan for health insurance. One of the primary benefits of employment is having health insurance. When you plan to leave, whether for permanent retirement or a temporary leave for a job change, you will need to make plans for some replacement health insurance. You may wish to investigate the following options:

If you are under age 26, your parents may be able to add you to their health plan.

If you participated in the insurance plan through your employer, you may be eligible through COBRA to continue on that plan for up to 3 years by making your own monthly payments.

Your spouse or partner may be able to add you to their health plan.

February 11, 2020

How to Prepare Your Finances for a Job Leave.

How to Prepare Your Finances for a Job Leave.

Working people depend on having an income to live. You need to pay for housing, food, health care and many other things. Nevertheless, there may come a time when you want to be able to leave your job. The most common reasons are either retirement or a temporary leave to change jobs or careers. Whatever your reason for wanting to leave work, you will need to make financial plans. You will need to set aside some savings and make changes to your spending. Your mortgage and insurance costs will be an important part of the picture as well. With adequate planning, you can make it happen.



Method 1 Setting a Target.

1. Choose a date. Some people may decide at the start of their career that they want to work to age 50, or 55, or some other number. If you would like to make this a goal, you need to set your target and then work toward it. Claiming to have a goal means nothing unless you take steps to get there, but your first step is to decide what you want.

2. Identify an event. Your target to leave your present job may be some event, such as reaching a particular level of expertise or the day your supervisor leaves. Some of these targeting events may be under your control, and some may not. The less certain the event, the more prepared you will need to be.

For example, you may have decided that you want to leave your present company if they ever sell out or merge with some other company. Since you cannot control something like this and may not know when it is coming, you should try to have some alternative source of employment at least in mind for when the time comes.

In the event of a maternity leave, you may not know for years exactly when it is coming, but then in the final nine months (or so) you will know almost exactly. You can plan in general to have some savings set aside, and then when you get pregnant you can begin making some specific last-minute preparations.

Sometimes, the "event" that triggers a temporary leave might be a long-term illness, either yours or someone you need to care for. This can come with almost no advance warning. You need to plan for the general contingency and make some emergency preparations.

3. Plan a savings target. This is probably the most controllable concept. You can sit down with a financial planner and decide how much money you would need to have in savings to allow yourself and your family to survive adequately without your income. Then work toward setting aside that amount of money. As time goes by and interest rates fluctuate, you may need to adjust your plans accordingly. However, setting the target and doing the work up front will help you be as prepared as you can be.

If your target is to retire early, financial experts recommend that your savings target should be about 25 times your annual salary. You will then be able to withdraw money at the rate of about 4% per year.

If you target is to be able to leave work temporarily to look for a new job or another reason, then your target will be whatever amount you need to meet your expenses for that time. For example, the average job search is approximately four to six months, so you should plan to have savings to cover your living costs for that long.



Method 2 Reaching Your Target.

1. Work with a financial adviser. If you want to plan for leaving your job, you should enlist the help of a qualified financial adviser. Someone with expertise in investing can help you decide how much you need to save and can help you find the best ways to invest. If you want some help with finding a qualified financial adviser, read Hire a Financial Advisor or Select a Financial Advisor.

2. Invest your savings carefully. Working with your financial adviser, you will want to do more than just place your earnings in a bank account. Simple savings accounts earn very low interest. You will do better to invest in bonds, stocks or other securities, in accordance with your adviser’s opinions.

Investing works best when you begin as early as possible. Your best ally when saving is time. Your interest compounds more effectively when you begin early.

If your focus is to be able to take a temporary leave at some time, then you may need to have your savings in a readily accessible account. Long-term IRA savings are good for retirement planning, but you may need to be able to withdraw money sooner. Work with your adviser to find the best investment or savings plans for your needs.

If you want to plan for a lengthy, temporary leave, such as for a maternity or family illness, you will want to have savings in some readily accessible account. A short-term bond or money market may be the best bet, or even a simple savings account that you earmark for such an emergency.

3. Cut your expenses as much as possible. Many people live their lives from month to month and use a great deal of their income. If you manage a budget this way, you will do fine from month to month, but you will greatly delay your savings plan. If your goal is to be able to leave work, you should begin by cutting expenses as much as possible.

To begin cutting expenses, start by listing them all. Then review how you spend your money over a one- to three-month period and identify the expenses that you believe you can live without. Perhaps you can reduce the number of times that you go out to dinner. Maybe you can cut some entertainment expenses.

Manage your utilities. Try to reduce some of your monthly expenses by reducing utility usage in your home. Manage the heat, turn off lights, and do what you can to save water. These sound like small steps, but over time they can all add up.

Cutting expenses is a powerful financial tool for any job leave, whether permanent/retirement or a temporary leave for illness, maternity or some other reason. You need to consider the absence from work as an overall change in your lifestyle.

4. Plan to spend some on your new job search. Part of setting your target, if you are anticipating leaving your current job, should be to have some savings available to spend on a search for a new one. You will need money for correspondence, printing resumes, travel, parking, and possibly one or two new interview suits. You should anticipate these costs, estimate the amount of money that you will need, and set this aside as part of your target savings.



Method 3 Handling Your Mortgage.

1. Recognize the importance of your mortgage. For most people, housing payments make up the largest expenses they have. If you are paying rent, rather than owning your residence, those monthly payments are effectively doing nothing for you. If possible, purchase a property and get a mortgage. In this way, your monthly payments will be building equity for you. At the end of your mortgage, you will own the property outright in your own name.

2. Aim for your target date. As much as possible, try to align your mortgage to your target retirement date. That is, if you are relatively young and just starting out, then you may want to get a 30 year mortgage to last the duration of your career. However, if you can afford the monthly payments of a shorter mortgage, you will be setting aside money toward your equity at a faster rate.

3. Refinance when possible. When mortgage interest rates go down, you should try to refinance. By refinancing, you will get a lower interest rate and reduce your monthly payments. You may also take that opportunity to refinance into a shorter term. For example, if you started out with a 30 year mortgage, you may be able to refinance to a 20-year or even 10-year mortgage, for roughly the same (or even lower) monthly payment amount. More of the money, that way, will be going to pay down the principal loan.

4. Downsize after retiring. When you do leave your job, whether for permanent retirement or as a temporary leave, you may want to consider changing your residence. Many retirees choose to move to a smaller house with a lower expenses and mortgage costs. You may also wish to move to a different part of the country with lower overall costs of living.



Method 4 Making Other Miscellaneous Arrrangements.

1. Investigate your employer's maternity leave benefits. Some employers will offer paid maternity leave for some period of time. Others may stick to the allotted unpaid leave that is required under the Family and Medical Leave Act, which allows up to 12 weeks of unpaid leave. However, many small employers are even exempt from this. You need to find out what policy your employer has, and use that information to help you determine what financial help you will need.

For a maternity leave, you can also investigate whether you can be covered under short term disability insurance. This could provide a portion of your salary during your leave. To investigate coverage, you should talk with your employer or human resources personnel, or your own insurance company.

2. Plan some alternative, temporary income. If you are out of work temporarily, either looking for a new job, on a maternity leave, caring for an ill family member or for some other reason, you may want to plan for some temporary work that you can do. Find something that gives you the flexibility that you need to go along with your leave, but still provides some income for you and your family. For example.

Even with a new baby or an ill family member, you can probably find some time to tutor a few students a week or teach music lessons (if you have that talent).

You might be able to do some freelance writing or editing.

3. Transfer your company-based savings plans. If you participated in an employer-based savings or retirement plan, you should transfer that plan when you leave. Your financial adviser may be able to help you set up a personal IRA, or you might talk to an investments adviser at your bank.

4. Collect any payout benefits. If your company allowed you to accrue vacation time or sick time, you might be able to cash that in and collect an additional payment in accordance with your contract. In some cases, this can be a valuable payoff amount.

In some cases, you may be able to collect a partial cash payout for unused sick or vacation days to provide some cash for a temporary emergency leave, such as a family illness or bereavement leave. Even if such a benefit is not standard, you may want to talk with your employer and come up with some creative possibilities.

If you are not aware whether or not you have such a benefit, contact your company’s human resources department and ask.

5. Maximize stock options, if any. If you were granted the option to purchase stock in the company, and you have not exercised that option to its fullest potential, you should do so before leaving. These options can often be very valuable and will not be available to you later.

Depending on your contract, you may have a set period of time to purchase such options upon your separation from the company.

6. Plan for health insurance. One of the primary benefits of employment is having health insurance. When you plan to leave, whether for permanent retirement or a temporary leave for a job change, you will need to make plans for some replacement health insurance. You may wish to investigate the following options:

If you are under age 26, your parents may be able to add you to their health plan.

If you participated in the insurance plan through your employer, you may be eligible through COBRA to continue on that plan for up to 3 years by making your own monthly payments.

Your spouse or partner may be able to add you to their health plan.

February 25, 2020

How to Finance a Business

How to Finance a Business.

When it's time to finance a business, there can be substantial work involved to facilitate this step. Every small business is different, and businesses in different industries and sectors have different ways of going about getting credit. There are various costs which widely range over the span of particular sectors. However, for the core process of securing the financial assistance that a business owner needs for a start up, some basic guidelines and principles will help create effective programs and a solvent business model. Estimate the costs of doing business, find out what you need to borrow money, and then research your financing options.





Estimating Costs of Your Business.



Determine the one-time costs of your business. These are costs that will only occur at the very beginning of opening your business. These include mileage (getting to a location), market research, advertising, and training. You will also need to look up any fees which will occur, such as a lawyer or consultant fee.



Calculate the recurring costs of your business. These are costs that you will have to pay over and over again, usually on a weekly, bi-weekly, or monthly basis. These include costs of utilities, insurance, wages, etc. Recurring costs are generally larger than one-time costs, and span a length of 10-30 years depending on your financing options. Calculate not only the total cost over the lifespan of your business, but also that on a yearly, and bi-yearly basis.



Ascertain whether costs are fixed, or variable. Fixed costs are those which will not change. The cost of your utilities, or your administrative costs are all fixed. Variable costs are those which will change over time. This includes wages, insurance, and shipping/packaging costs. The best way to keep all this information organized is to create a spreadsheet (use Excel). That way you can graph out this information, and view it multiple ways(bar graph, line chart, etc.).



Create a balance sheet. If you are just starting a small business, it is important that you write out balance sheets, which include: assets, liabilities, and equity. Each of these three categories will help you keep track of the finances of your business, and make it easier to pay your bills.

Assets = current assets(cash, accounts receivable, notes receivable, inventory) + fixed assets(land, building, machinery, furniture, improvements) + intangibles(research, patents, charity, organizational expense)

Liabilities = current liabilities(accounts payable, accrued expenses, notes payable, current long-term debt) + non-current liabilities(non-current long-term debt, notes payable to shareholders and owners, contingent liabilities)

Equity = Assets - Liabilities



Develop a cash flow analysis. This measures money which goes in and out of your business. This is then broken down into operational activities, investment activities, and financing activities. This analysis will help you determine when you break even, and can start reinvesting/expanding your business. Once more, the best way to do this is to create a spread sheet. Find all of your financial statements and gather them together before you start to analyze.

Operational = net income, loses of business, sales, and business expenditures.

Investment = purchases and sales of property, assets, securities, and equipment.

Financing = cash flows of all your loan borrowing and repayment.







Borrowing Money for Your Business.



Use equity financing to start your business. Equity financing usually comes from a primary investor, or other business. They will provide you a sum of money, in exchange for part-ownership of your company. This is a good option because investors look further down the road than a loan company, and you will have more money on hand. However, the investors will naturally want to interfere, and change aspects of your business model.

There are networks online which can set you up with a primary investor.

You can also check out private equity firms, which contain a vast array of specialized and experienced investors.

Remember, that small business owners generally use very little equity financing. It all depends on your business model, and the potential for growth.



Start your business using debt financing. Debt financing is when you take out a loan, usually from a bank or lending institution. This is a great option because the bank will have no say in how you run your business. The loan is tax deductible, and you can get short-term or long-term loans. However, you must have the loan repaid in a certain amount of time, and if you don't, you could have a hard time getting capital investment.

Talk to your local bank, or lending institution about the qualifications for specific loans. You will probably have to fill out some paperwork to determine whether or not you are qualified.

When using a local bank, you may be able to set up a personal relationship. This way, you can postpone a few payments if you fall on hard times.



Find out about credit scores and ratings. The higher your score is, the less risky you are to investors. In many cases, the initial business loan will be based on the borrower's own personal credit score. However, in some cases where a business is already operational, a business plan and other documents can provide for a different kind of credit specifically for the continued operations of that enterprise.

Use the online company TransUnion or EquiFax to determine your credit score. It is important to get an independent analysis, otherwise your own calculated score could be biased.

The main focus of the score is how long you have maintained a credit line, and how many monthly payments you have made on time.

If you have no prior experience taking out credit, it may be hard to get a loan. It is best to start using a credit card on small things like gas, or grocery store trips. Then gradually build up. Show the creditors you are a responsible client.[12]



Maintain an adequate debt to equity ratio. You want to make sure that the total debt and liabilities of your business is no more than four times the equity in the business. Equity simply means any retained earnings and cash injections by investors. In order to start out with equity, the owner of the business usually has to put in anywhere from 20-40%. This will maintain an adequate debt to equity ratio, and allow you to get a loan.



Put up collateral to start your business. Before you get a loan, the lending institution or bank will ask for collateral. This means you risk some of the items you own. In the case you cannot repay the loan, the bank can seize your property. Collateral usually includes homes, cars, furniture, equipment, stocks, bonds, etc. this is a scary proposition, so you need to be sure that your business will be financially successful beforehand.



Shop around for different lenders. There are a variety of lenders who may or may not be willing to issue new business loans, and all of these potential lenders have their own terms and conditions. Talk to various lenders and ask them about what kinds of loans are available. Evaluate loans by timeline. Lenders will offer various short-term, long-term or revolving-credit loans to business owners. Look at which ones suit the needs of a startup the best.

Look at secured and unsecured business loans. Secured loans actually use existing assets as collateral. For example, the person trying to start a business can use his or her home, or other property, as collateral and get lower interest rates for the loan. However, this leaves the assets vulnerable to seizure in cases of nonpayment. Unsecured loans rest solely on the borrower's credit score. See which of these types of loans best matches desired risk.

Select the best deals. You want a loan that has the lowest interest rates and most favorable terms for repayment.









Financing Your Business.



Get a bank loan. Small, local banks have received more strict standards after the financial crash of 2008. However, large investment banks such as JP Morgan Chase and Bank of America have received a set of moneys from the Federal Reserve to lend out to small businesses. This is your best option to go with, although it takes the long to pay off. Local banks will set you up with a contract, and a monthly payment. The other benefit is that you can get this loan postponed if you are having trouble paying it off.



Place your home up as collateral. Banks will generally allow you to borrow up to 75-80% of your home's worth, as long as you have at least 10-15% already down on your home. This is great because the loan will have a much lower interest rate than a credit card. Talk with your financier, or local mortgage company for more detailed information.



Use your credit card. This is a very dangerous game to be played. You need to stay on top of your monthly payments. If you fall behind, you get trapped in a death spiral. However, when carefully managed, credit cards can be great to get out of an emergency. Only use a credit card occasionally, when you are experiencing a hole you know that you can get out of.



Tap into your 401(k) plan. You will need a financial expert who can start up a C Corporation which you can then roll your retirement assets into. This is also a risky business, because you are tapping into your nest egg. This should only be done if you have more money put away in a savings account, or if you are independently wealthy.



Try loaning money from your friends and family. Ask who would be willing to make a contribution, or purchase a percentage of the company. Go about asking members of your church for donations. Let local businesses to partner with you. You might make some acquaintances, and make some deals (you make cheese, they make wine, a chance to exchange).



Pledge your future earnings. Some companies, or peoples, are willing to gamble and put money upfront, if you are willing to commit a certain percentage of future profits. This is a gamble because they, and you, are betting that you will be able to earn enough in the future. There is usually a contract involved, guaranteeing that they will at least get some money back, so keep that in mind.



Kickstart your business. Crowd funding, in the age of the internet, has become a very popular way to finance businesses. Write a description of your business idea online, at sites like Kickstarter, and convince people to donate to your business. You will want to be really descriptive, and excited in your word choice. The downside of this is that it could take months or years before you raise enough money.



Secure an SBA loan. SBA (Small Business Administration) is a branch of the Federal Government that supplies loans to businesses struggling to get off the ground. However, there are a number of qualifications. You had to have been denied a loan from another bank before. You have to meet the government's definition of a small business. You will also have to meet other restrictions, depending on the type of SBA loan. Go to the SBA's website, and fill out a form if you think you might meet these qualifications.



Attract an angel investor. These are wealthy individuals who like to bet on the financial success of start-up businesses. Angel investors are usually found at private-equity, and venture capital firms. You will want to bring someone older, who looks like he has had experience in business before. Be passionate about your idea when you present, and know all of the financial details before you walk in the room. Keep in contact with the investor days and weeks after your initial meeting.





Tips.

Talk to numerous lending institutions before you pick a loan. Some will have better interest rates, while others will have better repayments.

Consult with family members first. Getting a small loan from them can avoid dealing with greedy credit lenders.

Get some experience in the business before you start your own. If you want to start a restaurant, make sure you have worked in a restaurant before. If not, you will wind up purchasing outside help which will cost you astronomical amounts of money.



Warnings.

Talk to a lawyer and a financial advisor to avoid colossal mistakes. The biggest regret of many first-time small business owners is not consulting with a professional before they begin the process.

If you are a person living paycheck-to-paycheck, it is best to wait to start a small business. If the business goes down hill quickly, you could lose your assets, and your life savings.

Take a year to save up money and make a detailed plan. You do not want to go into small business owning head first.

November 13, 2019

how to finance a business well

How to Finance a Business.

When it's time to finance a business, there can be substantial work involved to facilitate this step. Every small business is different, and businesses in different industries and sectors have different ways of going about getting credit. There are various costs which widely range over the span of particular sectors. However, for the core process of securing the financial assistance that a business owner needs for a start up, some basic guidelines and principles will help create effective programs and a solvent business model. Estimate the costs of doing business, find out what you need to borrow money, and then research your financing options.





Estimating Costs of Your Business.



Determine the one-time costs of your business. These are costs that will only occur at the very beginning of opening your business. These include mileage (getting to a location), market research, advertising, and training. You will also need to look up any fees which will occur, such as a lawyer or consultant fee.



Calculate the recurring costs of your business. These are costs that you will have to pay over and over again, usually on a weekly, bi-weekly, or monthly basis. These include costs of utilities, insurance, wages, etc. Recurring costs are generally larger than one-time costs, and span a length of 10-30 years depending on your financing options. Calculate not only the total cost over the lifespan of your business, but also that on a yearly, and bi-yearly basis.



Ascertain whether costs are fixed, or variable. Fixed costs are those which will not change. The cost of your utilities, or your administrative costs are all fixed. Variable costs are those which will change over time. This includes wages, insurance, and shipping/packaging costs. The best way to keep all this information organized is to create a spreadsheet (use Excel). That way you can graph out this information, and view it multiple ways(bar graph, line chart, etc.).



Create a balance sheet. If you are just starting a small business, it is important that you write out balance sheets, which include: assets, liabilities, and equity. Each of these three categories will help you keep track of the finances of your business, and make it easier to pay your bills.

Assets = current assets(cash, accounts receivable, notes receivable, inventory) + fixed assets(land, building, machinery, furniture, improvements) + intangibles(research, patents, charity, organizational expense)

Liabilities = current liabilities(accounts payable, accrued expenses, notes payable, current long-term debt) + non-current liabilities(non-current long-term debt, notes payable to shareholders and owners, contingent liabilities)

Equity = Assets - Liabilities



Develop a cash flow analysis. This measures money which goes in and out of your business. This is then broken down into operational activities, investment activities, and financing activities. This analysis will help you determine when you break even, and can start reinvesting/expanding your business. Once more, the best way to do this is to create a spread sheet. Find all of your financial statements and gather them together before you start to analyze.

Operational = net income, loses of business, sales, and business expenditures.

Investment = purchases and sales of property, assets, securities, and equipment.

Financing = cash flows of all your loan borrowing and repayment.







Borrowing Money for Your Business.



Use equity financing to start your business. Equity financing usually comes from a primary investor, or other business. They will provide you a sum of money, in exchange for part-ownership of your company. This is a good option because investors look further down the road than a loan company, and you will have more money on hand. However, the investors will naturally want to interfere, and change aspects of your business model.

There are networks online which can set you up with a primary investor.

You can also check out private equity firms, which contain a vast array of specialized and experienced investors.

Remember, that small business owners generally use very little equity financing. It all depends on your business model, and the potential for growth.



Start your business using debt financing. Debt financing is when you take out a loan, usually from a bank or lending institution. This is a great option because the bank will have no say in how you run your business. The loan is tax deductible, and you can get short-term or long-term loans. However, you must have the loan repaid in a certain amount of time, and if you don't, you could have a hard time getting capital investment.

Talk to your local bank, or lending institution about the qualifications for specific loans. You will probably have to fill out some paperwork to determine whether or not you are qualified.

When using a local bank, you may be able to set up a personal relationship. This way, you can postpone a few payments if you fall on hard times.



Find out about credit scores and ratings. The higher your score is, the less risky you are to investors. In many cases, the initial business loan will be based on the borrower's own personal credit score. However, in some cases where a business is already operational, a business plan and other documents can provide for a different kind of credit specifically for the continued operations of that enterprise.

Use the online company TransUnion or EquiFax to determine your credit score. It is important to get an independent analysis, otherwise your own calculated score could be biased.

The main focus of the score is how long you have maintained a credit line, and how many monthly payments you have made on time.

If you have no prior experience taking out credit, it may be hard to get a loan. It is best to start using a credit card on small things like gas, or grocery store trips. Then gradually build up. Show the creditors you are a responsible client.[12]



Maintain an adequate debt to equity ratio. You want to make sure that the total debt and liabilities of your business is no more than four times the equity in the business. Equity simply means any retained earnings and cash injections by investors. In order to start out with equity, the owner of the business usually has to put in anywhere from 20-40%. This will maintain an adequate debt to equity ratio, and allow you to get a loan.



Put up collateral to start your business. Before you get a loan, the lending institution or bank will ask for collateral. This means you risk some of the items you own. In the case you cannot repay the loan, the bank can seize your property. Collateral usually includes homes, cars, furniture, equipment, stocks, bonds, etc. this is a scary proposition, so you need to be sure that your business will be financially successful beforehand.



Shop around for different lenders. There are a variety of lenders who may or may not be willing to issue new business loans, and all of these potential lenders have their own terms and conditions. Talk to various lenders and ask them about what kinds of loans are available. Evaluate loans by timeline. Lenders will offer various short-term, long-term or revolving-credit loans to business owners. Look at which ones suit the needs of a startup the best.

Look at secured and unsecured business loans. Secured loans actually use existing assets as collateral. For example, the person trying to start a business can use his or her home, or other property, as collateral and get lower interest rates for the loan. However, this leaves the assets vulnerable to seizure in cases of nonpayment. Unsecured loans rest solely on the borrower's credit score. See which of these types of loans best matches desired risk.

Select the best deals. You want a loan that has the lowest interest rates and most favorable terms for repayment.









Financing Your Business.



Get a bank loan. Small, local banks have received more strict standards after the financial crash of 2008. However, large investment banks such as JP Morgan Chase and Bank of America have received a set of moneys from the Federal Reserve to lend out to small businesses. This is your best option to go with, although it takes the long to pay off. Local banks will set you up with a contract, and a monthly payment. The other benefit is that you can get this loan postponed if you are having trouble paying it off.



Place your home up as collateral. Banks will generally allow you to borrow up to 75-80% of your home's worth, as long as you have at least 10-15% already down on your home. This is great because the loan will have a much lower interest rate than a credit card. Talk with your financier, or local mortgage company for more detailed information.



Use your credit card. This is a very dangerous game to be played. You need to stay on top of your monthly payments. If you fall behind, you get trapped in a death spiral. However, when carefully managed, credit cards can be great to get out of an emergency. Only use a credit card occasionally, when you are experiencing a hole you know that you can get out of.



Tap into your 401(k) plan. You will need a financial expert who can start up a C Corporation which you can then roll your retirement assets into. This is also a risky business, because you are tapping into your nest egg. This should only be done if you have more money put away in a savings account, or if you are independently wealthy.



Try loaning money from your friends and family. Ask who would be willing to make a contribution, or purchase a percentage of the company. Go about asking members of your church for donations. Let local businesses to partner with you. You might make some acquaintances, and make some deals (you make cheese, they make wine, a chance to exchange).



Pledge your future earnings. Some companies, or peoples, are willing to gamble and put money upfront, if you are willing to commit a certain percentage of future profits. This is a gamble because they, and you, are betting that you will be able to earn enough in the future. There is usually a contract involved, guaranteeing that they will at least get some money back, so keep that in mind.



Kickstart your business. Crowd funding, in the age of the internet, has become a very popular way to finance businesses. Write a description of your business idea online, at sites like Kickstarter, and convince people to donate to your business. You will want to be really descriptive, and excited in your word choice. The downside of this is that it could take months or years before you raise enough money.



Secure an SBA loan. SBA (Small Business Administration) is a branch of the Federal Government that supplies loans to businesses struggling to get off the ground. However, there are a number of qualifications. You had to have been denied a loan from another bank before. You have to meet the government's definition of a small business. You will also have to meet other restrictions, depending on the type of SBA loan. Go to the SBA's website, and fill out a form if you think you might meet these qualifications.



Attract an angel investor. These are wealthy individuals who like to bet on the financial success of start-up businesses. Angel investors are usually found at private-equity, and venture capital firms. You will want to bring someone older, who looks like he has had experience in business before. Be passionate about your idea when you present, and know all of the financial details before you walk in the room. Keep in contact with the investor days and weeks after your initial meeting.





Tips.

Talk to numerous lending institutions before you pick a loan. Some will have better interest rates, while others will have better repayments.

Consult with family members first. Getting a small loan from them can avoid dealing with greedy credit lenders.

Get some experience in the business before you start your own. If you want to start a restaurant, make sure you have worked in a restaurant before. If not, you will wind up purchasing outside help which will cost you astronomical amounts of money.



Warnings.

Talk to a lawyer and a financial advisor to avoid colossal mistakes. The biggest regret of many first-time small business owners is not consulting with a professional before they begin the process.

If you are a person living paycheck-to-paycheck, it is best to wait to start a small business. If the business goes down hill quickly, you could lose your assets, and your life savings.

Take a year to save up money and make a detailed plan. You do not want to go into small business owning head first.

November 12, 2019

how to protect your finances against market crashes

How to Protect Your Finances Against Market Crashes.

Economic expansions don't last forever, and eventually, the country will enter another recession. When it does, you need to protect your investments so that you can weather the storm. Assess how exposed you are to stocks and decide whether to diversify your portfolio with safer investments. Also clean up your balance sheet by reducing your debts, which will allow you to survive the recession that accompanies a stock market crash.

Method 1 Changing Your Investments.

1. Check your current investment allocation. You might have no idea what your retirement fund is currently invested in. If not, log into your account and print out the current allocation of investments, which should include the following:

stocks or stock mutual funds, bonds,real estate,money market accounts.

2. Identify why you fear a market crash. The economy goes up and down with some regularity, and when the market crashes stocks suddenly become cheaper to buy. For this reason, you might not want to diversify your portfolio. Instead, you can leave your investments as they are.

However, you might want to reduce your exposure to risk if you are nearing your retirement age or have just entered retirement. A major stock market crash could seriously cut the amount of money you have to live on.

Your tolerance for risk might also have changed. If so, then you can diversify your portfolio so that you are comfortable with your investment mix.

It’s impossible to predict exactly when the next recession will hit, so you shouldn’t move money in and out of the stock market hoping to get out just before things turn south. For example, it looked like the U.S. stock market was about to crash in late 2015. Since then, the Dow Jones Industrial Average has increased more than 20%.

3. Consider holding money in a savings account. The easiest way to protect your investments is to get out of stocks and move the money to savings accounts. Consider the following options:

High-yield online savings accounts. These accounts will only earn about 1-2% annually, but this amount is higher than most banks offer. Your cash is liquid, so you can access it if needed. Furthermore, your deposit will be protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 USD.

Money market accounts. These accounts are like bank accounts but with potentially higher returns. You can write checks against the money market account. Open with your bank or with a company like Scottrade or TD Ameritrade.

Certificates of Deposit. Banks and credit unions sell "CDs," which you can buy for a set sum. You are prohibited from accessing the money until the CD matures, but you will earn interest on the investment.

4. Invest in bonds. Bonds are debt. Companies, as well as governments, issue bonds to raise money, and bonds are a safer investment than stock. Consider putting more of your investment into bonds, such as the following:

Municipal bonds. State and local governments issue bonds to raise money, and in return the bonds are exempted from income taxes. You can typically earn 3% annually on bonds. They are a low-risk investment, unless the city government is on the verge of bankruptcy.

U.S. savings bonds. These bonds are very safe. With a Series I bond, you get a fixed interest rate, and your return is linked to inflation. With the Series EE bond, you earn an automatic rate of return each month.

Treasury Inflation Protected Securities (TIPS). The U.S. government offers a fixed interest rate as well as inflation protection that’s triggered every time inflation increases.

Image titled Protect Your Finances Against Market Crashes Step 5

5. Consider annuities. An annuity is a contract with an insurer or financial services company. You make a lump sum payment, and in return you are provided with a fixed sum of money for a specific amount of time. There are several varieties of annuities, which can protect your investments in case of a market crash. For example, fixed-indexed annuities can protect your principal.

Annuities are safer than stocks, but they do have some risks. For example, the company you bought the annuity from could go bankrupt. In that situation, you will no longer be paid. You can protect yourself by doing thorough research and only buying an annuity from a company with the highest rating.

The value of an annuity can also erode with inflation, though you can buy annuities that will protect against inflation.

6. Find safer stocks. Not all companies are the same, and some are safer investments in a down economy than others. For example, you might want to get rid of low-grade stock, such as companies with a lot of debt or businesses in speculative fields like biotech that have not yet produced strong profits. In a market crash, the value of these companies will decline.

Instead, look to high-quality stocks which tend to hold up better. These companies have stable earnings and low debt.

Also consider stocks that pay dividends. Check if you can invest in a dividend exchange-traded fund.

7. Change your contributions. If you’re not yet in retirement, you should consider changing the allocation of your retirement contributions for the last few years before you stop working. Direct your contributions toward safer investments, such as those discussed above.

Changing your contributions will not change the allocation of investments already in your portfolio, so consider diversifying it.

8. Diversify your portfolio. When the market is good, riskier investments such as stocks perform well. But when the market crashes, you can expect stocks to perform poorly. Accordingly, you might want to diversity your portfolio and move some money out of stocks.

How much to move is up to you. However, you don’t have to get out of stocks entirely. Instead, you could reduce stocks to 30% of your portfolio, and have the other 70% in bonds or another safe investment. In a market crash, your losses will remain in the single digits, and you can move back into stocks after the market improves.

If you don’t know what to do, meet with a financial planner who can help you assess your risk tolerance and come up with a plan suited to your needs.

Method 2 Reducing Your Debt.

1. Identify all of your debts. In a market crash, you’ll need as much cash as possible to pay for living expenses. Accordingly, you want to decrease your debt load as much as possible now. Begin by identifying every debt you have, including any of the following:

student loan debt, credit card debt, home mortgage,car loan,personal loans.

2. Prioritize your debts. You need to make the minimum monthly payments on all debts. However, you should direct extra money to the debts you want to pay off the most. Accordingly, sit down and prioritize your debts.

For example, if you lose your job, then you can often delay payments on student loans, using either forbearance or deferment. Accordingly, you might not want to pay down your student loans first but instead focus on credit cards, which probably have a higher interest rate.

However, some debts are tied to an asset. For example, you can lose your car or home if you don’t make payment. Paying these debts off early could be a wise choice.

3. Create a budget. To free up money to contribute to debt payments, you’ll need to budget. Identify the following:

Your fixed expenses. These are bills that don’t change much month to month. Generally, fixed expenses are also for necessities, such as your rent or mortgage, health insurance premiums, car payments, and other debts.

Your discretionary spending. You can track your discretionary spending over the course of one or two months. Write down what you buy every day and note the price. Alternately, you can buy everything with a debit or credit card and then look at your monthly statement.

Reduce discretionary spending. You need your income to exceed your discretionary spending. To free up as much money as possible, reduce discretionary spending to the bare minimum by giving up gym memberships and cable TV. You can also cut out vacations, entertainment expenses, and meals in restaurants.

4. Refinance your mortgage. Mortgage rates are still low. If you have a high APR, then consider refinancing into a loan with a lower one. Avoid spending the money that you save and instead funnel it toward debt repayment.

To investigate a mortgage refinance, contact your current lender to check what rate they can offer you. Then compare their rates to others on the market.

5. Tackle credit card debt. You want a stable balance sheet when the market crashes, so you should reduce your debts as much as possible. In particular, you should pay down high-interest credit card debt. Identify a method of repayment so that you can wipe out these debts as soon as possible:

Debt avalanche. You pay the minimum monthly payment on all credit cards. Then you contribute extra money to the debt with the highest interest rate. Once you pay off that card, focus on the debt with the second highest interest rate.

Debt snowball. Another method is to pay the minimum on your monthly debts but then use extra to pay off the card with the smallest balance first. The debt snowball method is more expensive than the debt avalanche, but it can give you momentum.

Debt snowflake. This method is ideal for people who can’t budget extra money to pay down debt. Instead, you try to save a little bit of money every day and make multiple monthly payments to slowly chip away at your debt.

Method 3 Preparing for Emergencies.

1. Build an emergency fund. You’ll need money in case you lose your job or if any kind of emergency springs up. Generally, you should save at least six months of expenses. If possible, save up to twelve months of expenses.

Put money toward your emergency fund every month, even if that means you pay off debts more slowly.

If you are a retiree, then you should try to have two years of expenses saved. When the market declines, you should live off your savings instead of drawing income from your investments.

2. Buy insurance. Insurance protects you from any unforeseen accidents that will hammer you financially. In an economic downturn, you’ll need all the money you can get, and insurance will provided valuable protection in case an accident strikes. Consider the following types of insurance:

Health insurance. If your employer doesn’t offer it, you can buy it on the government exchanges. Depending on your income, you might quality for a premium subsidy and/or help with out-of-pocket expenses.

Automobile insurance. Your insurance will pay if you injure someone in an accident. Depending on the insurance, you might also be covered if someone without coverage injures you.

Disability insurance. If you are disabled before you reach retirement, you’ll need income to support you. Your employer probably offers disability insurance. If not, you can shop on your own.

Life Insurance. You can replace the income of a working spouse with a life insurance policy. Life insurance is particularly important if you have young children. Calculate how much life insurance you need at lifehappens.org.

Homeowner’s insurance. Your homeowner’s policy covers injuries that occur on your property, as well as any structural damage caused by natural disasters and other accidents.

3. Assess the stability of your job. In a market crash, many jobs will be wiped out as employers are forced to lay off workers. You need to assess whether your job is stable enough to survive a recession, or whether you should plan on getting a different job.

Look at how many people your employer laid off during the last recession. Were only a few let go? If so, your job might be secure. However, if your employer engaged in mass layoffs, then there’s no reason to assume it won’t happen again.

You can also pick up some freelance or part-time work now. That way, if the market crashes, you’ll still have some income coming in.

Tips.

Consult with a personal financial counselor to help plan, protect, and control how your finances and money in the future.

January 18, 2020