Monday, December 30, 2019

Another Source for a Down Payment


Borrowing from a 401k, 403b or the cash value of life insurance policy is a common financial strategy.  While taxpayers are not allowed borrow from either a traditional or Roth IRA, they can withdraw funds before age 59 ½ for specific purposes like a first home purchase, qualified higher education expenses or permanent disability without incurring a 10% penalty.

First-time home buyers can make a penalty-free withdrawal of up to $10,000 if they haven't owned a home in the previous two years.  This would allow a married couple who each have an IRA to withdraw a lifetime maximum of $10,000 each, penalty-free for a home purchase.

In many cases, the money would be used for a down payment or closing costs.  However, some buyers might consider this source to increase their down payment so they could qualify for a loan without mortgage insurance.

There is another condition where a taxpayer can withdraw money from their IRA without triggering the tax or penalty if it is returned to the IRA within 60 days.  This can only be done once in a 12-month period.  Unless you're certain you can redeposit the money in the strict time frame, the potential tax and penalties makes this a risky and expensive way to arrange temporary funds.

If the taxpayer qualifies for the penalty-free withdrawal, there may still be taxes due.  Contributions to traditional IRAs are made with before-tax dollars and the tax is paid when the funds are withdrawn.  Since Roth IRAs are made with after-tax dollars, there is no tax due when the funds are withdrawn.

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

Before withdrawing money from an IRA, taxpayers should get advice from their tax professional concerning their individual situation.


Friday, December 27, 2019

Renting vs Buying



It might seem like kind of an odd concept, but there are a number of companies that let you rent your home décor these days. Companies like Feather and CasaOne allow you to lease your furniture and other décor for a limited period or until you decide to buy it outright. Even some older rent-to-own companies have options to change furnishings after completing a portion of your lease. The big question is, how viable is this as a way to decorate your home?


Renting vs. Buying

With just about any situation where you have the option to rent or buy something, there will be proponents on both sides extolling why that option is the better deal. People will discuss markets when talking about renting or buying a home, or depreciation rates when discussing automotive lease options versus outright purchase. With furniture, however, the discussions have long been fairly one-sided due to the excessive cost associated with many rent-to-own furniture options. Unless you had another other choice, buying your furniture was the only way to avoid paying nearly twice as much in some cases.

The difference here is that these new options are intended as a way to provide flexibility in your décor instead of simply providing a path to purchase. While you do have an option to purchase, you also have the option to change your furniture options as your needs and tastes change. Because services like Feather are focused more on providing an actual service than simply selling furniture with installment plans, they have a larger focus on benefits than what you would get from a standard rent-to-own purchase.


Is It a Viable Option?

There are two questions to ask when trying to decide if renting home décor in this fashion is a viable option for you. The first concern is the cost: is it really worth it to you to have the sort of flexibility these services provide, versus owning your furniture outright? Feather, for example, has a $19/month service charge in addition to the monthly furniture payments for members on annual contracts. If you don't plan on taking advantage of all the services that Feather offers, it might not be worth paying this extra cost in your case. On the other hand, if you're the sort that would like to be able to reinvent your living space on a regular basis, then the discounts and annual free change that membership provides might be more than worth that added monthly fee.

The second thing to consider is how viable these companies are in the long term. If there's no market for this sort of a service, then you might find yourself without a service to use a few years down the road. This may not be a concern, however; the market has supported multiple more traditional rent-to-own services over the years, but companies like Feather aren't really competing with those. Instead, they're taking an updated version of their model and targeting a slightly higher income bracket. With reasonable pricing, some great style and a solid service model in place, these early movers into this new bracket could have significant staying power.


Nailing Your Décor

Regardless of whether you plan to rent or buy, it's a good idea to plan out your décor before you start decorating. This is especially important if you're using an online service like Feather where you'll be doing your planning and shopping online. This is where it can help to have a professional interior decorator or designer there to assist you in choosing the pieces that will work best together.




Tuesday, November 19, 2019

7 Reasons to Buy a Home


Some people don't need a reason to buy a home, they just want it.  That can be enough justification by itself.  Other people need some solid logic before they're ready to make the commitment.  The following reasons might help you to make a decision.

  1. Pride of ownership ... among the most popular reasons given by homebuyers is that they want a place they can call their own and decorate and improve it the way they want.  It is a place to feel safe and secure and a place for their family.  They can share it with their friends and enjoy living in it.
  2. Good investment ... Homeowners have a 80 times greater net worth than renters.  By investing in a home that appreciates over time, it contributes to an increasing equity.  The high loan to value mortgages that are available combined with the low mortgage rates also contribute to the investment through leverage which has been described as "using other people's money" to control an investment.
  3. Interest and property tax deductibility ... Homeowners can deduct their qualified mortgage interest and up to a maximum of $10,000 of their property taxes as itemized deductions on their federal income tax return.  In some instances, the standard deduction may benefit them more, but they can elect to choose either method each year, whichever helps them the most. 
  4. Capital gain exclusion ... A single homeowner can exclude up to $250,000 of capital gain and if married filing jointly, can exclude up to $500,000 of gain on their principal residence.  The need to have owned and occupied it as their home for two of the last five years.
  5. Cash out refinance ... Generally speaking, a lender will allow an owner with good credit and income to borrow the difference in their current unpaid balance and 80% of the fair market value.  This money can be used for any purpose and is not a taxable event.
  6. Equity buildup ...The difference in the value of the home and the unpaid mortgage balance is called equity and it increases with each payment made.  It is like automatic savings.
  7. No landlords ... Instead of dealing with landlords who may impose restrictions on things like painting, improvements and pets.  Owners are not concerned about rent increases and will have a fixed principal and interest payment for as long as they have a mortgage.

A bonus reason to buy a home now are the low mortgage rates available. The lowest rate recorded by Freddie Mac is 3.35% in December 2012.  Today's rates are 3.75% on a 30-year fixed rate mortgage and 3.21% on a 15-year fixed rate mortgage.  So, they are certainly very close to all-time lows.

The highest rate on a 30-year fixed rate mortgage was 18.45% in October 1981.  When you put today's rates in perspective, they are an incredible bargain.  Many industry experts expect that they will not remain as low as they are now.  Locking in a low rate can keep your housing costs low.

A $275,000 mortgage at 3.75% for 30 years has a principal and interest payment of $1,273.57.  If the rate goes up by 1%, the payment would increase to $1,434.53 or $160.96 per month for the 30-year term. Check the Rent vs. Own to see how the numbers look in your situation.









Monday, November 4, 2019

Buy Your Retirement Home Now

Maybe you're not ready to move into it but that doesn't mean that you shouldn't take advantage of the present opportunities to acquire the home you want to live in during retirement. The combination of the low mortgage rates, high rental rates, positive cash flows and tax advantages can help you get it paid for by the time you're ready to move into it.

Your tenant could literally buy your retirement home for you.  One idea would be to finance it with a 15-year loan that will have a lower rate than a 30-year loan and it will obviously be paid for in half the time. With every monthly rental check from your tenant, you make the payment on the mortgage which includes a portion that reduces debt and builds equity. Even if you don't have the home paid for by the time you retire, your equity will be larger.  

Consider you sell your current home which could be paid for by then when you are ready to move into this retirement home .  Taxpayers can exclude up to $500,000 of tax-free gain for a married couple. That profit could be used to fund your retirement.

Even if you don't retire to this home, it could be a placeholder to control the costs of the home you do move into.  For example, you could buy a home in a destination location now, rent it out and build equity in it until you're ready to use it as your principal residence.  That home would have kept pace with other homes in the area so that you would not be priced out of the market you want to retire to.

With home prices and mortgage rates certain to rise, this may be one of the best decisions you can make. We want to be your personal source of real estate information and we're committed to helping from purchase to sale and all the years in between. 

Contact us if you'd like to talk about the idea or if you need a recommendation of real estate professional in another city. 





Monday, September 30, 2019

Price It Right the First Time


The Internet has empowered all buyers with information and home buyers are no exception.    The amount of information available to public includes details on size, condition, sales history, current inventory, recent sales, photographs, videos, school info, drive-times, entertainment and much more.

When a seller realizes that buyers are educated with facts, it becomes unlikely that they will pay more than a home is worth.  

If a home is priced too high in the beginning, it may stay on the market longer than normal which could adversely affect the ultimate sales price.  It is a natural reaction from people, personally or professionally, to assume that something must be wrong with a home that doesn't sell in a reasonable time for that market.

The seller is entitled to maximize the equity in their home and pricing it properly in the beginning is the best way to achieve that.  Overpricing can reduce buyers activity because they assume that the best homes are purchased soon after they are offered for sale and if one has been on the market longer than normal, there must be a problem with it.  Similarly, sales associates may come to the same conclusion.

After buyers have seen a few homes in a certain price range, they begin to expect similar amenities in each home they look at.  If a home is overpriced, it will not compare favorably with the other homes that are being viewed.  Sometimes, the buyer may even think that another home could be a bargain because it offers much more for the same price as the overpriced listing.

Shopping the market means looking at the homes that meet a buyers' wants and needs and selecting the one that gives them the most, whether it is in price or amenities.  The overpriced listing doesn't compete well, and it extends the market time.  There is a documented study that shows that the longer a home stays on the market, the lower the price will be.

It is essential that a seller receive factual information to price their home to compete favorably in the current market.  Some of the obstacles can include:

  • Failure to objectively compare the current and sold homes with theirs
  • Neighbors who mislead the seller as to how much they got for their home
  • Fear of making a mistake and thinking they can start high and always lower the price
  • Loss of perspective because the seller is emotionally involved
  • Expecting the home to sell for more than fair market value because they need the money
  • Agents who will accept a listing at any price in order to tie up the property until the seller realizes the price is too high

What a seller paid for the home or the cost to rebuild it today do not affect market value.  Neither does the amount spent by sellers on certain improvements that were made for their own pleasure and enjoyment.

It is unrealistic to expect a buyer to pay more than market value for a home.  The seller sets the price of a home but the buyer determines the value.  If the home is priced properly in the beginning, it is more likely to sell for a higher price, in a shorter period and with less problems.


Tuesday, September 17, 2019

Tips when buying land





                                                                                        

    Top Tips When Buying Vacant Land

Building a new home from scratch can be a dream come true. The idea of designing the perfect property with morning sun in the kitchen and evening breezes on the deck can be exhilarating; the first step to a successful project is finding the right piece of land on which to build. This can present challenges if not approached correctly.

       

        Top Tips When Buying Vacant Land

  •   Hire Experience More than most real estate transactions, it's critical to hire an agent who specializes in vacant land purchases and can guide you through the steps.

  •   Expect to Pay Cash Finding a lender for vacant land can be very difficult. Those who will finance land typically require a 50% or higher down payment and above average interest rates and terms.

  •   Get the Neighborhood Comps Do not neglect to understand home values in the community so you do not over, or under, build your home.

  •   Do Your Due Diligence It is critical to research the property thoroughly. Just a few considerations much include.

    o Site Surveys and Environmental Testing o Easements and Zoning Restrictions
    o Lot Survey and Boundaries
    o Utilities and Water Rights

    Once you've completed these preliminary reviews, it's time to consult with an architect and General Contractor who will then begin to develop concept drawings to consider. Even at this stage, you might find that the home you want is not appropriate for the land you've chosen. Staying flexible is a key component to searching for land; remember that by following a few tips, you can ensure you find the right lot for your dream home. 

Sunday, September 15, 2019

Want to be a Landlord?


Real estate has consistently been one of the highest rated investments available to individuals.  TV shows certainly make rentals look easy and you may even know someone who has made a lot of money with them.  Possibly, the thought has crossed your mind that if they can do it, you can too.

Before you contract for your first investment, ask yourself some questions that could save you time and energy.  Not all people have the time, the inclination or even the skill to manage property.  Landlords need to be good business people who can maximize revenue and minimize expenses.  If investors don't have the skills and talent to handle some of the repairs, they at least need to know reputable and reasonable service professionals.

Another important element is to be familiar with the state and local landlord tenant laws.  You'll need to know what are allowable security deposits and where the money can be held.  Knowing how long you have to return it to a tenant is important and what to do if you plan to keep all or part of it for damages done.  It is important to know about the eviction process and how fair housing applies.

If you decide that you may not be cut out for being a landlord, it won't eliminate investing in rentals.  It does mean that you will need to engage a property management company who is capable of dealing with all aspects of the process.  The peace of mind and convenience will cost you a fee, usually a percentage of the rent collected.  They can handle finding a tenant, doing the background check and writing the lease but there will be an additional fee for that service.

Even though your expenses will be higher with a property manager, with their experience, they should be able to help you lease the property for more money than you can get and will probably have service providers to do the work needed for less.

Occasionally, rental property requires out of pocket expenses for repairs and improvements which is like making another capital contribution.  As equity builds in a rental property due to appreciation and principal reduction, the owner does have the option to take cash out of the investment either to pay additional expenses or to use any way the owner wants.  Pulling equity out of a rental doesn't even trigger a taxable event.

Single-family homes and up to four-unit buildings offer an investor the opportunity to get a high loan-to-value mortgage at a fixed interest rate for 30 years on appreciating assets with tax advantages and reasonable control compared to other alternative investments.

Many investors like the fact that you can borrow to purchase a rental investment where many other investments require cash.  The use of borrowed funds can create an advantage called leverage.  Assume you paid cash for a $100,000 home that generated $7,000 income after the rent was collected and expenses were paid.  Divide the value of the home into the income and it would earn 7%.

If you decided to put an $80,000 mortgage on it at 5% interest, the interest expense would be $4,000 leaving only $3,000 income.  However, at that point, you'd only have $20,000 invested in the property.  Divide the cash invested into the income and the rate of return would increase to 15%.

This is a simple example of leverage showing that borrowed funds can increase an investor's yield on a property.

Rental property can be an excellent investment when it is treated like the business that it is.  Knowledge of the investment will reduce the risk and enhance the opportunity to make a profit.  Some investors consider their rental income as "mailbox money" because each month, they go to their mailbox and they have money being sent to them by their tenants.  The benefits of rental property can easily outweigh risk involved.

Contact me for more information on rental properties and the option to be the landlord or to delegate it to a property manager. 

Monday, September 9, 2019

Money You Saved for a Down Payment



Occasionally, buyers who can qualify to purchase a home decide to "take a break" and wait to purchase a home.  When the focus of buying a home is relaxed, other uses for the money that was going to be used for the home are considered. 

Maybe they think how much fun it would be to have a Sea-Doo or a motorcycle or a new car.  It is amazing how many people would like to buy a home but either don't have the down payment, the income or the good credit to make it possible.

Instead of spending the money, consider investing the money for two years until the time is right to buy a home.  Let's look at putting the money in a certificate of deposit that earns 2% or in the stock market that could average a 5% return.

Assume you were purchasing a $295,000 home on a FHA loan with 3.5% down payment.  The $10,325 would grow to $10,742 in the CD which isn't a big increase but at least it is safe and secure, and it will be available when you're ready.

If the same amount were invested in a safe stock or mutual fund that earned 5%, it would grow to $11,383 in the same two-year period.  It earns more but there is more risk involved.

Your Best Investment

 

CD

Stock Market

Home

Cash to Invest

$10,325

$10,325

$10,325

Wealth Position

$10,742

$11,383

$38,871

Profit Taxed as

Ordinary Income

Long-term capital gains

§121 exclusion applies

 

Alternatively, if you invest the same amount in purchasing a home that appreciates at 3% a year, the equity would be $38,871 two years from now.  The dramatic increase is due to leverage, being able to control a large asset with a small amount of cash.  The appreciation is based on the purchase price not the down payment.

Another factor is that there is principal reduction with each payment that is made.

Make your own projections with Your Best Investment.

Tuesday, August 6, 2019

Determining Property Type



The Internal Revenue Service considers four different types of real estate.  Specific types of properties have benefits based on their classification.  The determination does not depend on the property itself as much as it depends on how the property is used and what the owner's intentions are.

Principal Residence ... a principal residence is the place a person lives or expects to return if they are temporarily away from it.  It could be a single family, detached home or condominium or a duplex, tri-plex or four-unit.  The owner(s) can deduct the qualified mortgage interest and property taxes on the schedule A of their tax return.  There is a capital gains exclusion on profit of up to $250,000 for a single taxpayer and up to $500,000 for a married taxpayer.  

Income Property - is improved property that is rented or leased to tenants as opposed to using it personally.  It can include houses and condos, apartment buildings, office complexes, shopping centers, warehouses and other commercial buildings.  Depreciation is allowed on the improvements.  For property held more than one year, the profits are taxed at long-term capital gains rates.  This type of property is eligible for a tax deferred exchange.

Investment Property ... can be raw land or improved property that is not rented or leased.  This property is not subject to depreciation.  If the property is held for more than one year, the profits are taxed at long-term capital gains rates.  It is also eligible for a tax deferred exchange.  

Dealer Property ... this type of property is primarily considered inventory because the intention is to sell it without intentionally holding it for more than a year.  It could be new construction such as a home builder.  It could be an investor who buys a property and expects to sell it for more.  There is not a requirement to make improvements.  The profits on dealer property are taxed as ordinary, "sweat of the brow" income.  Dealer properties cannot be exchanged.

second home is like a principal residence in that you can deduct the interest and property taxes on your Schedule A, up to the limits.  A second home, as well as a principal residence, can be rented out up to 14-days a year without threatening the status of the property.  Seconds homes are not eligible for exchange because personal use properties are not allowed.  A second home is not a principal residence and profits are taxed like an investment property.  If you own it for more than a year, it is taxed at long-term capital gains rates.

Vacation homes are rented for more than 14 days a year and are like income property but with some additional rules that apply.  If your personal use is 14 days or less or 10% of the time it is rented, your expenses can be deducted in excess of income.  If you use it for more than 14 days or more than 10% of the number of days it is rented, it is considered personal use and your expenses are limited to the amount of income collected with no losses being deductible.

Taxpayers can strategically change the property type based on their intentions.  A principal residence can be converted to income property.  Dealer property could become a principal residence.  A rental property could become a principal residence.

Professional tax advice is always recommended to be able to understand the information and how it applies to your specific situation. 

Tuesday, July 23, 2019

Delaying usual cost you more


Two things can happen when the mortgage rates go up before you've found a home or locked-in your mortgage.  You'll either pay the current mortgage rate which means a higher payment, or you'll have to increase your down payment to keep the monthly payment at the same level.

If the rate were to go up by ½%, the payment on a $275,000 mortgage would increase by $82.87 per month for the entire 30-year term.  That would increase the cost of the home by $29,835.

Some people are purchasing the maximum home that they can qualify for.  In that case, they cannot qualify for a higher payment and the only way to buy the same price home is to put more money down which may not be a possibility.  The other alternative is to buy a lower price home which may not be in the same area or size which will involve some compromises.

The rate is not the only dynamic that affects buyers waiting to purchase.  The home they want could sell to someone else.  Prices could increase as new homes come on the market.  The question that many buyers ask themselves when they become a victim of the consequences of delay is "What could we have spent the money on if we didn't have to make a higher payment?"

Mortgage rates are very attractive currently and within ½% of the all time low of 3.35% in December 2012.  The highest rate was 18.45% in October 1981.  Whether you're purchasing or refinancing, it may not be this low again.

To see how it will affect the payment, plug your numbers into this Cost of Waiting to Buy calculator or call me at (785) 650-4370 and I'll help you with it.




    


Monday, July 1, 2019

Building Equity

Owning a home is the first step to building equity.  Tenants build equity but not for themselves; they build it for the owners.

Equity is the difference in the value of the home and what is owed on the home.  There are two dynamics that cause this to grow: appreciation and principal reduction.

As the home increases in value, it is said to appreciate.  Various authorities will annualize an appreciation rate based on average sales prices from one year to the next.  Since appreciation is based on supply and demand as well as economic conditions, it will not be the same year after year.  

If you looked at a ten to twelve-year period, some would be higher than others and there may even be some individual years that it is flat or even declined.  For the most part, values tend to appreciate over time.

Most mortgages are amortized which means that a portion of the payment each month is applied to the principal in order to pay off the loan by the end of the term.  A $300,000 mortgage at 4.5% for 30 years has $395.06 applied to the principal with the first payment.  A slightly larger amount is applied to the principal each following month until the loan is paid with the 360th payment.

If additional principal payments are made, it will save interest, build equity faster and shorten the term of the mortgage.  Using the previous example, if an additional $250.00 principal contribution was made with each payment, it would only take 270 payments to retire the loan instead of 360.  It would save $69,305 in interest and shorten the mortgage by 7.5 years. 

To see the dynamics of equity due to appreciation and principal reduction, look at the Rent vs. Own.  To see the effect of making additional principal contributions on your equity, look at the Equity Accelerator.  




Monday, February 4, 2019

Your Real Estate Resource


Being a better homeowner is a full-time job.  It takes good information to make good decisions not only when you buy and sell but all the years you own a home.

Think of times when you need advice on financing, taxes, insurance, maintenance, finding reasonable and reliable contractors and lots of other things.  Imagine how nice it would be to have a real estate information line you could call whenever you have a question.

Our objective is to move from a one-time sale to customers for life; a select group of friends and past customers who consider us their lifelong real estate professional.  We believe that if we help you and your friends with all your real estate needs, we can earn the privilege to be your real estate professional.

Throughout the year, we'll send reminders and suggestions by email and social media that enhance your homeowner experience.  When we find good articles to help you be a better homeowner, we'll pass them along.  You'll discover new ways to maintain your property, minimize expenses and manage debt and risk.  

We want to be your "Go-To" person for everything to do with real estate.  We're here for you and your friends...now and in the future.  Please let us know how we can help you.



Monday, January 7, 2019

Eliminate FHA Mortgage Insurance

Mortgage insurance premium can add almost $200 to the payment on a $265,000 FHA mortgage.  The decision to get an FHA loan may have been the lower down payment requirement or the lower credit score levels, but now that you have the loan, is it possible to eliminate it?

Mortgage Insurance Premium protects lenders in case of a borrower's default and is required on FHA loans.  The Up-Front MIP is currently 1.75% of the base loan amount and paid at the time of closing.  Annual MIP for loans with greater than 95% loan-to-value is .85% per year.  

For loans with FHA case numbers assigned before June 3, 2013, when the loan is paid down to 78% of the original loan amount, the MIP can be cancelled.  The borrower may need to contact the current servicer.

However, for loans greater than 90% with FHA case numbers assigned on or after that date, the MIP is required for the term of the loan.

Most homeowners with FHA mortgages are not eligible to cancel the MIP because they either originated their loan after June 3, 2013, put less than 10% down payment and/or got a 30-year loan.  If they have at least 20% equity in the home, they can refinance the home with an 80% conventional loan which in most cases, does not require mortgage insurance.

With normal amortization on a 30-year loan, it takes approximately 11-years to reduce the original loan to the 78-80% requirement based on normal amortization.  There is another dynamic involved which is the appreciation on the home.  As the home goes up in value and the unpaid balance goes down, the equity increases.

If the homeowners believe that they have enough equity that would eliminate the need for mortgage insurance, they can investigate refinancing with a conventional loan.  Borrowers refinancing will incur expenses in starting a new mortgage and the interest rate may be higher than the existing rate.  Analysis will determine how long it will take to recapture the cost of refinancing. 

Call me as (785) 650-4370 for a recommendation of a trusted mortgage professional.