Rental income is a great source of cash, and can boost your borrowing power and your income. Many property owners find that once they start making rental income, they buy additional properties to boost their income; it’s that effective. When you’re looking at a single family home, you can still find ways to make rental income. If a house-sharing situation doesn’t appeal to you, consider converting a part of your property to make money from your home.  

Conversion Possibilities

An in-law apartment, granny flat or other type of non-traditional rental unit can be a great way to add rental income to your home. Whether you’re looking to make money from a single-family home that you already own, or whether you’re considering buying and a single-family is all you can afford, a property conversion can help you boost your income and make money from your home.

The easiest type of property conversion involves a multi-story home with amenities on multiple floors. If you’ve got a two-story home and have bathrooms on both floors, it might not be a huge stretch to convert to two units and have a ready-made rental property. When doing a property conversion, the things you’ll need to look at are bathrooms, kitchens, entrances, bedrooms and living space.

If your two-story home has a bathroom, kitchen, dining room and living room on the first floor, you might be able to convert the dining room to a bedroom and have yourself a rental unit. Then you’d need to add a kitchen and a separate entrance to the second floor, or build out the existing staircase to make it accessible from the outside. Depending on the home, this type of conversion can be surprisingly cost effective.

Check Your Local Zoning

Before you buy a property with a conversion in mind, check local zoning and building laws. Make sure you can comply with local laws. Some areas don’t permit this type of conversion to a multi-family unit, and others have strict building codes that may make this type of conversion quite expensive.

If you’ve found your dream home but you’re a single person or you simply don’t earn enough money to cover the payments, it need not be the end of the dream. The right home may lend itself to a house-sharing situation. Housemates may not be convenient or particularly desirable, but they can make owning a home possible even when you don’t make enough to pay for it yourself. Be savvy when you consider housemates and you could find yourself in a great home and even make money on the deal.  

Finding a Home that Lends Itself to Housemates

When considering housemates, you’ll want to be sure that your home lends itself to housemates. A small, single-bedroom home isn’t going to be a particularly desirable home to share with a stranger – for you or the stranger. Look for a nice, multi-bedroom home with good kitchen access and good bathroom access.

A master bedroom with a master bath, and a second bedroom with a second bath, can negate the house-share situation nicely by enabling both you and your housemate to have your own bathroom. Consider house access, parking, and desirable home features when you’re looking for a property to share. If you can find a house with an apartment over the garage or other in-law-style apartment, you can make even more money on your house share.

Housemates Don’t Count Toward Your Borrowing Power

Keep in mind that in most cases, housemates don’t count toward your borrowing power. If a lender can’t approve you for a loan based on your income, housemates aren’t going to help convince the lender – they’ll just help you with the income. You may still need a co-borrower or a co-signer on the loan to get a lender on board. Adding a housemate or two is a great way to help you pay the bills, but you may need other tactics to help you get your loan.

Every homeowner faces the dreaded property taxes. Your property taxes are based on a periodic assessment of your home’s value conducted by your local tax assessment office. Tax assessors may occasionally assess your home’s value at higher than it is, or your home’s value may decline due to changes in the economy. When your tax assessment is too high, you’re paying too much on your property taxes – but you can change that.  

Property Values Fluctuate

Realistically, property values fluctuate. Homeowners buy with the intention of making money as property values rise, but they don’t always go up. Particularly if you bought in a boom economy when property values were high to begin with, your property value might actually go down. While this isn’t good news if you’re trying to sell, a decline in property values can be beneficial to your property taxes.

The amount of taxes you pay on your property is based on your property’s value, as determined by the tax assessor’s office. If the tax assessor values your property at $200,000, and you find that it’s actually only worth $150,000, you’re paying taxes on an extra $50,000 of property value. If your property taxes are too high, you can do something about it.

Save Money by Appealing Your Property Taxes

Consult your local tax assessor’s office to find out the procedures for appealing your property taxes. You may be required to submit comparable home sales data to establish that your home is currently selling for less than it’s assessed, and thus get a decrease in your property taxes. If you need comparable sales, contact the real estate agent who helped you buy your home and explain that you want to establish that your home’s value has changed for the purposes of decreasing your property taxes. The agent can probably help you by providing comparable sales data to help you establish your property’s value for the tax assessor’s office.

Mortgages traditionally come in a 30-year variety; in fact, the most popular home loan by a big margin is a 30-year fixed mortgage. However, a 30-year mortgage isn’t your only option; mortgages also come in a 15-year variety, typically with a significantly higher payment. When should you choose 15, and when should you take 30?  

Benefits of 30-year mortgages.

30-year mortgages are the most popular home loans for a reason: the payment is lower. A 30-year mortgage generally has a 25% lower payment than a 15-year mortgage. This is valuable for a lot of reasons; it frees up income for other household expenses, and helps homeowners keep their heads above water if an unforeseen financial situation should arise.

A 30-year mortgage is also beneficial because homeowners can use some of that money they save by contributing it to an IRA, 401k or other retirement account; thus meeting long-term goals while simultaneously maintaining a mortgage. Finally, you simply don’t want to live cash-strapped from month-to-month for 15 years to take on a shorter mortgage, so a 30-year mortgage can give you financial flexibility that you might otherwise lack.

When to consider a 15-year mortgage.

The primary benefit that a 15-year mortgage offers is that you pay less in the long run for your home. With fewer mortgage payments, you pay less in interest over the course of your loan. That means you can buy your home cheaper over 15 years. A 15-year mortgage can also be beneficial if you have goals you want to meet by freeing yourself from mortgage payments in 15 years. For example, if you have a young child, you might want to plan to be paying for college 15 years down the line, so a 15-year mortgage can be the perfect choice.

Finally, if you make enough money that you contribute the maximum to your IRA and 401k and still have cash leftover, a 15-year mortgage is a great forced savings plan, and a good way to make your money work for you. However, you should make sure you’re meeting your other financial goals before you consider a 15-year mortgage.

One of the most common questions I get from home buyers is “How much can I qualify for?”  I can tell you what the maximum the lender will most likely approve you for, however, only you can determine what you can afford. 

You have to understand one thing, don’t allow anyone to tell you what you can afford.  You have to be able to determine that.  My job is to help you to come to that figure.  The reason there was a housing crisis and mortgage meltdown was due to the fact the people were getting into homes they couldn’t afford. So don’t let your friends, family, Real estate agent or lender determine what you can afford.

Before setting out to talking to a Realtor you want to sit down and figure out your finances.  Sitting down with a properly trained mortgage officer can help get you on the right track.

I recommend getting a sheet of paper and writing down your monthly expenses.  This includes:

• Auto payments (be sure to include gas and insurance costs)
• Any other loans such as student loans or bank loans
• Credit card payments
• Groceries
• Utilities (gas, electric, phone, TV & internet).  Now understand that your gas and electric will most likely go up if you’re currently renting an apartment.
• Entertainment (meals outside the home, activities that cost money for your kids or yourself)
• Miscellaneous (such as savings or college tuition for kids)

Take out your pay stubs for a month and look at the net income.  Add up your monthly expenses from above and subtract it out from your monthly net income.  The figure you have left over will be an estimate of what can go towards your new house payment (including your taxes and insurance).  Now, this is just an estimate.  You still will have other expenses you need to think about, such as budgeting for vacations, home maintenance as well as unexpected emergencies.

If you go over this figure, then you’ll have to cut back on your expenses or you’ll end up living above your means.  If you live above your means, you’ll end up charging your credit cards up and you’ll begin drowning in debt.  Eventually, something has to give, whether you default on your credit cards or you’ll get behind on your mortgage payments.

Once we have this figure, I can work backwards to determining how much of a home this will buy you.

Buying a home is a big expense, but the expense doesn’t stop at the down payment and purchase costs. If you’re in the process of buying a home and calculating your mortgage payments and budget, make sure you budget for maintenance and repairs.

New homeowners may find this part tricky; how do you budget for maintenance and repairs if you’ve never owned a home? Maintenance budgets tend to follow a few tried-and-true rules, so you can successfully budget for a home even if you’ve never done it before.

Budget 1% of your home’s purchase price per year

The general rule for budgeting for maintenance and repairs is to budget up to 1% of your home’s purchase price per year. For example, if you purchase a $200,000 home, you should budget $2,000 per year for maintenance and repairs. Put this money aside in a separate savings account; don’t mix it up with your primary savings, and put it aside no matter what.

A home repair budget is a variable thing. While you may not spend $2,000 per year repairing and maintaining your home in the beginning, you might find yourself spending $10,000 on a new roof at some point, which would require five years’ budget to offset. Therefore, even if you find you’re not spending 1% per year, save it, because you’ll need it eventually.

Have access to emergency funds

Sometimes it seems like home repairs happen at the most inconvenient times. You might not have enough saved in your home maintenance budget to handle emergency repairs, so make sure you have access to emergency funds for unexpected repairs. This might be a primary savings account, or even credit cards, although that’s a last resort. You can also use a home equity line of credit to pay for emergency repairs, although again that’s a last resort.

Once you’ve created a budget, you have a detailed tool that can help you figure out where to spend and where you can cut back. Some expenses are normal and may even be necessary, but most families have plenty of areas where they can cut back and free up cash in their budget. 

Reduce or eliminate consumer debt.

Consumer debt isn’t inherently a bad thing, but it costs you a lot of money. Three credit cards, a personal loan and an auto loan can cost you hundreds of dollars every month, and that’s money you could be spending elsewhere – or better yet, saving. Rearrange your finances to reduce consumer debt, and you’ll ultimately free up money you can use elsewhere.

If you’ve got money in savings you can use to reduce consumer debt, do it. You may earn 3% on your money in savings, if you’re lucky, while consumer debt typically costs anywhere from 7%-25% every month. The math is simple; you’re not making enough money by keeping it in savings to offset the amount of money you’re spending on interest on your consumer debt. Don’t deplete savings to the point that you don’t have an emergency fund, but if you have excess money in savings, use it to pay down or reduce consumer debt.

Determine which items are necessary and which items are luxury.

Food is a necessity. However, dining out every night is a luxury. While it’s unreasonable to expect yourself to curb your dining out habits entirely, look for ways you can cut this expense. Likewise for other unnecessary expenses.

While complete deprivation isn’t sustainable long-term, look for ways you can alter your spending habits to keep more money in your pocket. Use generic items instead of name-brand, cut back on your cable service and replace Starbucks with a coffee from home.