Can 0.5% Really Equal 5%?

Can 0.5% Really Equal 5%?

Since the election, rates have started going up and it will have a direct effect on the cost of housing. There is a rule of thumb that a ½% change in interest is approximately equal to 5% change in price. 

As the interest rates go up, it will cost you more to live in the very same home or to keep the payment the same, you'll have to buy a lower priced home.

Before rates rise too much may be the best time to buy a home whether you're going to use it for your principal residence or a rental property. Low interest rates and lower prices make housing more affordable.

Time May Be Running Out

During the Great Recession, some homeowners elected to rent their home rather than sell it for less than it was worth.

IRS tax code allows for a temporary rental of a principal residence without losing the exclusion of capital gain based on some specific time limits. During the five year period ending on the date of the sale, the taxpayer must have:

• Owned the home for at least two years
• Lived in the home as their main home for at least two years
• Ownership and use do not have to be continuous nor occur at the same time

If a home has been rented for more than three years, the owner  will not have lived in it for two of the last five years. So the challenge for homeowners with gain in a rented principal residence that they don't want to have to recognize is to sell and close the transaction prior to the crucial date.

Assume a person was selling a property which had been rented for 2 ½ years but had previously been their home for over two years. To qualify for the exclusion of capital gain, the home needs to be ready to sell, priced correctly, sold and closed within six months.

All of the gain may not qualify for the exclusion if depreciation has been taken for the period that it was rented. Depreciation is recaptured at a 25% tax rate.

A $200,000 gain in a home could have a $30,000 tax liability. Minimizing or eliminating unnecessary taxes is a legitimate concern and timing is important.

Selling a home for the most money is one thing; maximizing your proceeds is another. For more information, see IRS publication 523 and an example on the IRS website and consult a tax professional.  

Gift or Inheritance - Does It Matter?

A person called into a radio talk program with a situation that was troubling to the caller and disturbing based on the potential tax liability that may have been avoided.

The caller's elderly father had deeded his home to his daughter a few years earlier because in his mind, his daughter was going to get the home eventually and this would be one less thing to be taken care of after his death. The daughter didn't really care because the father was going to continue to live in the home and take care of it so that it would be no expense to her.

Obviously, unknown to either the father or the daughter, transferring the title of a home from one person to another could have significant tax implications. In this case, when the father "gave" the home to his daughter, he also gave her the basis in the home which is basically what he paid for it. If she sells the home in the future, the gain will be the difference in the net sales price and her father's basis which could be considerably higher than had she inherited it.

If the home was purchased for $75,000 and worth $250,000 at the time of transfer, there is a possible gain of $175,000. However, when a person inherits property, the basis is "stepped-up" to fair market value at the time of the decedent's death.  If the adult child had inherited the property, at the time of the parent's death, their new basis would be $250,000 or the fair market value at the time of death and the possible gain would be zero.

In most cases, there are less tax consequences with inheritance than with a gift. There are other factors that may come into play but being aware that there is a difference between a gift and inheritance is certainly an important warning flag that would indicate that expert tax advice should be sought before any steps are taken.

It's the Principal of the Thing

Most people think they'll have a house payment and a car payment for the rest of their lives but it doesn't have to be with a plan and a little discipline. The plan is to make additional principal contributions to a fixed rate mortgage to shorten the term and save tens of thousands in interest. 

If a person were to make an additional $100 payment each month applied to principal on a $175,000 mortgage, it would shorten the loan by five years six months. If the person were to make $200 a month additional payments, it would shorten the loan by 9 years. $459 additional payment would shorten it to 15 years.

If a person does make a decision to regularly pre-pay their mortgage, it will be their responsibility to verify that the lender is applying the money to the principal each time as opposed to being placed in the reserve account for taxes and insurance.

In today's market, a savings account pays around 0.5% or less. Even with the low mortgage rates available, there is still a considerable savings. People who might need the funds in the near future should carefully consider this option due to the difficulty to access equity easily from one's home.

A Cost to Consider

Homeownership, part of the American Dream: a home of your own where you can feel safe, raise your family, share with your friends and enjoy life. The benefits are easily recognizable but maintenance is just a real and should be considered.

Property taxes and insurance are two of the largest expenses homeowners have aside from their mortgage interest. But, as any homeowner knows, there will be occasional expenses for repairing toilets, faucets, windows and other things. There are also the significantly larger expenses that arise like replacing a water heater or HVAC unit. And don't overlook the periodic maintenance like painting or floor coverings. 

Financial experts suggest that homeowners save one to four percent of the home's value per year for repairs and maintenance. Two to eight thousand dollars a year may sound like more than you'll need but the cost of an air conditioning unit can easily be $6,000.

Some homeowners purchase home warranties to avoid the unexpected costs. An annual premium instead of an unexpected large expenditure. Coverage varies from company to company and are not intended to cover existing conditions.

The alternative to not saving for these anticipated expenditures means that a homeowner might have to put it on a credit card at a very high interest rate or get a home improvement loan. Appreciation is a distinct benefit of home ownership and deferred maintenance can limit the value as well as lengthen the market time when it sells. 

Down Payment: FOUND!

Saving the down payment may be unnecessarily keeping would-be buyers from getting into a home. They may be unaware that the funds might be available.

The NAR Profile of Home Buyers and Sellers reports that 81% of first-time buyers got all or part of their down payment from savings. Less than 4% said that all or part of the down payment came from a withdrawal in their IRA and 8% from their 401(k) or pension fund. 

Traditional IRAs have a provision for first-time buyers which include anyone who hasn't owned a home in the previous two years. A person and their spouse, if married, can each withdraw up to $10,000 from their traditional IRA for a first-time home purchase without incurring the 10% early-withdrawal penalty. However, they will have to recognize the withdrawal as income in that tax year. For more information, go to IRS.gov.  

Allowable withdrawals from traditional IRAs can be from yourself and your spouse; your or your spouse's child; your or your spouse's grandchild or your or your spouse's parent or ancestor.

Roth IRA owners can withdraw their contributions tax-free and penalty-free at any age for any reason because the contributions were made with post-tax income. After age 59 ½, earnings may be withdrawn as long as the Roth IRA have been in existence for at least five years.

Up to half of the balance of a 401(k) or $50,000, whichever is less, can be borrowed by the owner at any age for any reason without tax or penalty assuming the employer permits it. There can be specific rules for loans from a 401(k) that would determine the repayment; interest is usually charged but goes back into the owner's account. You can consult with your HR department to find out the specifics.

A risk in borrowing against a 401(k) comes if your employment ends before the loan has been repaid. The loan may have to be repaid as soon as 60 days to keep the loan from being considered a withdrawal and subject to tax and penalty. Even if you continue with the same employer, failure to repay the loan could be considered a withdrawal also.

Your tax professional can provide you specific information on how making a withdrawal from your retirement program might affect you. Additional information can be found on www.IRS.gov.

It's not far, if you know the way

"It's not far, if you know the way." What this expression implies is that you could have a long way to go if you don't know where you're going or how to get there. Just like reading a map, there are some definite steps that will improve your success in buying a home in today's market.

• Know your credit score – the best mortgage rates are available to borrowers with the highest scores. Unless you know what your credit score is at all three major credit bureaus, you don't really know what rate you'll have to pay.
• Clean up your credit – it is estimated that about 90% of credit reports have errors. Some are not serious but others could affect a borrower from getting the loan they want. It is your responsibility to know what is on your different reports and correct them if possible. You're entitled to a free copy of your credit report each year from Experian, Trans Union and Equifax.
• Get pre-approved – Taking the time to make a loan application with a qualified lender even before you start looking at homes will provide peace of mind, make sure that you are looking at the "right" homes and may help you negotiate the best price on the home you select.
• Do your homework – when you find the home that meets your needs and desires, get the home inspected and research the tax assessments, school ratings, crime activity, possible zoning changes and comparable sales in the area. 

Call for a recommendation of a trusted mortgage professional and an inspector.

It's not "if" the rate goes up but "when" the rate goes up; it could make a big difference for some buyers. Freddie Mac predicts that mortgage rates will be at 4.5% a year from now.

If buyers can afford a home with higher interest rates, it means higher payments. Higher payments might mean they won't have the money to spend on other things like furniture or improvements to the home or an unrelated purchase like a new car.

When the rate moves 0.50% on a $250,000, the payment goes up by $70.66 a month. If it moves 1.00%, the payment goes up by $143.74 per month, each and every month for the entire term of the mortgage which means paying over $50,000 more for the house.

The question facing every borrower in this situation is "How will you feel about having to pay more to live in the same house because you were not ready to commit?"

Then, there's the borrower who is absolutely maxed out as to what they can qualify for or sometimes, it is a borrower who just refuses to pay a higher payment. When that's the case, the buyer has to make a larger down payment. In the same example, a 0.50% increase in rate would require $14,873 more in down payment. That could make the purchase impossible or require the buyer to buy a lesser price home that will not have the same amenities.

Mortgage rates have been low for so long that some people think that is what they should be. There are some economists who believe that the economy will not be strong again until mortgage rates are in the 7% range.

To see how this type of scenario might affect you, go to the If the Rate Goes Up calculator.

Waiting to Buy...WHY?

Some people wait to buy a home until they have 20% down payment to avoid paying the mortgage insurance which is required by lenders when the loan-to-value ratio is greater than 80%, with the exception of VA loans. 

To illustrate a typical situation, let's assume that buyers have $10,000 for a down payment on a $200,000 home. They could purchase it today with a 95% loan or save another $30,000 in order to get an 80% loan without mortgage insurance. 

If it took three years to save the additional down payment, the $200,000 home at 3% appreciation would cost $218,545. A 20% down payment on the increased sales price would be $43,709, less the $10,000 the buyers currently have leaves them $33,709 to save which would amount to $936.36 a month. They would secure a $174,836 mortgage at the then current mortgage rates, which in all likelihood, will be higher than today's rates.

The alternative is for the buyer to purchase the home today with a 95% loan at today's low interest rates plus approximately $85 a month for mortgage insurance depending on their credit score. At the end of three years, the unpaid balance would be $179,548.  Assuming the home will be worth the same $218,545, the buyer's equity would be almost $39,000.  To reduce the mortgage to the same amount as the first example, the buyer would need to make an additional $125 a month principal contribution above the normal payment. Then, the mortgage would have an unpaid balance at the end of three years of $174,775.

When there is sufficient equity in the home, the mortgage insurance is no longer required. Some lenders may drop the mortgage insurance requirement with an appraisal to provide proof. In other situations, it may require refinancing to eliminate the insurance.  Call to discuss options that may be available to you.

Dust-Free Home

Having a dust-free home isn't difficult, but it takes a serious commitment and a housekeeping strategy that addresses the dust and its causes. Whether your motive is cleanliness or to eliminate the cause of some allergies and asthma symptoms, it will be worth it.

• Try to dust your home at least twice a week. Dust the tallest items and work your way down. Dust picture frames, blinds, baseboards and anything that stands out from the wall.
• Feather dusters can spread more dust than they collect compared to microfiber cloths that attracts dust because they have an electrostatic charge.
• Filters on heating and air-conditioning systems should be changed often not only to remove dust from the air but to increase the efficiency of the units themselves. Special HEPA filters can improve the overall indoor air quality.
• Frequently changing the bag or emptying the container in your vacuum is helpful in eliminating dust.
• Vacuum the floors at least once a week. Vacuum under furniture and periodically, move appliances to clean behind and underneath. Use the proper attachments to vacuum upholstered furniture and under cushions.
• Eliminate dust magnets like carpet, heavy drapes and upholstered furniture. Consider hard surface flooring like wood or tile instead of carpet.
• Keep windows closed to keep dust out.
• Clean your pillows and drapes.
• Damp mopping and dusting with plain water helps hold the dust and is environmentally friendly.
• A humidifier can eliminate static electricity which holds dust.
• Air purifiers circulate are and capture dust and other pollutants.

Getting to Value

Fair market value is the price that real estate would sell for on the open market without any unusual forces being involved. The definition is relatively simple but there certainly different methods of determining what it is.

A homeowner could order an appraisal before they put their home on the market but would incur the expense of an appraisal and more likely than not, it won't or can't be used by the buyer or their lender. The advantage is that an appraisal is a professional approach by a disinterested party to establish value.

Licensed appraisers use three approaches to value: the market data, the replacement cost and the income approach. The appraiser can put more weight on one approach than another based on his/her assessment of what would be appropriate.

The replacement cost looks at what it would cost to rebuild the property today less the depreciation it has experienced by age and wear and tear plus the value of the lot.

The income approach uses a capitalization rate based on the net operating income of a property to determine value. It is more applicable to commercial properties than it is for homes used by homeowners and not rented.

The market data approach relies on recent sales of similar properties near the subject. The appraiser will make monetary adjustments for differences in the comparables that are used to create a more accurate comparison.

Real estate agents use a similar approach to determine fair market value by performing a Competitive Market Analysis, CMA. Like the market data approach of an appraisal, it looks at recent sales of similar properties, it also considers properties currently for sale and what homes were unsuccessful in their attempt to sell. This approach is sensitive to supply and demand and may be more reactive to rapidly rising or declining markets.

Both appraisals and CMAs have a distinct advantage because of the personal opinion as a professional compared to online website estimates using raw data and mathematical formulas. Regardless of which method is used, it is an estimate. Obviously, some estimates are more accurate based on the experience of the person making the estimate. A price is placed on the property by the seller but value is ultimately determined by the buyer when a final sale is achieved.

Pay Off Your Mortgage?

Becoming debt free is as much a part of the American Dream as owning a home but there certainly can be conflicting circumstances that make the decision to pay off your mortgage early unclear.

The advantages of paying off debt early is increased cash flow, less interest paid and a higher credit score. The disadvantages are lower cash flow available as discretionary funds for meals, entertainment and other things. If the ultimate goal is financial security, is it worth the intermediate sacrifice?

Whether you pay off your mortgage early is a personal decision that may be right for one person and not for another. Consider the following before you get started:

Reasons you should

• Peace of mind knowing that you don't have a mortgage
• You'll save interest regardless of how low your mortgage rate is
• Lowering your housing costs before you retire

Reasons you shouldn't

• You can invest at a higher rate than your mortgage
• You have other debt at a higher rate than your mortgage that needs to be paid off
• You might need the money in the future and want to remain liquid
• You might not qualify for a mortgage currently
• You should pay off other debt with higher interest rates
• Your employer has a matching retirement plan that would benefit you more
• You have more urgent financial needs like emergency fund, life, health and disability insurance
• You expect high inflation and the value of your mortgage debt will decrease

Use this Mortgage Accelerator to determine how quick you can pay off your mortgage.

There are two negotiation periods in some home sales. The primary negotiation takes place when the contract is agreed upon that includes the price, closing and possession. Buyers and sellers alike feel relieved once this first round has resulted in an agreement but there may be more negotiations to come if there are contingencies for financing, inspections or other things.

The purpose of an inspection is for the buyer to receive an objective evaluation about the condition of the home and its components to identify existing defects and potential problems. The expense for inspections can be several hundred dollars and it's reasonable for buyers to not want to spend the money before they find out if they can come to terms with the seller. From a different perspective, sellers want to know quickly if the buyer is going to reject the home due to the inspections. 

Sometimes, buyers will expect sellers to make all of the repairs listed on the report and this is where the second round of negotiations begins. If the seller refuses, the negotiations can go back and forth until the other party accepts the offer on the table or the contract falls apart.

When purchasing a new home from a builder, it is expected for everything to be in working order; after all, it is new. However, it is reasonable to expect that existing homes, that are not new, have a different standard. While it's understandable that buyers would want to be aware about major items that are not in "working order", normal wear and tear of components based on its age should be expected.

In a highly competitive seller's market, buyers might do whatever they can to get their contract accepted, realizing that there is another place to negotiate when they're not competing with other buyers' offers to purchase.

For this to be a WIN-WIN negotiation, both seller and buyer must feel good about the transaction. Neither party should feel that they have been taken advantage of.

Ready for Retirement?

It's surprising to realize that most people spend more time planning their next vacation or cell phone purchase than they do on their own retirement. Let's look at a hypothetical situation where you have $35,000 to invest for your retirement in 15 years. Have you compared where you might have the best opportunity? 

The safest place to put it might be a certificate of deposit because it's insured but unfortunately, rates would be less than 2%. The value would grow to $47,233.26 at the end of the 15 year holding period.

Investing in a mutual fund has more risk but also a greater opportunity to earn a higher rate of return. An estimated 7% return would project an accumulated value of $99,713.14. 

Using the $35,000 for a 20% down payment and closing costs on a $150,000 rental home could realize much higher proceeds. Using a familiar investment analysis spreadsheet, the $35,000 could grow to a future wealth position of $153,302. This analysis considers leverage, 3% appreciation, re-investing cash flows, 7% sales expenses and paying applicable taxes which the previous examples do not.

The rate of return on these three examples are 2% for the CD, 7% for the mutual fund and a comparable 14.19% return on the rental. As the rate of return increases on investments, additional risk is reasonable.

Most people are much more familiar with homes than they are with mutual funds, bonds and other similar investments. The same REALTOR® who helped you with your home can help you invest in a rental home.

Avoid Wasting Time

"If you waste my time, don't expect me to hang out with you very long." This could have been said by a buyer or seller or a real estate agent. Time is valuable and no one wants to waste their time. 

Most people can't put their lives on-hold while they're trying to buy or sell a home. Whether they have a family, a couple or single, life continues and the time constraints of moving can become burdensome. 

Your agent is committed to helping you save time while making the experience memorable. They know the process and the potential problem areas and can help you move through them.

To preserve your time and your agent's, please consider the following:

• If your plans to buy or sell change, let your agent know.
• Be on time for appointments or if it is necessary, cancel them with as much notice as possible.
• Get pre-approved through a trusted mortgage professional.
• Cooperate with your loan professional by providing all requested documentation.
• Don't wander into builder or REALTOR® open houses without your agent. If you find yourself in that situation, immediately notify them that you have an agent.
• Only talk to the other party through your agent until after closing. 

Your agent is working to help you meet your goals. Things work best when it's like a partnership where each party mutually respects the other and their resources including their time.

Picture This!

Listing photos may be one of the most important marketing efforts that lead to a potential buyer.

Nearly, all buyers use the Internet during the home search process. They usually start looking at homes online before they contact an agent. It's far more efficient to screen properties by looking at the pictures that have been posted than to make appointments with each homeowner, drive all over town and waste a lot of time looking at homes that would never meet a buyer's criteria. 

• There needs to be enough pictures of a property to adequately represent the home; most websites allow for at least 24 and more may be needed if it is a large home.
• Take horizontal shots to accommodate the format of most listing websites.
• The pictures should be well-lit so that it is easy to see all of the features of the room. Natural light is preferred over the limitations of flash.
• They should be taken with a wide-angle lens so that you can see the majority of the room in one picture.
• Large rooms can be taken from different angles to give the buyers a different perspective.
• Rooms should be set if not staged prior to taking the pictures so they will give the buyer an idea of what the room might look like with their own things in it.
• Arrange pictures in website to help buyers visualize the floorplan as if walking through it.
• Think about using a tripod; professionals do to absolutely hold the camera still.
• They should definitely not be "photoshopped" to modify factual elements like removing power lines.

Everyone occasionally takes a great picture but it doesn't make them a photographer. Since the photography can be one of the most important marketing efforts, consider using a professional photographer to show the home to its best advantage. 

How Will It Feel?

It has been said that change is the only constant. Most of the financial experts have been expecting interest rates to increase along with home prices. While homes, in most markets, have definitely seen increases over the past five years, the mortgage rates today are actually lower than they were a year ago. 

If the interest rates were to increase by 1% over the next year while homes appreciated at 6% during the same time frame, a $250,000 home would go up by $15,000 and the payment would be $211.53 more each month for as long as the owner had the mortgage. The increased payments alone would amount to $17,769 for the next seven years. 

When facing a decision to postpone a purchase for a year, a legitimate question to ask oneself would be: "how will it feel to have to pay more to live in basically the same home a year from now?"

It is easy to understand that if the price of a $250,000 home goes up by 6%, it increases the price by $15,000. A slightly more difficult concept to realize is that if the interest rate were to go up by ½%, it is approximately equal to a 5% increase in price. A 1% increase in mortgage rates would approximately equal a 10% change in price. This means that if a home goes up in price by 6% and the interest rate goes up by 1%, it is equivalent to the price of the home going up by a little more than 16%.

Use the Cost of Waiting to Buy calculator to estimate what it might cost to wait to purchase based on your own estimates of what interest rates and prices will do in the next year.

The Right Questions are Key

Asking the right questions will lead to the answers that help you determine which agent to use for one of the largest investments that most people make…the purchase or sale of their home. 

Rudyard Kipling wrote the verse "I keep six serving men, they taught me all I knew; their names were what and why and when and how and where and who." Prefacing your questions with one of these words can help you get the information you need to make a good decision about the REALTOR® you use.

• How long have you been selling homes and is this your full-time job?
• What designations or other credentials do you have?
• How many homes did you and your company sell last year?
• What is your average market time compared to MLS and your top competitors?
• What is your sales price to list price ratio?
• When will you report to me on the progress of my transaction?
• Who can you recommend for service providers like mortgage, inspections, repairs and maintenance?
• Why do you want to work with me?
• Where are the biggest opportunities to expose my home to the largest market?
  

Finding the right person to represent you is a little like the person who ordered a lobster dinner at a restaurant. When the waiter brought out the meal, the lobster only had one claw. The customer asked why it only had one claw and the waiter said: "I don't know; I guess it was in a fight." The customer looked at him and said: "then, bring me the lobster who won."

Opportunity Can Disappear

In the last few years, some people who were unable to sell their homes, rented them instead. The market has improved in most places and the home may easily sell now and possibly, for a higher price.

Even though the opportunity to sell in the near future might not change, there could be another opportunity that could quickly disappear for some homeowners. 

Most homeowners are aware that there is a capital gain exclusion on the profits of a principal residence of up to $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly. The rule requires that you must own and use the home as your principal residence for two out of the last five years.

A homeowner can rent their home for up to three years and still be eligible for the exclusion. As an example, if they had owned and lived in it for two years and then rented it for two and a half years, they would need to sell and close the transaction before the remaining six months expired.

If there was a $200,000 profit in the home that didn't qualify for the exclusion, a 15% long-term capital gain tax of $30,000 could become due depending on the tax bracket of the owner. With some careful planning, the tax could be avoided. Awareness of the time frames and the right team of tax and real estate professionals could save a considerable amount of the homeowner's equity.

Retirement Funds for Home Purchase

For the person who has good credit and income but not enough money for the down payment on a home, their qualified retirement program could offer them some help. The rules are different depending on whether it is a 401(k), a Roth IRA or a traditional IRA.

Up to half of the balance of a 401(k) or $50,000, whichever is less, can be borrowed by the owner at any age for any reason without tax or penalty assuming the employer permits it. There can be specific rules for loans from 401ks that would determine the repayment; interest is usually charged but goes back into the owner's account. You can consult with your HR department to find out the specifics.

A risk in borrowing against a 401(k) comes if your employment ends before the loan has been repaid. The loan may have to be repaid with as soon as 60 days to keep the loan from being considered a withdrawal and subject to tax and penalty. Even if you continue with the same employer, failure to repay the loan could be considered a withdrawal also.

Roth IRA owners can withdraw their contributions tax-free and penalty-free at any age for any reason because the contributions were made with post-tax income. After age 59 ½, earnings may be withdrawn as long as the Roth IRA have been in existence for at least five years.

Traditional IRAs have a provision for first-time buyers which include anyone who hasn't owned a home in the previous two years. A person and their spouse, if married, can each withdrawn up to $10,000 from their traditional IRA for a first-time home purchase without incurring the 10% early-withdrawal penalty. However, they will have to recognize the withdrawal as income in that tax year. For more information, go to IRS.gov. 

Another interesting fact about this provision is that the taxpayer making the withdrawal can help a relative includes children, grandchildren, parents and grandparents.

If you want more information to clearly understand the issues involved relative to your specific situation, talk to your tax professional or consult www.IRS.gov.

Myrietta Leach, CRS, Broker

RE/MAX PRO

4333 Vine Suite 40

Hays, KS 67601

785-621-5400 (office)

785-650-4370 (cell)

www.myriettaleach.remax-midstates.com

Check out my latest blog.

myriettaleach.blogspot.com

Choose a Lower Tax Rate

During campaign season, it is not unusual to hear a candidate criticized because they make a lot of money but pay little in income tax. While it might not seem fair, taxpayers are allowed to arrange their affairs so that they minimize the amount of tax paid.

Salary, wages and commissions, along with interest and dividends are taxed at ordinary income rates which can range from 10% to 39.6%. However, capital gains rates, for property held more than 12 months, are much lower ranging from 0% to 20%. Taxpayers in the 25-35% brackets pay LTCG rates of 15%.

The profit on rental property enjoys the lower long-term capital gains rates as compared to the profit on "flipped" property which is taxed at ordinary income rates. 

Investments in rental homes generate income, provide depreciation for tax shelter, have equity build-up due to the amortizing loan, leveraged growth due to the borrowed funds and appreciation. The profits could be considerably higher than alternative investments and the profits taxed at lower rates.

The advantage is available to people who understand the tax laws and choose to arrange their activities so they pay a minimal amount of tax. The advantage is available to all taxpayers, not just the rich. In fact, implementing these types of strategies could lead to an increase in wealth. 

The seller has three tools available to affect the marketability of their home: price, condition and terms. Price is the easiest to adjust for the competing properties, amount of inventory or market conditions. However, lowering the price is not necessarily the best decision when trying to maximize the proceeds of sale.

If a home is in poor or outdated condition, updating can be done to make it show favorably with other homes that are currently on the market. Sometimes, sellers rationalize not doing the work by saying they believe the buyers would rather make their own choices. The truth is that most buyers are using all their resources to get into the home and will have to live in its present condition until they can save enough to make the changes they want.

Another reason to go ahead and invest the money and effort into improving the condition is that it is difficult for buyers to imagine the home any other way than its current condition. When comparing one home to another, buyers will sometimes refer to a home as the "stinky house" or the "old kitchen" which may put it at a disadvantage.

While price and condition are the main things that control the marketability, terms can be equally effective. Terms relate to financial considerations made by the seller to induce a buyer to make a decision to purchase their home. 

Seller-paid points or closing costs, interest rate buy downs and owner-financing are examples of terms that may increase the marketability of a home because of the additional benefits they offer to buyers. 

An example could be that a seller will carry a 10% second lien so that the buyer can get an 80% loan and avoid the expense of mortgage insurance. The seller gets most of their equity plus a fair interest rate on the loan that doesn't have to be tied up for 30 years like the first mortgage.

Increasing the marketability of your home is a great conversation to have with your real estate professional especially to help you get the highest price in the shortest time with the fewest problems. Just be aware that not all agents may be as creative.

If you're going to play, GET IN THE GAME

If competition is a buyer's biggest concern, for goodness' sake, get in the game. In a new survey of close to a thousand home buyers conducted by Redfin, affordability is still the number one concern but due to low inventories, competition from other buyers is moving its way up the poll.

26% identified affordability while 19% mentioned competition and 15% mentioned low inventory as their respective top concerns.

To win, athletes study the competition to come up with a plan and buying a home is not different.

1. Ask what terms are important to the seller before you write the offer.
2. Once you decide to make an offer, do it as fast as you can, hopefully, to be the only one the seller is considering.
3. Make a good (or possibly, your best) offer in the beginning; you may never get a chance at improving it. In highly competitive situations, offer above the list price.
4. Attach your pre-approval letter from a respected lender. This means you'll need to get pre-approved before you even think about writing an offer.
5. Have your lender call the listing agent to reassure them of your ability to qualify.
6. Include a higher than normal amount of earnest money to show you are serious.
7. Eliminate unnecessary contingencies.
8. Write a personal, hand-written letter telling the seller what you like about their home and why you want it. Consider including pictures of your family.
9. Minimize seller expenses paid for the benefit of the buyer.
10. Shorten inspection times.
11. Don't ask for personal property.
12. Be flexible on closing dates to accommodate the seller's move.

Once you find your dream home, don't take a chance on losing it. Write a winning offer that will be good for both the sellers and the buyers.

Your Tenants Will Send Your Kids to College

Parents, with children getting closer and closer to entering college, may also be feeling stress because they haven't saved enough for tuition and other expenses. It's estimated that the average cost for the 2015-16 school year is $32,405 for private colleges, $9,410 for state residents of public colleges and $23,893 for out-of-state residents.

If you started saving the year your child was born, you'd have to save $4,608 per year for 18 years at 5% to accumulate $129,620. If you waited until they were 10 years old, you'd have to save $13,574 per year to have the right amount. Saving enough can be difficult if you have a lot of time but if you only have a short time to meet your goals, it can seem impossible.

Student debt is one way to handle the tuition but many parents are reluctant to saddle their children with the obligation. Currently, there is more than $1.2 trillion in outstanding student loan debt to 40 million borrowers with an average balance of $29,000. Some economists suggest that this debt is delaying would-be buyers from making their first home purchases.

There is another way to pay for the education by making an investment in a rental property. Rents are continuing to rise, homes in owner-occupied neighborhoods are appreciating and the leverage due to borrowed funds can be a huge help in building the equity to pay the tuition.

Rent the home and maintain its condition over the years. As the loan amortizes and the value increases, the equity will grow. When your student is ready to start college, you'll actually have several options.

You can sell the property; pay the tax on the gain at the reduced capital gains rate and fund the education. Another option would be to refinance and take the proceeds to pay for the tuition. This would allow you to continue to own the asset but would free your equity. Under current tax laws, it is a non-taxable event.

In effect, your tenants are paying to send your kids to college.

The Obvious Alternative Investment

Rental homes can be a natural alternative investment choice for homeowners because they are already familiar with houses. Maintenance on a rental is not that much different than on your personal home. The same plumbers, painters and other workmen can be used to make repairs. 

Single family homes offer an investor high loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with defined tax advantages and more control than other investments.

1. High loan-to-value mortgages – most investments require that you pay cash but rental properties can be purchased with 20% down payment.
2. Fixed interest rates – most commercial loans are based on a floating rate such as prime interest plus one or two percent compared to real estate loans as fixed rates for the term.
3. Long terms – commercial loans are generally short-term such as six months or a year with the possibility of being renewed for another six months or a year unlike real estate where a 30-year mortgage is commonplace.
4. Appreciating assets – real estate has a long-term history of going up in value.
5. Defined tax advantages – many investments are taxed as ordinary income but rental real estate enjoys a non-cash deduction called cost recovery, the profits from sale are taxed at lower long-term capital gains rates or may be eligible for a tax-deferred exchange.
6. Control – rental homes don't require partners and afford the investor more options than investing in mutual funds and other traditional investments.

The demand for good rentals is strong and the rents continue to go up in most markets.  There are people who choose not to buy or cannot buy a home who would prefer to live in a single family home rather than an apartment. 

It is estimated that seven million out of 50 million homeowners could save money by refinancing their existing mortgages. Obviously, if the replacement mortgage has a lower rate than your existing one, you will save money.

If you bought a home before 2011 and are paying mortgage insurance, you should investigate refinancing to eliminate that requirement. Even if you don't get a lower interest rate, the savings could amount to hundreds of dollars a month.

If a home you purchased since 2011 has appreciated enough, it could easily justify refinancing to eliminate the required mortgage insurance. Most loans don't require mortgage insurance if the loan-to-value is 80% or less. There are some programs for 90% mortgages that don't require mortgage insurance. It is certainly worth investigating with a trusted mortgage professional.

Continuing to pay mortgage insurance that could be eliminated is like having a broken cell phone and continuing to make the monthly payments for something you can't use and don't need.

If your current mortgage is several years old, instead of getting a new 30 year mortgage, you might consider a 15-year term. The money you save with a lower interest rate could help you to retire your loan in a shorter time so that your home would be paid for.

You may never stop paying for some improvements

You've saved the money and are ready to pay cash to build a new pool for your home.  However, that's just the beginning of your soon to be increased expenses which will include maintenance, higher utilities and higher taxes.

Homeowners obviously benefit by a larger equity when their home increases in value due to appreciation.   A not-so-obvious effect that will also more than likely take place is that their property taxes will increase.  In most cases, a property's assessed value is generally tied to market value to calculate the property taxes based on the tax rate for that year. 

Similarly, a homeowner can affect the value of their home by making capital improvements.  Some small items may never be recognized by the taxing authority but items that require a permit, certainly are brought to their attention.  Items such as a fence, roof, remodeling, windows, new rooms or swimming pools can easily increase the assessed value of a property.

Most states have an established time frame in which to challenge the current tax assessment for that year.  The process is relatively simple and doesn't require professional representation.  It generally involves showing that there is an error which has overstated the value or that current comparable sales indicate a lower value.

If you'd like more information or need the comparable sales data, please let us know.  We would be happy to help you investigate the possibility of lowering your property taxes.

Your home may be worth a lot more than you think

Real estate lost a lot of value during the recession but most areas have rebounded considerably.  In some cases, the homes are worth more than they were before the housing bubble burst. 

The dynamics are classic for this type of market: inventories are low, mortgage rates are low and demand is high.  All price ranges are on the rise with some at an even higher rate because the short supply is causing competition among buyers.

Another reason many homeowners' may have more equity is simply not staying current with what is going on in the market.  In a recent FNMA study, it indicates that 23% of owners believe they have negative equity in their home when actually, it is 9%.  37% believe they have greater than 20% equity in their home when actually 69% of homeowners do.

Even if you're not planning to sell your home, knowing the value helps you understand your financial position better.  Home equity debt up to a $100,000 limit is tax deductible and can be used for any purpose.  Owner's commonly refinance to eliminate mortgage insurance, consolidate mortgages, pay off higher interest rate debt like credit cards or student loans or to buy out an ex-spouse's equity.

Be aware that an automated value model like Zillow Zestimates uses algorithms to determine a price and while it might be in the ballpark, AVM results may only be accurate about 20% of the time.  A comparable marketing analysis or broker's price opinion will be more accurate due the subjective approach that will be used by an agent with personal experience in the area.  An agent will consider factors like condition, floorplan, marketability and demand.

Myrietta Leach, CRS, Broker

RE/MAX PRO

4333 Vine Suite 40

Hays, KS 67601

785-621-5400 (office)

785-650-4370 (cell)

www.myriettaleach.remax-midstates.com

Check out my latest blog.

myriettaleach.blogspot.com

Temporary Buy Down

There is an infrequently-used mortgage program available that could be the solution to a buyer's or seller's problem.

A temporary buydown is fixed rate mortgage that the seller has prepaid interest at closing to lower the payments for a number of years.  The borrower must qualify at the note rate but gets the benefit of lower payments for the early years. 

A 2/1 is a common buydown that the first year's payment is calculated at 2% lower than the note rate and the second year's payment is calculated at 1% lower than the note rate.  The third through thirtieth years' payments are the note rate.

Let's set the scene.  A buyer is using their available cash for down payment and closing costs to get into the home.  They'd like to put their own touches on the home when they move in but may not be able to for a year or two since most of their cash was used.

In this example, a $250,000 home is purchased with a 3.5% down payment and a 4% mortgage for 30-years.  Normally, the principal and interest payment would be $1,151.76 for the full 30-year term.  If the seller will pay the lender $4,736 at closing, it can be applied to pre-pay part of the interest for the first two years.

The first year, the buyer's P&I payment will be $891.71 for 12 months based on a 2% interest rate or 2% lower than the 4% note rate.  It is $260.06 lower per month in the first year.  The second year, the buyer's P&I payment will be $1,017.12 for the next 12 months based on a 3% interest rate or 1% lower than the 4% note rate.  It is $134.64 lower per month in the second year.

A bonus for the buyer will be that the cost of the buydown paid at closing by the seller becomes prepaid interest that is deductible by the buyer in the year of purchase.  The buyer gets lower than normal payments for the first two years and a sizable tax deduction.

This type of program can be very beneficial to a seller who wants to offer terms to improve the marketability of their home rather than lower the price.  The challenge will be explaining it to not only potential buyers but even agents who are not familiar with this program.