Find out how to manage a break-lease without losing rental income on your home.

How to Manage an Early Lease Termination

When you have a 12-month lease agreement in place, it’s safe to assume that your residents are staying put for at least a year. But in spite of their best intentions, life sometimes gets in the way and your residents will ask to leave early. Typically, under most contracts they will be on the hook for rent for the remainder of the agreement — but like most things, it’s not all black and white. Here’s how to manage an early lease termination without losing rental income. 

Just as a lease agreement is an essential part of renting out your home, so too is a policy on early termination of the agreement. If you don’t have a termination clause in place, you could be caught out if your residents want to leave earlier than planned. 

If you’re self-managing a rental property, you will want to ensure you have an up-to-date lease agreement that abides by your local state laws and includes a policy for lease termination. A formal lease agreement protects you from losses in the instance of a break-lease by ensuring that your residents remain financially responsible until the property is relet. You will need to either speak to an attorney or anyone you partner with to help manage your property, like Belong or a property management company. 

Regardless of how your property is managed, the residents will need to provide written notice to vacate. They also need to follow the procedures outlined in their signed lease agreement, such as continuing to pay for rent during any vacancy and covering marketing costs. 

As the homeowner, once you have been served notice for a break-lease, you must be seen to take reasonable steps to find a new tenant. That is, you can’t simply wait out the lease agreement while the former resident is still paying rent. The property must be marketed for rent in an effort to find new residents — either by you or whomever is managing the property. 

There are a few instances where these financial penalties don’t apply and only 30-days written notice is required, such as if the resident is called for active military duty or needs to leave to protect themselves from a domestic violence situation. 

4 reasons a tenant has a legal right to break a lease

There are some exceptions under state laws that allow a tenant to terminate a lease agreement early without the same penalties. Check with your local jurisdiction, but for example here are the legal reasons within California where a tenant can end an agreement early:

1. The resident is a victim of domestic violence

In many states (including California and Washington), a victim of domestic violence can provide 30 days written notice to vacate and end their lease early without having to pay rent for the remainder of the agreement. Typically they will need to provide proof of this status (such as a protective order). 

Even if your state laws do not enforce this, it is worth having compassion in these scenarios and consider the safety of your residents. Not allowing them to leave without a financial penalty could force them into an unsafe situation. Not only is this inhumane, there is a real potential for damage to your property or lawsuits if the situation were to escalate. 

2. The resident has been called to start active military duty 

If your resident is part of uniformed services (armed forces, National Guard, NOAA or commissioned corps of the Public Health Service) the War and National Defense Service members Civil Relief Act gives them the right to break a lease under federal law.  

They must still provide you with written notice of their intent to break the lease for military reasons and their tenancy will terminate 30 days after the date that rent is next due, even if it’s prior to their lease expiration. 

3. You have not provided a habitable living space

As the owner, you have a responsibility to your resident to provide a safe and habitable space to enjoy as their home. This isn’t just a nice thing to do, it’s a legal requirement known as “warranty of habitability” that applies to all residential leases. 

If there are issues in the home that violate this right (for example, structural issues or a lack of hot water and heat in winter) and you don’t take measures to rectify it, your resident can leave without being held responsible for further rent. Bear in mind that this is only for serious violations and there is a process that needs to be followed, a resident couldn’t simply move out because their shower stopped working without giving you a reasonable time to respond. 

If your home is with Belong, you never need to worry about habitability. This is because we have a team of vetted maintenance professionals on staff and all residents in our network have access to a 24/7 concierge service, ensuring nothing slips through any troublesome, leaky cracks. 

4. You harass the resident or violate their right to privacy 

State laws vary, but typically you will need to give reasonable notice (around 24 - 48 hours or more) before entering your home while it’s being rented out. If you fail to abide by this or are seen to be harassing the resident in any way (such as turning off utilities, changing locks, or showing up unannounced), they have a right to terminate the lease without penalty. Depending on the nature of the violation, you could also face legal action and your own financial penalty. 

If your home is with Belong, again we handle all communication with residents and abide by local state laws regarding inspections and notices, ensuring that overstepping the mark is never a concern for our homeowners. 

How Belong handles early lease termination on your behalf

When your home is loved with Belong, we will manage all communication with both the former and new residents on your behalf and make sure you’re not left out of pocket in the process. 

When a resident requests to terminate their lease early, they remain responsible for paying the rent until the end of their agreement or until another resident has been placed to take on a new 12-month lease. This means there’s no gap in your cash flow and you can continue to earn guaranteed rent even when a resident needs to leave early. 

When the exiting residents move out, we take care of prepping your home to go back on the rental market, with any repairs and/or cleaning costs deducted from the security deposit. In the case of early lease termination, the resident will also be responsible for the placement fee that homeowners usually pay when marketing their home to new residents. 

Of course, the real estate market is a fickle beast and prices can fluctuate wildly due to changing market conditions. If the rental market value of your home has gone down and we need to consider a price adjustment to attract interest from new residents, any difference in rent will need to be covered by the former residents until the expiry date of their original lease agreement. 

Find out why Belong is the stress-free alternative to property management		

When the unexpected happens, you’ll really notice the difference between Belong and a traditional property management company. From 24/7 concierge support for both you and your residents to guaranteed rent and protection against eviction costs, Belong is making renting lovable for everyone. 

Learn more and find out if your home is eligible at belong.com/homeowners or ditch your old property manager and apply to make the switch to Belong today. 

Sometimes tenants want to terminate their lease agreement early. If you own a rental property, find out how to manage a break-lease without losing rental income

Understand how capitalization rates (or cap rates) are calculated to identify the best methods for assessing a potential rental property investment.

Capitalization Rate: What It Is and How To Calculate It

The capitalization rate is one of many ways to evaluate a potential investment property. Still, it’s critical to understand how capitalization or cap rates are calculated and their limitations. With a better understanding of calculations like cap rates, you can identify the best methods for assessing a potential rental property. 

Capitalization rates compare and estimate the future return on investment or ROI of one or more real estate properties. Cap rates for residential and commercial real estate are expressed as a percentage. They’re a popular tool because they help individuals estimate the potential return on real estate investments. 

Capitalization rates measure the potential yield of a specific real estate property over one year, assuming that the property is not financed. You can also think of cap rates as the percentage rate of return, either a loss or gain, of a specific property based on the income it generates, minus expenses. 

How do you calculate the capitalization rate of a property? There are two methods or formulas that are used to calculate capitalization rates. 

Most real estate investors will use the calculation which divides the net operating income by the property’s current market value. This calculation can be expressed using this formula:

Capitalization Rate = Net Operating Income / Current Market Value

In this calculation, the net operating income equals the estimated annual income minus expenses like maintenance, property management, and property taxes. This formula is most popular because it compares the projected income of a property against the current market value. 

The second formula used to calculate capitalization rates differs because it compares net operating income against the property’s purchase price. 

Capitalization Rate = Net Operating Income / Purchase Price

This formula puts more emphasis on the acquisition cost of a specific property, as opposed to the current value of a property. While there is no drawback to using this formula at the time of purchase, it’s not ideal for properties purchased months or years prior. Using the purchase price from several months or years ago will incorrectly estimate a property’s potential return. Similarly, this formula works poorly for homes that have been inherited because the purchase price is zero. As a result, using this formula can result in unrealistic expectations. 

To estimate the net operating income of a property, you will need to calculate the annual rent by multiplying the monthly rent by twelve. Once you have calculated the annual rent, you will need to subtract expenses. Expenses should include taxes, utilities (if not paid by the resident), property and liability insurance, and maintenance. 

If you are unsure of the monthly rent, we recommend that you research similar properties in the same area. You’ll need to look for other properties that have similar amenities. Identifying several similar properties will help you accurately estimate your monthly rent for a property. 

Why don’t the capitalization rate formulas account for financing 

Capitalization rates do not account for property acquisition costs like interest and closing costs for a very specific reason. The cost of acquiring a property will vary significantly depending on current interest rates, type of loan, and your particular closing costs. While other formulas can account for these costs, capitalization rates are designed to provide a baseline rate of return, regardless of loan repayment or interest rates. Excluding acquisition costs ensures that investors compare potential properties based on possible returns without factoring in highly variable costs unique to each individual. 

When you shouldn’t use capitalization rates to assess real estate properties 

You should not use capitalization rates to evaluate a property if you plan to use the property as a vacation or short-term rental. The potential income, occupancy, and expenses are too variable to assess a property accurately. 

While capitalization rates are a helpful tool, they have limitations that can be illustrated using two hypothetical properties. Let’s imagine that the first property has a net operating income of $50,000 and the current market value of the property is $600,000. In this example, the capitalization rate is 8%. 

Property #1 = ($50,000 / $600,000) x 100% = 8%

In the second example, a property has a net operating income of $40,000 and is currently valued at $400,000. The capitalization rate for this property is 10%. 

Property #2 = ($40,000 / $400,000) x 100% = 10%

If you only consider capitalization rates, the second property is the better investment. However, each investment opportunity has unique characteristics that should be considered. While the second property has a better capitalization rate on paper, it could be located in a less desirable location or have fewer amenities. As a result, the first property might be a better investment, even if it has a lower cap rate. 

How to use capitalization rates to your benefit 

Capitalization rates are one tool for gathering information and comparing potential rental properties. Individuals can identify the best investment for their financial picture and goals with more details. 

When calculated correctly, capitalization rates can indicate the length of time needed to recover the amount invested into the property. For example, a cap rate of 10% will require around ten years to recover the amount invested in the property. 

Understanding what constitutes a ‘good’ cap rate

It may be tempting to look for a potential investment property with “good cap rates.” However, it’s essential to understand that capitalization rates are not evaluated as good or bad but rather as an expression of potential risk.

A higher capitalization rate corresponds to more risk, and a lower cap rate is associated with less risk. Your ideal cap rate will depend on how much risk you’re comfortable taking. Generally, capitalization rates will fall somewhere between 4% and 10%.

You should assess capitalization rates in the context of the specific property and the current real estate market. As a general rule, you can expect capitalization rates to increase whenever interest rates rise. An increase in interest and capitalization rates will significantly impact anyone who owns a rental property. 

All things being equal, a lower cap rate equates to a better valuation and a better prospect of returns with less risk. Conversely, a higher cap rate will likely result in a relatively lower ROI and a higher level of risk. 

In real estate, properties are rarely equal. One property may generate more rental income but has more maintenance costs and higher taxes. Ideally, you want to identify a property with a reasonable cap rate relative to the amount of risk in purchasing a specific property.

How Belong supports the success of your real estate investments

A successful real estate investment strategy requires you to identify the ideal property, maintain a positive cash flow, and manage the investment effectively. Belong helps homeowners increase their profits and limit the hassles of owning an investment property.

When it’s time to price your property, Belong uses data and real-time insights to help you maximize cash flow. We also offer guaranteed rent, which means you never worry about less than 100% occupancy, which helps keep your investment safe. 

Learn more about Belong and see its role in your real estate investment strategy.

Understand how cap rates are calculated to identify the best methods for assessing a potential rental property investment.

Property management and asset management play distinct roles in real estate. Find out how successful real estate investors use both to maximize their returns.

Asset Management vs Property Management (and Why You Really Need Both)

The most successful real estate investors don’t go it alone — their wealth is driven by the support of both an asset manager and property manager to maximize income and make strategic decisions on their investments. In this article, we discuss what the difference is between asset management and property management, and how Belong is taking the best from both worlds to create a new service that makes this help more accessible to the everyday rental home investor. 

When it comes to maximizing the income and value of real estate investments on the rental market, asset managers and property managers play two very distinct roles. 

Property management generally describes anyone who manages the physical, day-to-day operation of a home. Services like marketing and listing a home on the rental market, vetting tenants, issuing the lease agreement, collecting rent, and inspecting the property. 

Asset management refers to a professional who gives advice on strategic and financial decisions for the asset, helping to optimize management to suit the owner’s financial goals. For example, this could include cash-flow maximization, tax strategies, or optimizing for long-term equity. They also monitor the performance of the home as a real estate investment and can help determine when it’s the best time to acquire, hold onto, or sell a property in a specific local market.  

Is there a need for both asset management and property management?

While you can certainly get away with just one of these services (or even none, if you take on self-management yourself), there are huge benefits to having help in managing your property as both a financial asset and rental home. 

Property management is an obvious choice for rental property investors. If the property is well-maintained and cared for by quality, trustworthy residents you can retain the home’s value and minimize vacancy periods. 

But when it comes to maximizing the returns on your investment, homeowners who use a real estate asset manager can realize higher profits and stronger portfolio growth. 

This is because asset managers are finance professionals that keep a close eye on ever-evolving market trends. With a solid understanding of the economic climate and latest predictions, they can help homeowners to stay responsive, acting fast to mitigate risk and capitalize on opportunities. 

This is different to getting broad financial advice too. Your home is not the same as the next investor’s and your financial objectives are unique to your personal situation. A good real estate asset manager can take your goals and circumstances into account, providing guidance on what can benefit you and your family specifically. 

Even if you’re an ‘accidental investor’ and have inherited your home, an asset manager can take a practical approach and examine all angles to determine how best to manage financial decisions on what to do with the property. 

Belong looks after your property as both an asset and a home

If you partner with Belong you will have all the benefits of a property manager and asset manager — plus a whole lot more. Belong isn’t a property management company, but a complete residential network and service that goes above and beyond for homeowners and their residents. 

These unexpected perks (that you won’t get from a traditional property manager) include having a highly qualified asset manager on staff. 

Our experienced asset manager has managed over a billion dollars in real estate assets on behalf of institutional clients — a service now available to everyday rental property investors who partner with Belong. With in-house asset management, Belong homeowners can run the numbers on their own property (or properties) and get expert assistance navigating strategic decisions to meet personal financial goals. 

And because you can also access Belong’s dedicated team of real estate and maintenance professionals, your home will always attract the best price and the best residents when it’s on the rental market. 

Discover the difference between Belong vs property management

Asset management is just one of the many ways Belong is eclipsing the old-school property management model. Our homeowners also enjoy a unique hospitality experience that includes guaranteed rent, a 24/7 concierge service, access to employed tradespeople, and 66% less vacancy. All without hidden property management fees and scary markups. 

Learn more and find out if your home is eligible at belong.com/homeowners.

Predicting the annual cost of home maintenance on your rental property will allow you to plan for expenses and ensure that there are fewer surprises in store.

How to Predict a Property’s Annual Cost of Maintenance

Predicting the annual cost of home maintenance will allow you to plan for expenses and ensure that there are fewer surprises in the future. Maintenance is critical because it prevents more expensive repairs and replacements down the line. 

If you are unfamiliar with your property, you should begin by inspecting any major appliances and house systems, including your heating and cooling units, insulation, roof, and hot water heater. It’s also helpful to understand the current state of your electrical, water, and sewer systems. If you recently purchased the property and had a professional inspection, you can find much of this information in their report.

Factors that impact the annual cost of maintenance

Your annual maintenance costs will vary depending on the current age and condition of the property. It’s common for a single-family home to require more maintenance than a condo or apartment that may have an HOA. In some cases, the HOA may be responsible for some maintenance. If this is the case, be sure you are familiar with any fees or costs associated with their maintenance. 

The location of your rental property will also impact the annual maintenance cost. You can expect more maintenance for homes in very cold climates (consistently below 20 degrees) or if you receive significant snowfall. Similarly, homes in humid climates or areas that receive lots of rain will likely need additional maintenance to combat mold and mildew. Frequent rain can also impact the roof and require more frequent siding repair or tree removal.

Carefully consider all of these factors as you calculate annual maintenance costs and plan for expenses. 

How to estimate rental property maintenance

Several calculations can help homeowners predict their maintenance costs. Keep in mind that these formulas should be used only as an estimate.

The 50% maintenance rule suggests that homeowners should allocate half of their rental income, or mortgage, for repairs, maintenance, taxes, and insurance. If you already know your tax and insurance costs, you can quickly determine what remaining amount to attribute to maintenance costs. We recommend using this calculation against one of the other formulas to verify your estimate.  

You can also use the square footage of your home as an indicator of your annual maintenance costs. If you use this rule, you should start by estimating $1 per square foot for yearly maintenance costs. If you have a 2,000-square-foot house, your annual maintenance estimate would be $2,000. This estimate may not include yard maintenance, tree removal or care, or snow removal. Likewise, this rule does not account for significant repairs that may be needed. 

If you use the 1% maintenance rule, you will plan that maintenance costs for the year will equal 1% of the property value. For example, if your home is valued at $500,000, your annual maintenance costs will be $5,000. If you use the 1% rule to estimate your maintenance expenses, keep in mind that it does not include any major repairs or replacements. 

The 1% rule can be a helpful maintenance cost indicator because as home values increase and inflation continues to rise, you can expect maintenance costs to increase. While we’ve been using the 1% rule for some time, it’s wise to consider saving closer to 2-5% of your property value, depending on your property’s age, condition, and location. 

Average costs of common rental property maintenance

To accurately predict your annual maintenance cost, you should use a combination of calculations. Consider using a formula and comparing it against the actual costs of routine maintenance. 

Routine maintenance costs (every few weeks or months)

Routine maintenance costs should include any expenses you expect to incur on a regular or semi-regular basis. Keep in mind that some maintenance may only be seasonal. You may need to plan for yard maintenance in the summer and snow removal in the winter. 

You should expect homes to require minor repairs on a semi-regular basis. Things break, and you’ll be less frustrated if you have planned for these repairs, even if you can’t plan which things might need repairs. If you can make these minor repairs yourself, you’ll likely save money on annual maintenance. Likewise, a responsive, reliable handyperson can save you many headaches and additional costs. 

Leaky faucets or toilets: $150-$400/each 

Appliance repairs - washer/dryer, refrigerator: $100-$400/each 

Major maintenance and replacement costs 

Major repairs and maintenance costs can be extremely expensive and cause homeowners significant difficulty. Almost all homeowners will experience a considerable maintenance cost at some point. However, if you assess the current state of your home systems and appliances, you’ll better understand which expenses might arise in the future. As you evaluate your home, you can keep these costs under consideration. 

Sewer line or septic tank replacements: $5,000-$15,000

After you’ve evaluated the current condition of your home, you can plan for additional expenses that are likely to occur in the future. For example, if your hot water heater is ten years old, it’s prudent to begin setting aside money for a replacement. 

Every system in your home has an expected life expectancy. With regular maintenance, you can extend the life of these systems. However, these things will ultimately need to be repaired or replaced. You can expect the exterior paint on a home to last anywhere from four to six years. HVAC systems can last 10-20 years, depending on the climate. The AC may need to be replaced sooner in warmer climates where the system runs more frequently. A traditional water heater has a lifespan of 8-12 years, and a tankless water heater will last 20-25 years. 

The roof of your home is one of the most expensive items to replace. Each type of roof will last for a different duration. It’s critical to familiarize yourself with the kind of roof you have and its current condition. Roofs will generally remain in good condition for 12-25 years. 

Many of us are now spending more time at home, and many may still work from home, either part-time or full-time. As a result, you can expect more wear and tear on a home. 

Unfortunately, the costs of goods and services have increased, and you should consider that as you predict the annual maintenance cost. You will likely find that the availability of specific materials may impact timelines, or you may be forced to choose a different or more expensive replacement. Likewise, contractors are harder to find than ever before. This can make it challenging to complete repairs on time and under budget. Don’t let these changes impact your financial outlook. Plan and estimate your maintenance costs accordingly.  

There are both federal and state taxes related to real estate rental income. Learn more about tax rates on rental income in the US for rental property owners.

Tax Rates on Rental Income: What You Need to Know

Rental property is defined by the IRS as a property you own and rent to tenants for 15 days or more each year. It is critical to understand how taxes are calculated as they relate to your rental property. This also allows you to plan accordingly and consider implementing tax strategies for real estate investors. 

The United States has a progressive tax system which means your tax rate increases as your income grows. Tax rates in the United States range from 10% to 37%. Importantly, each person is charged at multiple rates as your income rises, rather than just at the rate of the bracket into which you fall for the total amount of your income. You can also lower your tax burden or the amount of money you will owe at the end of the year by claiming certain deductions on your tax return. 

There are both federal and state taxes related to your real estate rental income, but at the federal level, your net rental income is taxed as ordinary income according to your IRS tax bracket. Essentially, the rental income you collect, minus your expenses, will contribute to your total income, which is progressively taxed. 

To calculate your federal income tax from rental incomes, you’ll need to use two IRS forms: 

Schedule E: Supplemental Income and Loss, Form 1040 or 1040-SR

To determine your rental property income, you’ll need to subtract any rental property expenses from the total income generated from your rental property. This number becomes your total taxable income before depreciation. Once you calculate and deduct depreciation from that number, you will add the remaining amount to any other taxable income. 

Rental property income is primarily the rent you collect from your residents. However, there are several other potential sources of income that you will need to include. If your residents have pre-paid some or all of their future rent, you’ll need to include this as part of your rental property income. Security deposits that were not returned to a resident should also be included. If you are still in possession of a security deposit and the lease has not expired, you should categorize those amounts as a short-term liability on your balance sheet, so they are not included in your income. 

Any additional fees, such as pet or lease cancellation fees, will also contribute to your total rental property income. Finally, you’ll need to include tenant-paid owner expenses in calculating your rental property income. These types of expenses can occur if your resident is not obligated to pay for utilities, like water or electricity, as part of their lease but they make a payment and are not reimbursed. We recommend that you keep a careful record of all income to ensure that your tax return is accurate.

Rental property tax deductions come in the form of expenses related to the operation and management of your property. These deductions work by lowering the overall taxable income at the end of the year.

Common rental property tax deductions include:

Legal or professional fees - hiring an attorney to create a lease, accounting services 

Utilities, pest control, and other services

You can reduce your total taxable income by keeping careful records of your expenses. If you are not a meticulous record keeper, you should consider using accounting software for landlords to ensure accuracy. 

The final piece of information needed to calculate your taxable rental property income relates to the depreciation of your property. This is an essential step, as depreciation lowers your taxable income over a period of time. 

You can deduct the costs of buying and improving a rental over its useful life through a process called depreciation. Depreciation is calculated using a modified accelerated cost recovery system (MACRS). Essentially, this allows you to depreciate your property over the course of  27.5 years, which is considered the useful life of your property. This equates to 3.636% each year. Keep in mind that depreciation does not include the value of the land because land does not become less useful over time. Therefore, land does not depreciate. 

We recommend you engage a tax professional to assist in identifying the correct depreciation amount. You can estimate your depreciation by taking the amount you paid for the property, minus the value of the land and dividing by 27.5. This should give you an estimated amount for your yearly depreciation deduction. 

As you make capital improvements to your property, you can add this amount to the property's value and recalculate your depreciation. Again, this is best done with consultation from a tax professional. For more detailed information, you can review IRS Publication 946: How to depreciate property. 

While your federal taxable rental property income will account for the major portion of your tax burden, there are several additional taxes related to owning a rental property. 

In most instances, the tax rate on rental income is based on federal standards. However, each state has its own guidelines regarding taxable rental income. You should familiarize yourself with these guidelines or engage the services of a tax professional in your state or the state where your property is located. 

It’s likely that you are already familiar with property taxes. This is the amount you pay monthly, along with your mortgage payments. This amount is based on the assessed value of your home and varies depending on your state’s property tax rate.

The capital gains tax is related to selling and buying real estate. Even if you have no plans to sell your rental property, you should familiarize yourself with this tax to plan appropriately for the future. If you sell a property at a profit after owning it for at least one year, you will owe a capital gains tax. The IRS provides detailed information regarding the capital gains tax: Internal Revenue Service. “Tax Forms and Instructions,” Pages 8–9. The capital gains tax exists to ensure that property owners are taxed in accordance with how their property appreciates or increases in value. 

Rental property owners must also understand how the depreciation recapture tax can impact their tax returns. If and when you sell your rental property, the IRS will collect a certain amount of the depreciation deductions you have taken on the property. This amount is calculated not by how much of a deduction you have taken in the past but by the

depreciation deduction you should have taken. If you failed to take a depreciation dedication, you would still own the depreciation recapture tax. The depreciation recapture tax is based on your ordinary income tax rate and is capped at 25%. 

You'll need to keep careful, accurate records to avoid potential penalties and ensure your taxes are correct. Consider working with an accountant or property manager if this sounds challenging. Some property management companies offer record keeping and reports that may assist you in preparing your taxes. Most importantly, we recommend that you find a tax professional who can ensure you take advantage of any deductions and guarantee that your taxes are filed correctly. 

Belong supports homeowners through all the stages of owning rental property 

Belong makes managing taxes a breeze because you always know where you stand. Your rent is guaranteed so you always know exactly what your rental income will be, regardless of when residents pay. You won't be stung with hidden fees or expenses either. 

Because Belong homeowners can also manage all maintenance and repairs through the Belong app, you have full visibility on your income and expenses in the one place. Each year we'll send you a statement for you or your accountant to work through, plus your concierge is on hand to assist if you need to clarify any information around earnings or charges. And did we mention that Belong fees are tax deductible?

To learn more, contact us to speak with a Belong advisor.

Understand how to purchase an REO foreclosure property and what makes them different from other real estate investment opportunities. 

What is an REO Foreclosure?

An REO Foreclosure is a real estate-owned property that failed to sell during foreclosure. The mortgage lender, bank, or mortgage investor owns the property, and these types of properties are sometimes also called “bank-owned” homes. REO foreclosures offer buyers another avenue to acquire real estate. 

Still, as with all investments, it’s critical to understand precisely how to purchase an REO property and know what makes them different from other real estate opportunities. 

For a house to become an REO property, the home must go through several steps. In the pre-foreclosure stage, a homeowner will default on their mortgage. If the homeowner and mortgage lender cannot agree on an option to allow the homeowner to remain in the home (sell via a short sale or return the deed to the lender/investor), the property enters the foreclosure process.

A foreclosure sale is scheduled, and the home is listed for a specific price. If the property does not sell, the lender or the investor will take over property management.

If the property does not sell at foreclosure, the home becomes an REO (real estate owned) property. A house may also become REO property if the previous owners moved out or passed away at the end of a reverse mortgage. If their heirs won’t or don’t want to pay off the mortgage, refinance or sell the property, they can return the property to the lender or investor, and it will become an REO property. 

REO properties are typically categorized as distressed and always sold “as-is.” Remember that these properties are foreclosed when the owner cannot pay their mortgage. As a result, it’s unlikely that REO properties will be well-kept. If the previous owner did not have money for the mortgage, it’s doubtful they kept up with much maintenance. There is also little incentive to keep a home in good condition if you know it is being foreclosed. You will find that REO properties are frequently discounted to sell quickly, which can provide real estate investors with a unique opportunity. 

Pros and cons of purchasing an REO property 

REO properties are a less common way to purchase a real estate investment. As such, they come with distinct pros and cons. Understanding the potential benefits and pitfalls will allow you to decide if buying an REO property is right for you. 

Price is the most significant benefit of purchasing an REO property. The initial listing price of REO properties is often below the current market value, and investors will find that banks are often willing to negotiate the sale of these properties. Purchasing an REO property also offers a buyer protection from outstanding property taxes. There are no outstanding taxes on REO properties, which can be preferable to buying a tax foreclosure home because the new owner would inherit the tax bill. 

REO properties are sold “as-is,” meaning they can have expensive repairs that will likely exceed the standard 1% – 3% of the home value. If you carefully inspect the property and estimate repairs, REO properties can still offer an upside. 

Those interested in purchasing a multi-unit REO property should familiarize themselves with the Protecting Tenants at Foreclosure Act which requires giving the tenants 90 days’ notice. You may be required to honor the terms of the existing lease. 

REO properties can also come with additional costs, including attorney fees and the cost of securing the property. Depending on the market, there can also be a lot of competition for these types of properties. 

You can start your search for REO property listings by using publicly available lists from the Department of Housing and Urban Development (HUD), the Department of Veterans Affairs, the Department of Agriculture, and the IRS. Fannie Mae and Freddie Mac provide an aggregate list of REO properties. 

If you are interested in purchasing an REO property, you’ll want to find a real estate agent with this type of property experience. They have a better understanding of how to structure a suitable offer. The right real estate agent will also have good insight into what repairs or changes will be needed for each property. Finding a lender to provide the appropriate financing for an REO property is also critical. Finally, you may need to identify an attorney with REO property experience. 

Once you have identified the best professionals and a suitable REO property, you must submit an offer. Through this process, you will have the opportunity to inspect the property and get an appraisal, which is highly encouraged in purchasing an REO property. The seller is unlikely to pay for an inspection and will not fix anything identified in the inspection report, but having a professional inspection will ensure you have all the information needed to make an informed decision and offer. 

General vs. special warranty deeds for REO properties 

When purchasing an REO property, you will receive a general or special warranty deed. Understanding the difference between the two is essential to protecting your new asset. 

With a general deed, no one can claim issues with your title from before you owned the property. A general deed also indicates that there are no liens and that the property is owned free and clear by the seller.

With the sale of an REO property, you are more likely to receive a special warranty deed. This deed only guarantees that no additional title issues have been created since the bank or investor took over ownership. While the bank or investor has the right to sell the property, there’s no promise against other pre-existing title issues or liens. If you have a special warranty deed, an owner’s title policy can help protect against any pre-existing property claims.

Once you’ve purchased your real estate investment property, consider Belong 

Belong is a new alternative to old-school, expensive property management. We use data and real-time insights to price your property and find your new residents. We help you get your new real estate investment ready for the residents of your dreams. With Belong, you’ll have access to 24/7 customer service and a team of full-time maintenance professionals, who can even assist with renovations and strategic financial decisions on your new investment. 

Once you’ve purchased your new real estate investment, we invite you to explore working with Belong for the smoothest process, guaranteed rent, and concierge-level support. Learn more about Belong for Homeowners.

This Q&A on rental inspections for your home shows how to manage routine inspections of rental properties and how they can protect your real estate investment.

Rental Inspections: Why You Need Them and What To Do With The Results

Regular rental inspections for your home are a great way to stay connected with your residents and uncover any fixable issues before they become expensive problems. This simple Q&A will cover the ins and outs of inspecting a rental property and what to do when you receive an inspection report for your home. 

Routine inspections of your rental home are essential to protect your investment, by keeping tabs on any wear and tear on the property. It’s also an opportunity to connect with your residents to make sure they’re happy and are sticking to the conditions of the lease agreement. 

During rental inspections, you (or a representative), should be looking for damage, but also for wear-and-tear on the property that has the potential to become an issue if left unattended. 

For example, some damaged roof tiles and cracks in the caulking is not an urgent issue — but if water seeps in and leaks — it is. Identifying basic maintenance work could be the difference between a small patch job and replacing the roof! 

The exterior condition of the home — including gutters and lawn upkeep

The internal condition of the home — such as any mold growth, water damage, or physical damage to walls or windows

Issues with the plumping such as toilet, sinks, or water line

Any malfunctioning appliances that need updating

Anything that creates an uncomfortable environment for your residents

Any violations of the lease agreement (e.g. keeping a pet without permission)

It also gives you an opportunity to spot any changes to the tenancy agreement. For example, if a couple has split and one resident has moved out, or if long-term guests are staying and haven’t yet been screened or approved as a resident. Giving them the opportunity to be screened and added to the lease is another way to protect your investment. 

How often do you need to inspect a rental property?

Generally routine inspections take place anywhere from 1-4 times per year. This could be done annually, seasonally, or quarterly, depending on your lease agreement. 

Your state laws will guide you to what is an excessive number of inspections per lease period. Regardless of where your home is located, all tenancy laws give residents the right to ‘quiet enjoyment’. This means that as the homeowner, you should not be bothering them with more than a few inspections a year.

Who should be conducting routine inspections on my rental home?

Who conducts the inspections of your home depends on how you manage your property. If you self-manage the home, you will need to either do the inspections yourself or hire a representative to do them on your behalf. 

If you use a property management company to look after your rental property, they will also do the inspections. Check the fine print on your management agreement to see how many inspections are included, as many property managers will charge fees per inspection. Particularly if you pay a lower monthly rate, you could be up for ~$150 per inspection and will need to factor this into your budget. 

If your home is on Belong’s residential network, we schedule home visits on your behalf to connect with the residents, assess if anything needs fixing, and ensure there are no lease violations occurring. Inspect reports and information can be delivered directly to your smartphone via the Belong app. And best of all — it’s free. There are no hidden fees when a Belong team member visits your home for an inspection. 

If we identify any maintenance issues or damage, we can provide you with a quote from one of our in-house Belong Pros to take care of the job without any fuss (or markups!). You can even select a finance option to pay the cost of on your own terms. Learn more about Belong’s homeowner services here. 

How much notice do residents need before a rental inspection?

How much prior notice residents need varies depending on state law. For example, if you own a home in Seattle, you need to give residents at least two days’ written notice to enter. In California, it’s “reasonable notice” and 24 - 48 hours notice is presumed to be reasonable for most matters. 

Legal website Nolo has this handy chart of State-based laws for entry into rental properties. 

Of course, no one likes to be sprang upon, so keep in mind that these are legal minimums. It is courteous to allow a week or so to give your residents time to respond or reschedule. If you are providing written notice via the post, you should also allow six days for the mail to be received. 

If your home is on Belong’s residential network, we schedule home visits on your behalf and foster a positive relationship with all of our residents, making the process simple and stress-free. You won’t need to contact your residents because our Member Service Team will ensure both you and your resident have everything needed. 

If you (or a representative) suggests a date and time that doesn’t work for the residents in your rental home, they can request an alternative. But they cannot outright refuse to let you or your management team inspect your property if you have followed the laws around notice. 

Is it ok to do a ‘drive-by inspection’ of my home when it’s being rented?

Welcome to The Playroom