What to Know Before Renting out a Room in Your House

What to Know Before Renting out a Room in Your House

Renting out a room in your house isn’t something to be done on a whim. From legal and financial considerations to aesthetics, there are lots of things to think about before offering the space to a potential housemate.

Here are some things to consider before renting out a room in your house.

What Are Some Room Rental Options?

Renting out a room in your house doesn’t have to mean having one long-term renter, although that’s certainly one way to go.

Short-term Rental

One option homeowners might consider is short-term rentals, such as Airbnb or Vrbo. This could be a good option if you live in an in-demand tourist area or have a home in an out-of-the-way locale that might attract someone looking for a place to relax and unwind. Some travelers prefer to stay somewhere that feels more like a home than a hotel.

Recommended: 25 Things to Know When Renting Out an Airbnb

Long-term Rental

Having a housemate who is planning to rent a room in your home for an extended period of time can be one way to have a steady income for that time period. It’s a good idea to have a formal rental agreement that clearly outlines expectations of both parties.

Furnished or Unfurnished Rental

Whether to offer a furnished or unfurnished space will probably be determined by the type of renter you’re looking for. If you live in a college town, prospective renters might not have any furnishings of their own, so will likely be looking for a furnished rental. As with a short-term rental mentioned above, a furnished rental will probably be a given. A potential long-term housemate, though, may have their own furnishings to bring to the space.

What Financial Considerations Are There?

For some people, the sole reason for renting a room in their house is to have some extra income. With income, though, come expenses.

Return on Investment

It’s not likely that a spare room is ready for a renter without some updating and perhaps even some repairs. Keeping a record of how much money you spend preparing the space will help you determine if you’re coming out ahead financially. It may take some time to recoup the money you spend before you make a profit. And it’s a good idea to have a record of any ongoing expenses you incur to make sure you’re charging enough rent to offset those.

Recommended: What Is Considered a Good Return on Investment?

Taxes

In most cases, there will be income tax implications, so it’s wise to treat renting a room in your house as a business of sorts. As such, it’s a good idea to consult a tax professional who can answer detailed questions about rental income.

The IRS considers rental of part of your property, such as a spare room, as taxable income. And, like some business expenses, there are expenses related to this type of rental that are tax deductible. Any deductions claimed must be directly related to the portion of the home that is used for rental purposes and is generally calculated as a percentage of the home’s total square footage.

Recommended: 25 Tax Deductions for Freelancers

Are There any Legal Considerations?

It’s wise to look at your state’s landlord-tenant laws as a first step. Some states are more landlord friendly, while other states have a wide range of protections for tenants, putting more limitations on landlords’ rights.

Even if you’re just renting out a room to an acquaintance, you’ll likely still be considered a landlord and must adhere to regulations that apply to your situation. The Fair Housing Act protects potential tenants from discrimination except in limited circumstances. Shared housing is one of those circumstances because the government concluded that sharing one’s personal space has “significant privacy and safety considerations” in a U.S. Court of Appeals ruling.

Neighborhood Restrictions

Aside from governmental legal considerations, it’s a good idea to check your apartment lease or your neighborhood or homeowner’s association, if you have one, as some homeowner’s associations may have regulations about leasing all or part of your home. If you’re renting a home or apartment, your lease may specify whether you’re allowed to sublease or if you’re restricted from doing so.

Your homeowner’s insurance policy may also include a clause related to leasing part of your home. Some companies may allow you to rent a room in your home without any change to your policy, while others may disallow it completely. There’s a chance you may see an increase in your premium, as well. To be on the safe side, it’s a good idea to let your insurance agent know of any change in your home’s occupancy.

Recommended: Condo vs Townhouse

Screening Tenants

Finding the right person to share your personal space may take some time. You likely have certain things you’re looking for in a potential renter along with other things that might be deal-breakers. Maybe you’re looking for a non-smoker who has a solid rental history. A rental application is one tool that can help you find a housemate that fits the bill.

You may want to run a credit check and a background check on any applicants who are truly interested in renting a room in your house. These checks generally have fees associated with them, and it’s a good idea to specify in the rental application who will be responsible for paying for credit and/or background check.

The applicant’s permission is required to run either of these checks and they are entitled to know if the results of either a credit or background check resulted in the denial of their rental application. It’s important to make sure you’re complying with fair housing laws when screening potential tenants and aren’t discriminating against certain applicants.

Rental Agreement

Having a formal, written lease in place will go a long way in protecting both you and your renter. A thorough agreement might include:

•   The leasing period — it’s typical for a lease to be for one year, but if you’re renting a room to college students, you may consider a shorter lease for the duration of the school year. This section might specifically note the move-in and move-out dates.

•   Rent amount — including the due date, how you would like to collect it, and any late fees you might charge.

•   Security deposit — the amount and conditions for returning or withholding it at the end of the lease.

•   Utility costs — are they included in the monthly rent or will the renter be responsible for paying their share of the total bills?

•   Shared spaces — expectations around common areas like the kitchen, living room, and bathroom.

•   Pets — are they allowed or not, as well as policies about pet messes and noise.

•   Cleaning and maintenance — will the renter be responsible for regular house cleaning, including private and common areas, and home maintenance, inside or out?

•   Parking — if there is a parking space available, is it included in the rent or is it a separate charge?

Covering a wide variety of things in a rental agreement can go a long way in avoiding misunderstanding and miscommunication between you and your tenant. Having an attorney review the agreement is a good way to make sure you’re not missing important elements. Lease agreements are legally binding contracts when signed by both parties.

It’s also a good idea to do a walk-through of the room with the tenant before signing the lease and again before they move out. Any damage can be documented (e.g., carpet stains, scratches on woodwork, torn window screen, among other things) so it’s clear that the tenant isn’t responsible for that damage. A final walk-through can be done before the tenant moves out, during which any additional damage can be documented and accounted for.

What Are the Costs of Renting a Room in Your House?

You may encounter costs preparing a room to be rented as well as ongoing expenses related to having another person living in the home.

Preparing the Room for Rental

Safety for you and your tenant are important concerns. You may want to make sure doors and window locks are in good working order. Your tenant will likely want their room to be private, so a keyed lock on their door can go a long way to easing any concerns they might have about living in someone else’s home. Providing a combination safe for the tenant’s valuables might be a nice gesture.

Installing locks on doors to any areas you don’t want your tenant to have access to is another layer of safety you may want to consider.

Fixing loose railings, sticking doors or windows, flooring trip hazards, and doing other home maintenance that could become safety issues is important in making your home and the individual room an attractive rental prospect for tenants.

You may want to make some cosmetic changes, too.

•   Painting the walls a neutral color may allow a prospective tenant to imagine their belongings in the room, instead of bright colors that might be a distraction to them. Using an easy-to-clean paint finish, like satin instead of flat, may also save you some effort after your tenant moves out.

•   If the room is carpeted, you might consider having the carpet cleaned, either professionally or using your own carpet cleaner. If the room is furnished with upholstered furniture, it can also be cleaned. Doing so will help the room look and smell fresh.

•   If you’re renting a furnished room, make sure the furnishings are clean and in good condition. Even used furniture can be presentable.

•   If the tenant will have a private bathroom space, the fixtures should be as modern as possible, but more importantly, clean and working. If the faucet drips, if the bathtub leaks, if the toilet runs — make the repairs before renting the room.

•   Is the bathroom a shared space? You might consider adding some baskets or other types of storage for the tenant’s personal hygiene products. Making a cabinet available for their own use would be nice if there is space to do so.

•   Cleaning, decluttering, and updating other shared spaces such as the living room and kitchen can make your home look more inviting, possibly increasing your chances of finding a renter.

•   You might consider adding some storage space for a tenant’s use. It could be as simple as a stand-alone cabinet or a designated area in a basement or garage. The rental agreement could specify what isn’t allowed to be stored (e.g., no hazardous chemicals) and how much storage space is allotted. A prospective tenant might feel more comfortable storing belongings if the space is able to be secured.

Increased Utility Costs

An extra person living in the house will likely increase utility usage. Costs for gas, electric, water, sewer, and other utilities will probably be more than you typically pay without an extra person in the house. You may want to calculate your average utility costs over the past year to have an idea what an extra person’s use might add to those costs.

Some landlords include the cost of utilities in the cost of rent, while others might require the tenant to cover a percentage of each monthly utility bill. When renting out a room in your house, it may not be convenient to have separate utility connections for a renter.

Covering the Cost of Making Your Room Rental Ready

Depending on how much work needs to be done, getting a room in your house ready for someone to rent could be a few hundred dollars or a few thousand dollars. You may be able to keep costs down by doing some of the work yourself, but you might need to hire a professional contractor for some tasks you don’t have the skills to tackle or don’t feel comfortable doing on your own. It can help to think of this as an investment with a potential for a return in the form of rental income.

Taking some time to save money for the expense of getting a room in your house rental ready can be a smart choice. It can at least be one way to pay for some basic tasks, while considering other funding sources for more expensive repairs.

If you don’t have cash on hand, you could put all these expenses on one or more credit cards. But because credit cards carry such high interest rates, you might want to avoid racking up a credit card bill you can’t pay down any time soon.

Homeowners who have equity in their homes might consider taking out a home equity loan or home equity line of credit. These secured loans use your house as collateral. The application process can be lengthy and typically require an appraisal of your home. Also, you risk losing your home if you don’t repay the loan.

Another option is to apply for a personal loan. Personal loans are typically unsecured loans, which means you don’t have to put up any collateral to qualify for them. Many personal loans also have fixed interest rates.

The Takeaway

From your personal comfort level for sharing your space with someone to financial and legal considerations, there are lots of things to consider before deciding to rent out a room in your house. You may need to complete some repairs to make the space safe for a tenant, and there may be some decor updating necessary to interest potential renters.

Using a SoFi Personal Loan to update a room in your house to rent out can be one way to fund the task list. Personal loans from SoFi have competitive, fixed interest rates and a variety of terms to fit different budgets. Since a personal loan is an installment loan with a payment end date, unlike the revolving nature of a credit card, you’ll know how long it will take to pay down the debt.

Fixing up a room in your house to rent out? A SoFi Personal Loan might be the right financial tool for you.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Cheapest States to Attend College

Cheapest States to Go to College in the United States

The cost of attending college in the U.S. can be quite expensive. In addition to tuition and fees, students may need to cover the cost of room and board, and other expenses like books and lab fees. To help students going to college manage their budgets, it’s important that they carefully weigh their options when it comes to public and private schools. In-state tuition at public colleges can be far cheaper than out-of-state tuition or the price of attending private nonprofit schools.

College Tuition in the United States

The United States has some of the highest tuition costs, and prices have risen over time. Some of the factors that drive increasing prices are increased demand from students and increased availability of financial aid. Consider that in 2019, 16.6 million undergraduates enrolled in a degree program, compared to 13.2 million in 2000.

Colleges have also added amenities to their campuses to help attract higher-paying students. The cost of these amenities can account for as much as $3,000 per student per year. Schools are also spending more on administration.

Average College Tuition

The cost of colleges varies depending on whether students choose to attend public or private institutions. Public schools generally have different costs for in-state versus out-of-state tuition.

In the 2021–2022 school year, the average tuition and fees at a public, four-year school for in-state students was $10,740, $170 more than the year before. Students attending a public four-year program from out-of-state could expect to pay $27,560, $410 higher than the year before.

The cost of a public two-year college for students who are in district is $3,800, just $50 more than the year before.

Students who wished to attend a private nonprofit four-year college paid an average of $38,070. That’s $800 higher than in the 2020-21 school year.

Over the past 30 years, tuition and fees have increased from $4,160 to $10,740 at public four-year colleges and they’ve increased from $19,360 to $38,070 at private nonprofit four-year schools, adjusted for inflation.

In addition to tuition and fees, students have to cover other costs, such as the price of room and board, transportation, and other expenses. These additional expenses will vary depending on whether you’re living on or off-campus, but they can add more than $10,000 to the price of attending school. The average student budget for students attending a public four-years in-state program was $27,330 for the 2021–2022 school year. Out-of-state students had an average budget of $44,150. And students attending a private nonprofit four-year program had an average annual budget of $55,800.

Recommended: What is the Average Cost of College Tuition?

States With the Cheapest College Tuition

College tuition prices vary widely by state at public four-years institutions. Generally speaking, public colleges in the South and the West are the cheapest to attend. Colleges in the Northeast are the most expensive. Vermont has the most expensive in-state tuition and fees, topping out at $19,000. New Hampshire is a close second at $18,960. To learn more, take a look at the annual study published by the College Board that tracks trends in college pricing and financial aid.

Here’s a look at the states with the cheapest in-state tuition and fees at four-year flagship university programs over the 2021–2022 school year.

Wyoming

University of Wyoming
In-state tuition and fees: $6,100
2020–2021 tuition and fees: $5,790

Florida

University of Florida
In-state tuition and fees: $6,380
2020–2021 tuition and fees: $6,380

Montana

University of Montana
In-state tuition and fees: $7,490
2020–2021 tuition and fees: $7,430

Idaho

University of Idaho
In-state tuition and fees: $8,340
2020–2021 tuition and fees: $8,300

New Mexico

University of New Mexico
In-state tuition and fees: $8,510
2020–2021 tuition and fees: $8,860

Nevada

University of Nevada: Reno
In-state tuition and fees: $8,590
2020–2021 tuition and fees: $8,370

Mississippi

University of Mississippi
In-state tuition and fees: $8,930
2020–2021 tuition and fees: $8,830

North Carolina

University of North Carolina at Chapel Hill
In-state tuition and fees: $9,040
2020–2021 tuition and fees: $8,990

Alaska

University of Alaska Fairbanks
In-state tuition and fees: $9,070
2020–2021 tuition and fees: $8,980

West Virginia

West Virginia University
In-state tuition and fees: $9,140
2020–2021 tuition and fees: $8,980

Paying for College

Because the price of college tuition, fees, room and board can be so high, many students have to take out student loans, apply for grants and scholarships, or apply for student aid in order to make college affordable. Students may take out federal loans or private loans to help them pay for school. They will have to repay these loans through a series of monthly payments with interest.

College Board are offered by the U.S. Department of Education under the William D. Ford Federal Direct Loan Program. This program offers four types of federal loans:

•  Direct Subsidized Loans are available to undergrads who demonstrate financial need. Interest on these loans is covered by the Department of Education while the students are enrolled in school at least half-time.

•  Direct Unsubsidized Loans are available to undergrads, graduate students, and professional students and are not made based on need.

•  Direct PLUS Loans are for graduate and undergraduate students and parents of dependent undergrads. Eligibility is not based on financial need.

•  Direct Consolidation Loans allow students to combine federal loans into a single loan.

To apply for federal student loans, and other forms of federal aid, students are required to fill out the FAFSA®, or Free Application for Federal Student Aid, each year.

Recommended: FAFSA Guide

Private student loans may be available through private lenders, such as banks. These institutions set their own terms, interest rates, and loan amounts. When determining individual rates and terms, lenders will generally evaluate the applicants credit history, among other factors. Private student loans are typically considered a last resort when it comes to financing college because they aren’t required to offer the same borrower benefits or protections (like income-driven repayment options) as federal student loans.

There are also various sources of financial aid that can help students pay for school. It can come from federal, state, school and private sources.

•  Grants, such as federal Pell Grants, are a form of financial aid that doesn’t need to be paid back, unlike student loans.

•  Scholarships are funds offered to students often based on academic performance, an area of study, or special talents. Scholarships also do not generally need to be repaid.

•  Work-study programs allow students to earn money while they are in school. Students may qualify for the federal work-study program based on financial need.

•  Many schools offer financial aid or scholarships.

The Takeaway

College can be a huge expense, but there are also a lot of benefits of a college education. As you’re choosing schools, it’s important to evaluate all of your options and think seriously about choosing one that’s in your budget as well as finding manageable ways to pay for it. That may mean attending the public school in the state you live in. And if you live in one of the states with the cheapest in-state tuition, you may pay less than $10,000 a year to go to school.

If you have to borrow to pay for school, be sure to understand exactly how much you’re borrowing, when it needs to be paid back, and how your loans will affect your financial future.

SoFi private student loans offer competitive interest rates for qualifying borrowers, flexible repayment plans, and no fees.

3 Student Loan Tips

1.   Can’t cover your school bills? If you’ve exhausted all federal aid options, private student loans can fill gaps in need, up to the school’s cost of attendance, which includes tuition, books, housing, meals, transportation, and personal expenses.

2.   Even if you don’t think you qualify for financial aid, you should fill out the FAFSA form. Many schools require it for merit-based scholarships, too. You can submit it as early as Oct. 1.

3.   Federal student loans carry an origination or processing fee (1.057% for loans first disbursed from Oct. 1, 2020, through Oct. 1, 2022). The fee is subtracted from your loan amount, which is why the amount disbursed is less than the amount you borrowed. That said, some private student loan lenders don’t charge an origination fee.

FAQ

How much does college cost on average in the U.S.?

On average, annual college tuition and fees cost $10,740 for in-state students at public four-year programs, $27,560 for out-of-state students at public four-year schools, and $38,070 at private nonprofit schools.

What is the average cost of four years of college?

The estimated cost of four years of college tuition and fees is around $42,960 for in-state students at public four-year schools, $110,240 for out-of-state students at public four-year colleges, and $152,280 for students at private nonprofit schools.

What state has the cheapest tuition?

Wyoming’s in-state tuition and fees for the 2021–2022 school year are $6,100, the cheapest in the country.


Photo credit: iStock/Bet_Noire

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. SoFi Bank, N.A. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Row of houses

Investment Property Guide: Definition, Types, Pros and Cons

Suppose you’re one of the lucky few who have substantial savings, built an emergency fund, and are well on your way to a healthy retirement portfolio. In that case, it may be time to think about diversifying your financial portfolio. An investment property may be a solid option to do that.

Real estate investing can help diversify your existing investment portfolio and bring an additional income stream. But before taking the plunge to invest in real estate, here’s what you need to know about investment properties and how to invest in this asset class.

What is an Investment Property?

An investment property is a piece of real estate purchased to earn a return on the investment through rental income or the property’s future resale.

Usually, an investment property differs from an investor’s primary residence or a second home. It can be more challenging for investors to secure financing for an investment property because lenders see it as riskier than a primary residence.

Investors often treat property as a long-term investment. Over a given period, investors can benefit from a stream of rental income and capital appreciation, where the value of a property increases over time.

Most investors get into real estate investing with this long-term time horizon, but some investors treat investing in property as a short-term trade. Investors do this by house flipping, which is when real estate is purchased, renovated, and sold for profit in a short amount of time.

Types of Investment Properties

Residential real estate is a type of property used for people to live in, like single-family homes, apartments, townhouses, and more. Most people think of residential real estate when investing in property.

💡 Recommended: Investing in Single Family vs. Multi Family Houses

However, that is just one type of investment property. Other types of investment properties include:

•  Commercial: Commercial real estate is a term used to describe a piece of land or property used for business purposes. Commercial real estate can include office buildings, warehouses, retail space, large apartment developments, etc. While less common for individual investors, commercial real estate may still be an attractive investment that offers higher rents than residential property, though with increased costs.

•  Mixed-use: A mixed-use property can be used for both commercial and residential purposes. For instance, a building may have a retail storefront on the main floor, while the upper portion of the structure consists of residential apartments or condos.

Who Is an Investment Property Right For?

An investment property is usually a good fit for those interested in earning rental income or owning an appreciating asset. Investing in property can be a way to diversify a financial portfolio, combining it with a mix of stocks, bonds, and other assets.

Additionally, some people invest for the tax benefits associated with real estate investment, while others invest for the ability to build equity in a property.

No matter your reason for investing in real estate, it is vital to research and understand the risks and potential rewards associated with this type of investment.

Pros of Investing in Property

Here are some of the advantages of investing in property. However, these advantages are not guaranteed; investors must research properties and real estate markets to increase the odds of generating returns.

Potential for High Returns

If the real estate you own increases in value over time, you can sell it for a profit. However, this price appreciation isn’t guaranteed.

Passive Rental Income

Investing in real estate can be a way to generate relatively passive income. Whether you invest in residential or commercial real estate, you can rent out your space to tenants and receive regular rental income.

Hedge Against Inflation

Real estate investments may protect against inflation. When the prices of goods and services rise, home values and rents typically increase. Investment properties can therefore provide you with increasing monthly income and appreciation to help protect you when consumer prices are going up.

Potential Tax Advantages

Investing in real estate comes with tax benefits. You can deduct several expenses associated with owning an investment property from your taxes, including your property taxes, mortgage interest, and other expenses.

Cons of Investing in Property

Like any investment, there are potential downsides to investing in property.

High Upfront Costs

Directly investing in property generally requires higher upfront costs than primary residences. Lenders usually require higher down payments and interest rates for investment properties. This makes it difficult for some people who don’t have the initial capital to invest in a property.

High Maintenance Costs

Maintaining a property can be expensive and time-consuming, and it is essential to factor in these costs when considering an investment.

Illiquidity

Real estate isn’t a liquid asset. It could be complicated if you want to sell the property, and you may not be able to sell the property at the price you want.

Real Estate Market Risks

The real estate market can be volatile, and there is always the risk that your investment may not perform as well as you hoped. It’s important to do market research to make sure your investment property is in a location that may experience price increases.

How to Invest in Property

Rental Properties

Purchasing a residential investment property to rent out to tenants is a popular way to invest in property. This strategy allows investors to reap the benefits of generating rental income and price appreciation.

Before you directly invest in a property, it’s important to determine how much you have to spend on this property upfront. Also, it would be best if you have the time to take care of it or have the means to employ someone else to maintain the property.

It’s often beneficial to look in neighborhoods or areas you are familiar with to limit surprises down the line. You may also want to consider neighborhoods where experts think a property is likely to increase in value.

Real Estate Investment Trust (REIT)

Buying and selling the shares of real estate investment trusts (REITs) is one of the easier ways to invest in real estate. With a REIT, an investor buys into a piece of a real estate venture, not the whole thing. There’s less responsibility and pressure on the shareholder when compared to purchasing an investment property.

When a person invests in a REIT, they’re investing in a real estate company that owns and operates anything from malls, office complexes, warehouses, apartment buildings, mortgages, etc. It’s a way for someone to add a diverse mix of real estate investments to their portfolio without developing real estate.

In addition to diversification, earning consistent dividends can be a compelling reason for investors to get involved with REITs. REITs are required by law to pay at least 90% of their income in dividends. The REIT’s management can decide to pay out more than 90%, but they can’t drop below that percentage.

Many, but not all, REITs are registered with the SEC (Securities and Exchange Commission) and can be found on the stock market, where they’re publicly traded. Investors can also buy REITs registered with the SEC but are not publicly traded.

💡 Recommended: Pros & Cons of Investing in REITs

Interest Rates on Investment Properties

Lenders treat investment property loans differently because people are more likely to default on an investment property loan than on a primary residence mortgage.

Typically, lenders will charge a higher interest rate on an investment property than on an owner-occupied property. So if the rate was at 5% for your primary home mortgage, you might have a 6% to 8% interest rate on your investment property mortgage.

Lenders often require at least a 20% down payment to purchase an investment property. This down payment minimum may be higher, depending on the borrower’s credit score and savings.

The Takeaway

Adding an investment property to your financial portfolio can be a good option to build wealth. However, real estate investments come with a lot of work, especially if you decide to invest directly in a property; not everyone is cut out to be a landlord.

Fortunately, investors don’t have to invest directly in real estate or resort to house flipping to get exposure to real estate. Investors can invest in various publicly-traded REITs to benefit from their potential share price appreciation and regular dividends. And with the SoFi Invest® online trading platform, investors can trade stocks and exchange-traded funds (ETFs) for as little as $5.

See how a SoFi Invest account can help you build wealth.


SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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SWOT Analysis, Explained: Definition and Examples

A SWOT analysis is a tool used by businesses and investors to assess a company’s strengths, weaknesses, opportunities, and threats. Businesses often use the SWOT framework to help make strategic decisions about where to allocate resources and how to respond to changes in the marketplace.

Investors can use a SWOT analysis to decide whether or not to invest in a particular company. This can be helpful because investors look for any way to evaluate stocks and other investments. By conducting a SWOT Analysis on a specific company, it can be one more tool in an investor’s toolkit when choosing what stocks to buy and sell.

What Is a SWOT Analysis?

SWOT is an acronym that stands for Strength, Weakness, Opportunity, and Threats. Analysts who use a SWOT analysis consider these four key aspects of a company to determine its future performance.

Initially, SWOT analyses were used by businesses to assess a firm’s operations. But now, SWOT analyses are used by all sorts of organizations and individuals, including investors.

When using the SWOT framework, investors consider a company’s internal operations and external competition with the expectation that this will provide a well-rounded view of where the stock lies—and where it might be headed.

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Strengths and weaknesses are a company’s elements that give it a relative advantage or disadvantage over its competitors. In this analysis, the strengths and weaknesses usually come from internal factors involving the company’s operations. Opportunities and threats typically come from external factors in the company’s industry or the overall economy.

Many investors probably use some form of a SWOT analysis already, whether they realize it or not. Common sense could compel investors to consider the strengths and weaknesses of a company to some extent.

Using the formal SWOT analysis may give an investor a more systematic, in-depth picture of a company’s present and its potential future.

💡 Recommended: How to Evaluate a Stock Before You Buy

SWOT Analysis Matrix

Business analysts and investors usually depict a SWOT analysis in a table, with quadrants dedicated to each element. Analysts typically create a list of questions for each component that they can answer with quantitative and qualitative data. Strengths and weaknesses are listed first, followed by opportunities and threats.

Example SWOT Analysis Matrix

Strengths Weakness

•   What products are performing well?

•   What assets does the company have?

•   What unique resources and relationships does the company have access to?

•   What areas of the company need to improve?

•   How much debt does the company have?

•   What complaints do customers usually have?

Opportunities Threats

•   Could the company offer additional products or enter a new market?

•   Is there talent available that the company could hire?

•   Could the company leverage new technology to improve operations?

•   Do regulations threaten business operations?

•   Is the company positioned to withstand an economic downturn?

•   Are there any outside security risks?

How to Do a SWOT Analysis

There are several ways to approach a SWOT analysis. Regardless of the method used, analysts should look at a company’s strengths, weaknesses, opportunities, and threats to identify the key factors that will impact an investment.

Strengths

Strengths may be areas or characteristics where a company excels and has a competitive advantage over its peers. Examples of strength include having a solid brand, conducting innovative research on new technologies or products, or cornering the market for a particular sector in an area (e.g., being the first legal cannabis company in a state that recently legalized cannabis).

Analysis of strength might also come from simply looking at a company’s financial statements. Rising quarterly earnings and dividends, for example, might be considered a strength because it means the company is growing.

Weakness

If a company doesn’t perform well in critical areas that typically indicate strength, that could show a potential weakness. Declining earnings, cutting or suspending dividends, or a general lack of promising research and development could be signs of weakness. Additionally, analysts may consider inexperienced management or high employee turnover as weaknesses.

Opportunities

Opportunities are potential external factors that a company may be able to take advantage of. For example, suppose a pharmaceutical company specializes in manufacturing a particular type of drug, and that drug is expected to be approved by regulators in another country. In that case, that could be seen as an opportunity to enter a new market. However, it’s important to note that the existence of an opportunity and the reality of a company seizing it are two different things.

Threats

Threats are external factors that may harm a company. For a company specializing in oil and petroleum products, the rising trend of electric vehicles (EVs), renewable energy tech, and shifting consumer trends toward sustainable practices could pose a significant threat. This trend may threaten an entire industry, especially with the growth in renewable energy and green investing.

Other examples include a company’s most significant product becoming obsolete (like film and digital cameras did once smartphones became widespread) or a significant competitor encroaching on its business.

How to Use a SWOT Analysis

The best way to use a SWOT analysis will vary depending on the specific situation and goals of the investor conducting the analysis. However, some general tips on how to use a SWOT analysis effectively include:

•  Clearly define the purpose of the SWOT analysis.

•  Gather as much relevant information as possible. This may involve conducting market research or analyzing data.

•  Be honest and objective in your assessment. It is important to avoid bias or personal opinion when conducting a SWOT analysis.

•  Periodically review and update the SWOT analysis. As the market environment changes, the SWOT factors will affect the company. Investors want to regularly review and update a SWOT analysis to ensure it remains relevant.

Additionally, investors can gather internal and external data to use the SWOT analysis framework.

💡 Recommended: Using Fundamental Analysis to Choose Stocks

Internal

As noted above, strengths and weaknesses refer to a company’s internal operations. These are the resources and experiences readily available to a company. The following are some common internal factors that investors consider when determining a company’s strengths and weaknesses:

•  Financial resources: Revenue, earnings, and investments

•  Physical resources: facilities and equipment

•  Intangible assets: brand name, trademarks, patents, and copyrights

•  Human resources

External

External forces influence and affect every company. They may present opportunities or threats to a company or potential investment. External factors are typically things a company doesn’t directly control, such as the following:

•  Market trends: new products and technology advancements

•  Economic trends: local, national, and global financial and economic trends

•  Demographics

•  Regulations

💡 Recommended: Understanding Economic Indicators

Example of a SWOT Analysis

For investors interested in conducting a SWOT analysis, here is an example of one by looking at Netflix.

Netflix Strengths

One of Netflix’s main strengths is its brand recognition — Netflix has become synonymous with online video streaming. The general public sometimes uses “Netflix” to mean all streaming.

Like Netflix, Amazon, Apple, Meta, and Nike all have strong brands as one of their key strengths. These corporations also have the following strengths:

•  Amazon: The e-commerce giant has developed an industry-leading logistics and distribution network that ensures quick delivery times to customers

•  Apple: The technology company invests substantial resources into the research and development of its products and services.

•  Meta: The social media company, formerly known as Facebook, has a diversified portfolio of business units – like Facebook, WhatsApp, and Instagram – that gives it a substantial market share.

•  Nike: The apparel company creates strong marketing and advertising campaigns to target more customers.

While Netflix does have many competitors that are threatening its business, the company still has several other strengths because they were the first big player in the streaming space. Additionally, the company produces a lot of exclusive content not available on any other streaming platform.

Netflix Weaknesses

A potential weakness for Netflix is its high debt levels. The company’s debt rose from shy of $1 billion in 2014 to more than $16 billion in 2020. The company increased its borrowing as it shifted from licensing content to becoming a large television and movie production studio. However, this debt level may constrict future growth, especially in a rising interest rate environment.

Netflix Opportunities

One opportunity that Netflix may consider is adding an ad-based model with a lower-priced subscription tier. This opportunity could help the company gain increased revenue from advertisements on its platform while also attracting subscribers interested in signing up for the service at a lower price.

Netflix Threats

The visible threats to Netflix would likely be their competitors, including Hulu, Amazon Prime, Disney+, and HBO Max. They also have a recognizable, trusted name and plenty of exclusive content not available on other platforms. Disney+, in particular, has gained a large number of subscribers since it was made available.

Additionally, Netflix faces threats from macroeconomic factors, like rising inflation and the tightening of consumer spending. Because of the prevalence of competitors and the increasing cost of a Netflix subscription, consumers may be willing to cancel their subscriptions.

How Can Investors Use SWOT Analysis?

There are several ways that investors can use SWOT analysis. One way is to use it as a tool to screen companies. For example, an investor could use a SWOT analysis to determine companies with a solid competitive position and are well-positioned to take advantage of opportunities in the market.

Investors can also use SWOT analyses to monitor a company’s performance. An investor may conduct periodic SWOT analyses to track a company’s progress in its competitive position and growth prospects.

The Takeaway

Even if they don’t know what a SWOT analysis is, investors usually consider at least one of the four areas of strengths, weaknesses, opportunities, and threats when making investment decisions. However, investors can leverage a SWOT analysis to look at all four factors from a systematic, big-picture perspective, providing investment insights that might have been missed otherwise. That is the essence of SWOT analysis.

While SWOT analysis won’t eliminate investment risks, it is one more way for an investor to be as informed as possible before making any financial decision.

The SoFi Invest® investment app offers a variety of options so you can invest in line with your personal risk preferences and financial goals. With SoFi Invest, you can trade stocks and ETFs for as little as $5.

Find out how SoFi Invest can help you choose investments that suit your needs.


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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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What Is a Governance Token?

What Is a Governance Token?

A governance token is a cryptocurrency that gives its holders a right to vote on proposed changes to a blockchain network. This innovation is seen as a necessary step toward keeping certain crypto projects, particularly those within the decentralized finance (DeFi) ecosystem, decentralized. The idea is that rather than a single person or group controlling the direction of a platform, a community of users can influence decisions in a process known as governance.

While not unique to DeFi, governance tokens have become a key attribute of the DeFi ecosystem. Stick with us in this crypto guide to learn more about the question “what is a governance token.”

What Are Governance Tokens Used For?

Governance tokens give users of a particular blockchain protocol certain rights — such as the right to vote on proposed changes to the network. This could include granting token holders the ability to create new proposals or to spend tokens in an attempt to alter an existing proposal.

Other examples of uses for governance tokens might include:

•   Voting for changes to a network’s fee structure

•   Implementing changes to a project’s user-interface

•   Changing a network’s reward structure

•   Revising the amount of funding that developers receive

Governance tokens can have other functions in addition to granting voting rights to holders. Most DeFi tokens have governance features built into them, and most of them can also be used for things like staking crypto and yield farming.

Examples of Governance Tokens

As mentioned, most governance tokens are involved in the DeFi space in one way or another. Community governance is a key function that helps to keep DeFi decentralized. Most DeFi protocols run on the Ethereum blockchain.

Here are some examples of popular governance tokens.

Compound

Compound (COMP) is an ERC-20 utility token running on Ethereum. The protocol is a DeFi lending/borrowing platform. COMP holders have a chance to vote for changes to the network via the compound governance dashboard.

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Yearn.finance (YFI)

Yearn.finance (YFI) is also a DeFi protocol hosted on Ethereum that offers lending, borrowing, and trading services. The platform has different products like Earn, Zap, Vaults, and APY. Users can earn YFI tokens by locking up crypto funds in smart contracts that run on Curve and Balance (other DeFi trading platforms). This allows users to participate in what’s known as yield farming.

Yield farming is the act of locking up funds in a DeFi protocol to earn interest. The more value that users lock up, the more tokens they earn as rewards.

Maker (MKR)

Based on Ethereum, Maker is responsible for creating the DAI stablecoin. MKR holders can vote on new proposed changes to the Maker DAO network inside the Maker Voting Dashboard. DAI has been praised for being one of the few stablecoins that are intended to be decentralized. It has also been integrated into some games, wallets, and DeFi apps.

💡 Recommended: What Is Maker (MKR) Cryptocurrency?

Synthetix Network Token (SNX)

Synthetix is a decentralized exchange (DEX) for synthetic assets. Also known as “synths,” these are tokens that are designed to mirror the price of a real-world asset. Whether it be bonds, stocks, commodities, or fiat currencies, users can trade synths in an effort to gain exposure to the price of a particular asset. This can be beneficial for those who might not have access to traditional capital markets.

SNX, the native token of the Synthetix Network, functions like a stablecoin in that it is pegged to an external asset at a one-to-one ratio. However, rather than being tied to a single currency, Synthetix allows users to mint a synthetic asset that will be backed by SNX. SNX holders can also influence the direction of the platform going forward.

Aave (AAVE)

Aave is a DeFi platform for borrowing, lending, and earning interest on crypto. Much like its peers, Aave runs on a series of smart contracts that manage the platform’s financial operations. Users can borrow funds and pay interest, or lock up crypto to earn interest. AAVE is the network’s native token, and it gives holders a say in the platform’s future development.

Governance Token vs Utility Token

When trying to answer the question “what is a governance token,” it’s useful to think of it as an improved type of utility token. Utility tokens usually have a single specific use case only.

For example, Binance coin (BNB) is used to give discounts on trading fees to traders who use the Binance crypto exchange. Holders may get to vote on which tokens they’d like to see listed on the exchange, but that’s very different from voting on a fundamental change to the protocol of a specific blockchain; which is a function of a governance token.

Depending on the crypto network, a governance token may offer the best of both types of tokens.

Governance Tokens: Potential Advantages and Disadvantages

While the idea of a governance token may sound almost perfect in theory, in practice governance tokens have their advantages and disadvantages.

Potential Advantages:

•   Decentralization. Governance tokens allow developers to keep projects decentralized. Without this type of governance structure in place, DeFi platforms would be only collections of smart contracts that no one could control.

•   More effective and inclusive development processes. Developers can arrive at conclusions and implement changes after receiving guidance from the community, instead of needing to figure out everything on their own.

•   Community involvement. Governance gives a project’s community a reason to come together to help improve the platform.

Potential Disadvantages:

•   Potential for a takeover. Individuals or groups with large amounts of capital can sometimes acquire enough governance tokens to make unilateral decisions affecting the network. This can defeat the whole purpose of a governance token, which is to keep decision-making decentralized and democratic.

•   Selfish decisions. Just because people have the ability to vote doesn’t mean they will always act in the best interest of their own community. A real-time example: In 2020, Maker experienced a flash crash that caused many of its investors to lose large sums of cash. Initially, the Maker community — represented by current holders of MKR governance tokens — voted to reimburse investors. Six months later, the community rescinded the vote; none of Maker’s investors could reclaim any of the money they lost.

•   No real accountability. Ultimately, there’s no legitimate accountability when it comes to democratic crypto governance. If a decision is deemed to be wrong or appears to go against the best interest of many users, there’s no clear person or party to blame or hold accountable.

The Takeaway

A governance token is not a unique type of token. Rather, a governance token may be any token that gives its holder a share of influence over how a crypto network is governed. In addition to their use in the decentralized finance sector, governance tokens may also be utilized on social media platforms that are decentralized.


Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


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