How much car can you afford? Knowing the limits of your budget can help you make a savvy decision when you head to the dealership.
By
Jim Wang
October 5, 2020
debt obligations
20 percent of your budget covers unnecessary expenses and “fun” money
There are many ways to design a budget, but the 50-30-20 budget gives you a good place to start. It will certainly point out of there are any areas that are totally out of whack.
What do you have in savings?
Having a healthy savings account balance is important when making a car purchase as well. If you don’t have an emergency fund with a balance equal to three to six months’ worth of expenses, building that emergency fund up should be a priority.
If you don’t have an emergency fund with a balance equal to three to six months’ worth of expenses, building that emergency fund up should be a priority.
With an added car payment, having a plush savings balance will help you ensure you can cover the new payment even if you hit a financial bump. Or, for instance, if the car needs repairs.
Determine the total cost of the car
Once you have looked at your budget and determined the amount of money per month you are comfortable spending on a car you’ll want to be clear on the total car costs before you make your purchase. Affording a new car isn’t simply about the payment.
There are several other costs associated with car ownership, such as:
Insurance policy costs
Fuel and parking costs
Maintenance and repair costs
You can call your insurance company ahead of time and get a quote for the new vehicle you’re considering. If you are still trying to narrow down what type of car you want, check out this list of the most and the least expensive cars to insure.
Call your insurance company ahead of time and get a quote for the new vehicle you’re considering.
Fuel costs are fairly easy to determine. A Google search will give you the MPGs of any car you could think of. Compare that to your current car to see if your costs will change.
Maintenance and repair costs can be harder to determine but you can get an idea by using averages across a brand. Here’s an article from Autowise that displays the cheapest and most expensive cars to maintain.
Be sure to factor in an accurate estimate of these additional car ownership costs as you determine a purchase price and payment amount you’re comfortable with.
Get the right kind of car loan
Doing your due diligence as you shop for a car loan is important as well. You do not have to get financing through the dealership. You will likely do better getting a loan yourself through your bank. At the very least, have an understanding of what rate you would qualify for before heading into the dealership so you know if they are offering you a fair rate.
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About the Author
Jim Wang has been writing about money for over 15 years, most recently at WalletHacks.com. His software engineering background has given him the skills to distill complex financial concepts into easier-to-understand ideas people can use to take control of their lives and build wealth.
If you are a retiree who finds it tough to make ends meet, join the club.
Retiree households had an estimated median income of just $29,000 before taxes in 2019, according to the 20th annual Transamerica Retirement Survey of Retirees.
Even worse, just over 1 in 4 retiree households — 27% — reported an income of less than $25,000.
Altogether, 56% of retiree households brought in a pre-tax income of less than $50,000, while a lucky 13% earned at least $100,000.
The survey findings for 2019 pre-tax household income break down as follows:
Less than $25,000: Reported by 27% of survey respondents
$25,000 to less than $50,000: 29%
$50,000 to less than $75,000: 14%
$75,000 to less than $100,000: 9%
$100,000 to less than $150,000: 9%
$150,000 to less than $200,000: 2%
$200,000 or more: 2%
Among the survey respondents, 6% declined to answer the income question and 2% were unsure of their pre-tax household income.
The statistics paint a sobering picture of the reality of retirement for millions of people, says Catherine Collinson, CEO and president of the Transamerica Institute and Transamerica Center for Retirement Studies:
“Many retirees were forced into retirement before they were ready, which shortened their working years, extended their time in retirement, and left them more financially vulnerable. Retirees have been getting by, but they risk outliving their savings.”
These scanty incomes make it more challenging for retirees to pay off household debt.
Transamerica found that 46% of retiree households have nonmortgage debt, such as credit card, car loan, student loan or medical obligations. In addition, 23% of households have mortgage debt.
Planning your retirement
Saving early and often gives you the best chance of avoiding the same fate as millions of today’s retirees. But even if you are starting to save later in life, you can still build up a substantial nest egg. For more, check out “5 Ways to Save Up $500,000 in 15 Years.”
Another way to prepare for post-work life is to enroll in Money Talks News’ retirement course. This 14-week boot camp offers everything you need to plan the rest of your life so that you will have enough to make your retirement dreams a reality.
The course is intended for those who are 45 or older, but even younger folks can benefit from the wisdom to be gleaned from these lessons. The earlier you understand the lay of the land, the sooner you can start saving. And starting to save earlier makes everything so much easier down the road.
The right financial pro can also play a key role in helping secure your financial future. Stop by Money Talks News’ Solutions Center for help finding the right financial adviser.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.
Pop quiz! If I asked you, “Who invented the index fund?” what would your answer be? I’ll bet most of you don’t know and don’t care. But those who do care would probably answer, “John Bogle, founder of The Vanguard Group.” And that’s what I would have answered too until a few weeks ago.
But, it turns out, this answer is false.
Yes, Bogle founded the first publicly-available index fund. And yes, Bogle is responsible for popularizing and promoting index funds as the “common sense” investment answer for the average person. For this, he deserves much praise.
But Bogle did not invent index funds. In fact, for a long time he was opposed to the very idea of them!
Recently, while writing the investing lesson for my upcoming Audible course about the basics of financial independence, I found myself deep down a rabbit hole. What started as a simple Google search to verify that Bogle was indeed the creator of index funds led me to a “secret history” of which I’d been completely unaware.
In this article, I’ve done my best to assemble the bits and pieces I discovered while tracking down the origins of index funds. I’m sure I’ve made some mistakes here. (If you spot an error or know of additional info that should be included, drop me a line.)
Here then, is a brief history of index funds.
What are index funds? An index fund is a low-cost, low-maintenance mutual fund designed to follow the price fluctuations of a stock-market index, such as the S&P 500. They’re an excellent choice for the average investor.
The Case for an Unmanaged Investment Company
In the January 1960 issue of the Financial Analysts Journal, Edward Renshaw and Paul Feldstein published an article entitled, “The Case for an Unmanaged Investment Company.”
Here’s how the paper began:
“The problem of choice and supervision which originally created a need for investment companies has so mushroomed these institutions that today a case can be made for creating a new investment institution, what we have chosen to call an “unmanaged investment company” — in other words a company dedicated to the task of following a representative average.”
The fundamental problem facing individual investors in 1960 was that there were too many mutual-fund companies: over 250 of them. “Given so much choice,” the authors wrote, “it does not seem likely that the inexperienced investor or the person who lacks time and information to supervise his own portfolio will be any better able to choose a better than average portfolio of investment company stocks.”
Mutual funds (or “investment companies”) were created to make things easier for average people like you and me. They provided easy diversification, simplifying the entire investment process. Individual investors no longer had to build a portfolio of stocks. They could buy mutual fund shares instead, and the mutual-fund manager would take care of everything else. So convenient!
But with 250 funds to choose from in 1960, the paradox of choice was rearing its head once more. How could the average person know which fund to buy?
When this paper was published in 1960, there were approximately 250 mutual funds for investors to choose from. Today, there are nearly 10,000.
The solution suggested in this paper was an “unmanaged investment company”, one that didn’t try to beat the market but only tried to match it. “While investing in the Dow Jones Industrial average, for instance, would mean foregoing the possibility of doing better than average,” the authors wrote, “it would also mean tha the investor would be assured of never doing significantly worse.”
The paper also pointed out that an unmanaged fund would offer other benefits, including lower costs and psychological comfort.
The authors’ conclusion will sound familiar to anyone who has ever read an article or book praising the virtues of index funds.
“The evidence presented in this paper supports the view that the average investors in investment companies would be better off if a representative market average were followed. The perplexing question that must be raised is why has the unmanaged investment company not come into being?”
The Case for Mutual Fund Management
With the benefit of hindsight, we know that Renshaw and Feldstein were prescient. They were on to something. At the time, though, their idea seemed far-fetched. Rebuttals weren’t long in coming.
The May 1960 issue of the Financial Analysts Journal included a counter-point from John B. Armstrong, “the pen-name of a man who has spent many years in the security field and in the study and analysis of mutual funds.” Armstrong’s article — entitled “The Case for Mutual Fund Management” argued vehemently against the notion of unmanaged investment companies.
“Market averages can be a dangerous instrument for evaluating investment management results,” Armstrong wrote.
What’s more, he said, even if we were to grant the premise of the earlier paper — which he wasn’t prepared to do — “this argument appears to be fallacious on practical grounds.” The bookkeeping and logistics for maintaining an unmanaged mutual fund would be a nightmare. The costs would be high. And besides, the technology (in 1960) to run such a fund didn’t exist.
And besides, Armstrong said, “the idea of an ‘unmanaged fund’ has been tried before, and found unsuccessful.” In the early 1930s, a type of proto-index fund was popular for a short time (accounting for 80% of all mutual fund investments in 1931!) before being abandoned as “undesirable”.
“The careful and prudent Financial Analyst, moreover, realizes full well that investing is an art — not a science,” Armstrong concluded. For this reason — and many others — individual investors should be confident to buy into managed mutual funds.
So, just who was the author of this piece? Who was John B. Armstrong? His real name was John Bogle, and he was an assistant manager for Wellington Management Company. Bogle’s article was nominated for industry awards in 1960. People loved it.
The Secret History of Index Funds
Bogle may not have liked the idea of unmanaged investment companies, but other people did. A handful of visionaries saw the promise — but they couldn’t see how to put that promise into action. In his Investment News article about the secret history of index mutual funds, Stephen Mihm describes how the dream of an unmanaged fund became reality.
In 1964, mechanical engineer John Andrew McQuown took a job with Wells Fargo heading up the “Investment Decision Making Project”, an attempt to apply scientific principles to investing. (Remember: Just four years earlier, Bogle had written that “investing is an art — not a science”.) McQuown and his team — which included a slew of folks now famous in investing circles — spent years trying to puzzle out the science of investing. But they kept reaching dead ends.
After six years of work, the team’s biggest insight was this: Not a single professional portfolio manager could consistently beat the S&P 500.
Mihm writes:
As Mr. McQuown’s team hammered out ways of tracking the index without incurring heavy fees, another University of Chicago professor, Keith Shwayder, approached the team at Wells Fargo in the hopes they could create a portfolio that tracked the entire market. This wasn’t academic: Mr. Shwayder was part of the family that owned Samsonite Luggage, and he wanted to put $6 million of the company’s pension assets in a new index fund.
This was 1971. At first, the team at Wells Fargo crafted a fund that tracked all stocks traded on the New York Stock Exchange. This proved impractical — “a nightmare,” one team member later recalled — and eventually they created a fund that simply tracked the Standard & Poor’s 500. Two other institutional index funds popped up around this time: Batterymarch Financial Management; American National Bank. These other companies helped promote the idea of sampling: holding a selection of representative stocks in a particular index rather than every single stock.
Much to the surprise and dismay of skeptics, these early index funds worked. They did what they were designed to do. Big institutional investors such as Ford, Exxon, and AT&T began shifting pension money to index funds. But despite their promise, these new funds remained inaccessible to the average investor.
In the meantime, John Bogle had become even more enmeshed in the world of active fund management.
In a Forbes article about John Bogle’s epiphany, Rick Ferri writes that during the 1960s, Bogle bought into Go-Go investing, the aggressive pursuit of outsized gains. Eventually, he was promoted to CEO of Wellington Management as he led the company’s quest to make money through active trading.
The boom years soon passed, however, and the market sank into recession. Bogle lost his power and his position. He convinced Wellington Management to form a new company — The Vanguard Group — to handle day-to-day administrative tasks for the larger firm. In the beginning, Vanguard was explicitly not allowed to get into the mutual fund game.
About this time, Bogle dug deeper into unmanaged funds. He started to question his assumptions about the value of active management.
During the fifteen years since he’d argued “the case for mutual fund management”, Bogle had been an ardent, active fund manager. But in the mid-1970s, as he started Vanguard, he was analyzing mutual fund performance, and he came to the realization that “active funds underperformed the S&P 500 index on an average pre-tax margin by 1.5 percent. He also found that this shortfall was virtually identical to the costs incurred by fund investors during that period.”
This was Bogle’s a-ha moment.
Although Vanguard wasn’t allowed to manage its own mutual fund, Bogle found a loophole. He convinced the Wellington board to allow him to create an index fund, one that would be managed by an outside group of firms. On 31 December 1975, paperwork was filed with the S.E.C. to create the Vanguard First Index Investment Trust. Eight months later, on 31 August 1976, the world’s first public index fund was launched.
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Bogle’s Folly
At the time, most investment professionals believed index funds were a foolish mistake. In fact, the First Index Investment Trust was derisively called “Bogle’s folly”. Nearly fifty years of history have proven otherwise. Warren Buffett – perhaps the world’s greatest investor – once said, “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.”
In reality, Bogle’s folly was ignoring the idea of index funds — even arguing against the idea — for fifteen years. (In another article for Forbes, Rick Ferri interviewed Bogle about what he was thinking back then.)
Now, it’s perfectly possible that this “secret history” isn’t so secret, that it’s well-known among educated investors. Perhaps I’ve simply been blind to this info. It’s certainly true that I haven’t read any of Bogle’s books, so maybe he wrote about this and I simply missed it. But I don’t think so.
I do know this, however: On blogs and in the mass media, Bogle is usually touted as the “inventor” of index funds, and that simply isn’t true. That’s too bad. I think the facts — “Bogle opposed index funds, then became their greatest champion” — are more compelling than the apocryphal stories we keep parroting.
Note: I don’t doubt that I have some errors in this piece — and that I’ve left things out. If you have corrections, please let me know so that I can revise the article accordingly.
Lending limits for conventional loans got a nice boost this year.
The Federal Housing Finance Agency (FHFA) determined home prices are up 7.42% on average across the nation.
It raised
conforming loan limits by the same percentage — a dollar increase of almost
$38,000 for the standard one-unit home. Multi-unit
properties got a similar boost.
Baseline conforming loan limits
Standard loan limits for 2021, which apply in most of the United States, are as follows:
1-unit homes: $548,250
2-unit homes: $702,000
3-unit homes: $848,500
4-unit homes: $1,054,500
Keep
in mind that these are only “standard” limits. In areas with high-cost real estate, buyers get significantly higher mortgage limits.
Maximum conforming loan limits
High-balance
conforming loan limits vary by county. They can fall within the following
ranges:
1-unit homes: $548,250–$822,375
2-unit homes: $702,000–$1,053,000
3-unit homes: $848,500–$1,272,750
4-unit homes: $1,054,500–$1,581,750
Areas
such as Alameda County, California, Arlington, Virginia, and Jackson, Wyoming enjoy the maximum conforming loan limits, while cities like Seattle, Washington and
Baltimore, Maryland fall between the “floor” and the “ceiling.”
In
Alaska, Hawaii, Guam, and the U.S. Virgin Islands — which follow their own loan
limit rules — the baseline loan limit for 2021 is $822,375 for a one-unit
property.
Verify your home buying eligibility (Jan 11th, 2021)
Conforming
loan limits by county for 2021
What is a
mortgage loan limit?
A loan
limit is the maximum amount you can borrow
under certain mortgage programs.
There
is not just one loan limit, but many. Conventional mortgages adhere to one set
of loan limits, and FHA another.
VA loans did away with limits altogether in 2020.
In the world of conforming loans, Fannie Mae and Freddie
Mac limit “borrowable” amounts to keep their nationwide programs available to
those who need them.
For instance, Fannie Mae doesn’t want a $10 million loan
going through its system. That’s a lot of risk wrapped up in one
transaction, and the agency would rather issue many smaller loans to more home
buyers.
Fortunately,
loan limits are on the rise in 2021 to reflect rising
home prices across the country.
What
is a conforming loan?
A conforming loan is any mortgage that:
Has a loan amount within local conforming loan limits
Meets lending guidelines set by Fannie Mae and Freddie Mac
Mortgages within conforming loan limits are eligible to be backed by Fannie Mae and Freddie Mac, as long as the borrower meets basic criteria for credit score, income, down payment, and debt levels.
Conforming loans typically require:
A credit score of at least 620
A debt-to-income ratio below 43%
A down payment of at least 3%
Two-year history of stable employment and income
Exact conforming loan requirements
can vary by lender, but they all have to meet the minimum guidelines set by
Fannie and Freddie.
These
standards give lenders and investors more
confidence in these loans.
As a result, conforming loans are available with ultra-low mortgage rates and just 3% down payment.
Remember
that the conforming loan limit applies to the loan amount, not the home price.
For
instance, say a buyer is purchasing a 1-unit home in Boulder, Colorado where
the limit is $654,350. The home price is $1 million, and the buyer is
putting $450,000 down.
This
buyer is eligible for a conforming loan. The final loan amount is
$550,000 — well within limits for the area.
Still,
many applicants will need financing above their local loan limit. For
them, a number of solutions exist.
Jumbo loans
The
simplest method is to use a jumbo loan. Jumbo mortgages describe any home loan
above local conforming limits.
Using
the example above, let’s say the Boulder, CO home buyer puts down $200,000 on a
$1 million home. In this case, their loan amount would be $800,000 — far above
the local conforming loan limit of $654,350. This buyer would need to finance
their home purchase with a jumbo loan.
You might think jumbo mortgages would have higher interest rates, but that’s not always the case.
Jumbo loan rates are often near or even below conventional mortgage rates.
The
catch? It’s harder to qualify for jumbo financing. You’ll likely need a credit
score above 700 and a down payment of at least 10-20%.
If
you put down less than 20% on a jumbo home purchase, you’ll also have to pay
for private mortgage insurance (PMI). This would increase your monthly payments
and overall loan cost.
The
next method helps you avoid PMI when buying above conforming loan limits.
Verify your jumbo loan eligibility (Jan 11th, 2021)
Piggyback financing for high-priced homes
Perhaps the most cost-effective method is to choose a piggyback loan. The piggyback or “80/10/10” loan is a type of financing in which a first and second mortgage are opened at the same time.
Typically, this structure is used to avoid private mortgage insurance.
A buyer can get an 80 percent first mortgage, 10 percent second mortgage (typically a home equity line of credit), and put 10 percent down.
However,
these loans are also available for those putting 20 percent down or more. Here’s how
it would work.
Home price: $700,000
Down payment: $140,000 (20%)
Financing needed: $560,000
Local conforming limit: $548,250
The
buyer could structure his or her loan as follows.
Down payment: $140,000
1st mortgage: $548,000
2nd mortgage: $12,000
The
home is purchased with a conforming loan and a small second mortgage. The first
mortgage may come with better terms than a jumbo loan, and the second mortgage
offers a great rate, too.
Verify your piggyback loan eligibility (Jan 11th, 2021)
What’s the jumbo loan limit for 2021?
Technically there’s no jumbo loan limit for 2021.
Since jumbo mortgages are above the conforming loan limit,
they’re considered “non-conforming” and are not eligible for lenders to assign
to Fannie Mae or Freddie Mac upon closing.
That means the lenders offering jumbo loans are free to set
their own criteria, including loan limits.
For example, one lender might set its jumbo loan limit at $2
million, while another might set no limit at all and be willing to finance
homes worth tens of millions.
But the amount you can borrow via a jumbo or
non-conforming loan is limited by your finances.
You need enough income to make the monthly mortgage payments on your new home. And your debt-to-income ratio (including your future mortgage payment) can’t exceed the lender’s maximum.
You can use a mortgagecalculator to estimate the maximum home price you can likely afford. Or contact a mortgage lender to get a more accurate number.
What if I’m
getting an FHA loan?
FHA loans come with their own loan limits. Standard FHA limits for 2021 are as listed below.
1-unit homes: $356,362
2-unit homes: $456,275
3-unit homes: $551,500
4-unit homes: $685,400
You
might notice that FHA’s limits are considerably lower than conforming limits.
That’s by design.
The FHA program, backed by the Federal Housing Administration, is meant for home buyers with moderate incomes and credit scores.
But
the FHA also suits home buyers in expensive counties. Single-family FHA loan limits reach $822,375
in high-cost areas within the continental U.S. and a
surprising $1,233,550 for a 1-unit home in Alaska, Hawaii, Guam, or the Virgin Islands.
What are
today’s mortgage rates for these loan limits?
Mortgage
rates for conforming loans are stellar, which is why so many buyers consider a
conforming loan before using jumbo financing.
Get
a rate quote for your standard or extended-limit conforming loan. Compare to
jumbo rates and piggyback mortgage rates to make sure you’re getting the best
value.
The Mortgage Bankers Association reported that applications decreased 1.2% during the week ending Dec. 4 in its latest weekly survey — the second straight week of application decreases.
The refinance index and the unadjusted purchase index did increase, however, jumping 2% and 29% respectively from the previous week. The refinance index is up 89% from the previous year, according to Joel Kan, MBA’s associate vice president of industry and economic forecasting.
“The increase in refinance applications was driven by FHA and VA refinances, while conventional activity fell slightly,” he said. “The purchase market is also poised to finish 2020 on a strong note. Applications fell slightly last week, but were around 3% higher than the two weeks leading up to Thanksgiving. Reversing the recent trend, there was also a shift in the composition of purchase applications, with an increase in government loans pushing the average loan balance lower.”
The refinance share of mortgage activity decreased to 72% of total applications, up from 69.5% the previous week. The adjustable-rate mortgage share of activity also decreased – for the second week in a row – to 1.7%, from 1.8% last week.
The FHA share of total applications increased to 9.9% from 9.1% percent the week prior, while the VA share of total applications increased to 12.7% from 11.9%.
Here is a more detailed breakdown of this week’s mortgage application data:
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to 2.9% from 2.92%
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $510,400) increased to 3.2% from 3.19%, the second week in a row that jumbo loan balances saw an interest increase
The average contract interest rate for 30-year fixed-rate mortgages fell to 2.97% from 3%
The average contract interest rate for 15-year fixed-rate mortgages decreased to a survey-low 2.51% from 2.53%
The average contract interest rate for 5/1 ARMs decreased to 2.60% from 2.63%
The average U.S. mortgage rate for a 30-year fixed loan fell to 2.81% this week, the lowest in Freddie Mac’s survey history, the mortgage giant said in a report on Thursday. The rate fell six basis points from the week prior and is now five basis points lower than the original all-time low set in mid-September.
The average fixed rate for a 15-year mortgage was 2.35%, falling from last week’s 2.37% — matching the record set three weeks ago.
There have now been 12 consecutive weeks when average mortgage rates have been below 3% and this is the tenth record broken this year, said Sam Khater, Freddie Mac’s chief economist.
“Low mortgage rates have become a regular occurrence in the current environment,” Khater said. “Many people are benefitting as refinance activity remains strong. However, it’s important to remember that not all people are able to take advantage of low rates given the effects of the pandemic.”
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Although mortgage applications fell seven basis points last week, purchase applications have now boasted 21 weeks of year-over-year gains.
In September, the Federal Reserve predicted that rates will remain low through 2023.
By Melissa4 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 19, 2018.
My grandparents retired when their youngest child turned 18. They promptly sold their house, bought a trailer in Florida, and lived there seven months of the year. They had a 5th wheel trailer that they lived in during the five months when they weren’t in Florida.
For them, the decision to sell their home was an easy one, and it helped bring them financial stability in retirement.
Since their house was paid off, after they bought their trailers, the rest of the money from the sale of their home when straight into retirement investments.
Their retirement investments outlasted them; they passed away 25 years after they retired and sold their home. They even still had a small inheritance to give each of their nine children.
As most people reach retirement, however, the decision to sell the family home is not so easy. People are emotionally attached to their homes and struggle with the idea of selling them. “A full 83% would prefer to age in place” (Forbes). Yet for many, that may not be the wisest decision.
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live comfortably in retirement if all of their debts are paid off. However, fewer homeowners are entering retirement debt free.
Of homeowners over 65, “the proportion with housing debt rose to 35 percent in 2012, up from 23.9 percent in 1998” (The New York Times).
Strictly considering finances, not emotions, staying in a home you owe money on doesn’t make sense. Not only do you need to pay the mortgage payment every month, but your equity is tied up in an asset that isn’t very liquid. Getting out of the house if the equity is needed would take some doing.
If you sell the house and move into a cheaper home that you can buy outright, you no longer have the monthly mortgage payment, often freeing up $1,000 or more from your monthly budget. In addition, you also can invest the equity in your home into your retirement savings.
Reduce Other Expenses
Those with families often live in larger houses that accommodated the kids, their friends, and all their stuff. Once the kids move out, parents may find themselves in a house that is too big for their needs. By selling the house and moving to a smaller home, they can pay less on many expenses including utilities, property taxes, and maintenance expenses. These expenses alone can add up to $500 or more per month.
Retire Earlier
If you are free of the monthly mortgage as well as maintenance and utility costs, plus you have the equity to invest in your retirement, you may find that you can retire earlier than you thought, often by several years. What could you do with those extra years in retirement? There’s something to be said for retiring while you’re still healthy enough to enjoy your newfound freedom.
Footloose And Fancy Free
While selling your home may initially be terrifying and feel as if you’re security is ripped from you, it may also be a blessing. Not owning a home can open you up to all sorts of adventures such as traveling, or living in a new area of the country, or settling into an apartment for retirees where you no long have to worry about yard maintenance and other household chores.
Being emotional about our homes is understandable. After all, our homes are where we raised our families and spent years of our lives. Some of our best memories are there.
But if you can set the emotions aside, you may find that selling your home launches you into a much more comfortable retirement than you would have if you kept your home.
Do you plan to sell your home in retirement, or are you emotionally attached and plan to stay there?
What Does ARV Mean in Real Estate? | SmartAsset.com
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Real estate investors often consider the after-repair value, or ARV, of a piece of real estate when deciding whether a deal is worth pursuing. The ARV is an estimate of what the property will be worth after all the needed repairs, renovations and upgrades have been done. It is the sum of the cost of the property and the value of the repairs. Knowing this key real estate metric is especially helpful to investors and lenders.
The margin between the ARV and the cost of the property, including the cost of the repairs and other work, represents the potential profit on the investment. Therefore, ARV can help investors select an appropriate method of financing the property purchase as well as the best exit strategy. For instance, it can direct investors toward a fix-and-flip approach, which normally means selling within a year, or a buy-and-hold approach that may involve owning a property indefinitely. Lenders can use ARV to decide whether to fund a project, and the ARV can also suggest the ultimate selling price of a renovated property.
Figuring ARV
ARV is an estimate based on the investor’s assessment of the repairs and upgrades that will be necessary, the likely cost of those improvements and the effect on the value of the property. Making this estimate requires significant knowledge about local market conditions as well as the availability and pricing of local contractors.
The formula for ARV is:
ARV = Purchase price + Value of renovations
To calculate ARV requires placing a value on the property as is. This can be done by hiring a professional appraiser, or by examining comparable properties listed for sale. When looking at comparable properties, it’s important to look for properties that have similar locations, sizes, ages, condition and other characteristics. If an investor finds that similar properties in similar condition are listing and selling for $150,000 on average, that is the likely estimate for this property’s as-is value.
After estimating the as-is value, the investor estimates the cost to perform the needed repairs and renovations. For example, if the property needs a new roof, new carpet and kitchen updates, the estimated cost for these repairs may be $30,000.
Next the investor looks for listings and sales of comparable properties that have already been upgraded. If the average value of these comparable properties is $225,000, that is the ARV for this property as well. In this case, the value of the repairs is $75,000. That is the $225,000 value of comparable already-repaired homes, minus the as-is property value of $150,000. Since the cost of the repairs is $30,000 and the value of the repairs is $75,000 that indicates a $45,000 potential profit margin and suggests this is a deal worth considering.
Using ARV
After calculating the ARV, an investor can use it to help suggest a price to offer to acquire a property. In order to this well requires considering much more than the value of the repairs. A successful real estate investment decision also takes into account carrying costs such as interest, insurance and taxes, as well as repair costs.
One approach uses what is called the 70% rule to perform initial screening on investment opportunities. The 70% rule calls for an investor to put no more than 70% of the ARV into a property. This includes the purchase price as well as the cost of repairs. According to this rule, if a property’s ARV will be $225,000 after $30,000 in repairs, the investor should not pay more than $127,500 to acquire it. That amount is equal to 70% of $225,000, or $157,500, minus $30,000 for repairs.
The Bottom Line
ARV, or after repair value, is a real estate investing term used to describe an estimate of what a property will be worth after needed repairs, upgrades and renovations are done. Knowing the ARV of a potential investment property helps an investor decided whether the deal if of interest how much to offer to acquire the property, what type of financing to secure and which exit strategy makes the most sense.
Real Estate Buying Tips
Consider working with an experienced financial advisor if you are calculating operating cash flow or evaluating a company for potential investment. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
When considering a real estate purchase it’s important to know whether you can truly afford a property. Using a free calculator can give you a quick estimate of whether a residence fits into your financial plan.
Another real estate investing term — annual rental value — has the same initials but a different meaning. Annual rental value is the amount that it would cost to occupy a property or a space for a year. It might not be the same as the amount of rent that a tenant would pay to rent the property. Instead, annual rental value is based on comparable properties and includes other costs of occupancy. Investors may use annual rental value when estimating the cost to occupy a space or a property.
Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
An offer is pending on a remote and distinctive dwelling in Nevada known as the Hard Luck Castle and Mine.
“We got a lot of interesting calls from people in various parts of the country, because it was marketed as kind of a Doomsday ‘Mad Max’ house, out in the middle of nowhere on 40 acres,” explains the listing agent, Brian Krueger.
“It is completely off-grid, self-sustaining. The owner built the home pretty much on his own, and it took him many years to do it.”
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Over a decade of hard work created a one-of-a-kind castle on Bonnie Clair Road, which is currently listed for $549,900. The massive, 8,000-square-foot structure sits near the tiny town of Goldfield, NV.
The owner originally decided a couple of years ago that he wanted to sell the castle.
“I think we initially started out at $1.2 million, and slowly, over time, the seller agreed—based on our recommendations—to reduce the price. And we’ve probably had a handful of price reductions,” Krueger says.
Property records show that the castle came on the market in October 2018. Since then, the price was sliced eight times before it landed at its final price in June 2020.
Exterior of Hard Luck Castle near Goldfield, NV
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The structure was a true labor of love by its owner.
“It was constructed from 2000 to 2012, so it took him about 12 years,” Krueger says.
It’s solidly built of steel and concrete cinder blocks, with 16-inch thick walls, and since it was engineered to last 400 to 500 years, it’s not going anywhere.
As for the infrastructure, in this remote corner of Nevada? The property has a 4,000-gallon water tank, solar and wind power, a 3,000-gallon propane tank, and diesel generators.
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Inside, the four-story castle has 22 rooms with four bedrooms, three bathrooms, and a number of unique features.
“There’s a wine cellar, there’s a theater and a game room, there’s a glass solarium planetarium. And there’s a fountain room,” Krueger says.
Oh, and there are also two 1920s pipe organs.
“This was kind of just a personal love of the owner. He loves to play the organ, and it’s quite a spectacle when you go in,” Krueger explains.
“I don’t think he ever thought he was going to sell it when he built it. He was building this to be the place he was going to live in for the rest of his life. One of his loves was the organ.”
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There are also two kitchens and decks with views of the surrounding land. Many of the antiques inside the castle will convey with the sale.
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For the buyer truly looking to dig in, the property’s 4 acres offer an intriguing element. A dormant gold mine with mining rights is also included.
The listing details state that the mine shaft is in serviceable condition, even though it closed at the start of World War II and was never reopened. The owner also offered tours to any tourists hardy enough to reach this remote locale.
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The outbuildings include a wood and metal shop, a miner’s cabin that sleeps four, and a shower house.
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Hard Luck is the original name of the mine on the property. From a monumental tower on the property, you can see open desert for miles.
“Gold Point is about 10 miles away. That’s the nearest town,” Krueger says.
At one point, the mining town had 125 homes and various businesses. Now, it’s a historical ghost town.
To give a sense of how far removed the castle is from civilization, the bright lights of Las Vegas are 187 miles away, and the city of Reno is 325 miles from Hard Luck.
The white tower on the property, on a rocky outcrop, serves as a landmark in the area and lists all the names of the U.S. presidents and the years they served.
Like everything else on the property, it’s distinctive. Suffice it to say, the Hard Luck Castle isn’t for every buyer.
“It kind of combines the Wild West with a modern-day castle,” Krueger says. “It’s definitely eclectic, but that’s what made it unique.”
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For more photos and details, check out the full listing.
This tiny home packs a bouldering wall, a roll-up garage door and a full-sized soaking tub into just 250 square feet.
There’s no need to park in the mountains when the rock climbing is right at your doorstep.
At least that’s what the team at Tiny Heirloom figured when they set out to design a tiny home for an intrepid couple looking to take adventure on the road.
The Portland, OR-based company combined two of the things its clients enjoyed most — fitness and being outside — into a 250-square-foot, custom-built home, said Jason Francis, creative director and co-founder at Tiny Heirloom.
The idea for a tiny home with a bouldering wall came from organic brainstorming, Francis said.
“The rock wall really started as a long-shot idea, but the more we thought about it, the more excited we got,” Francis said. “So we figured out a way to make it happen!”
“We’ve built many custom homes,” Francis added, “but this was definitely one of our most unique.”
His team added some rich design elements, including a roll-up garage-style glass door, to bring the outdoors inside. The couple intends to use the place as their primary residence.
The home cost about $145,000, but $35,000 of that went to building the custom climbing wall.
The home is 24 feet long and 13 feet tall, providing plenty of room for outdoor climbing. The bouldering wall is on one side of the home, and the handholds can be reconfigured to change up the climbing route.
One side has a traditional entryway, while the other has the roll-up door to provide expansive views of wherever the home is parked.
The living space contains two lofts: one with an office and the other with a bedroom. Designers hung a chandelier made of Edison bulbs between the two.
The kitchen features a farmhouse sink and full-sized oven. The cabinets are a rich blue color with brass accents. There are two open shelves above the countertops.
The home also contains a dining space with bench-style seating that doubles as storage.
An arched blue-tile doorway leads to the bathroom, which has a full-sized soaking tub, white subway tiles and a rainfall showerhead.
After completing the tiny home and sharing it on social media, Francis said they’ve had a number of inquiries about building similar spaces for clients.
“Ideas have spread from it quite a bit, but no one else has bought the exact same thing,” Francis said. “We have had a client request a rock wall system in the house as a way up to the lofts for his two young boys.”
