Real Estate Information

Who's Paying Your Mortgage? 
 

As a homeowner, you obviously pay for your mortgage but as an investor, your tenant does.  Equity build-up is a significant benefit of mortgaged rental property.  As the investor collects rent and pays expenses, the principal amount of the loan is reduced which increases the equity in the property.  Over time, the tenant pays for the property to the benefit of the investor.

Equity build-up occurs with normal amortization as the loan is paid down.  It can be accelerated by making additional contributions to the principal each month along with the normal payment.  Some investors consider this a good use of the cash flows because interest rates on savings accounts and certificates of deposits are much lower than their mortgage rate.

In the example below, is a hypothetical rental with a purchase price of $125,000 with 80% loan-to-value mortgage at 4.5% for 30 years compared to a 3.5% for 15 years.  The acquisition costs were estimated at $3,000, the monthly rent is estimated at $1,250 and $4,800 for operating expenses. 

Notice that both properties have a positive cash flow before tax.  The cash on cash return is the revenue less expenses including debt service divided by the initial investment to acquire the property.  The 15 year mortgage will obviously have a smaller cash flow and lower cash on cash but the equity build-up is significantly higher.

If the goal of the investor is to pay off the property to provide the highest possible cash flow at a later date, a shorter term mortgage with a lower interest rate will help them achieve that.  A simple definition of an investment is to put away today so you’ll have more tomorrow.  Sacrificing cash flow now, during an investor’s earning years, is a reasonable expectation to provide more cash flow in the future when it might be needed more.

Contact me if you’d like to explore rental property opportunities.

All Dollars Not Equal

The division of assets between the spouses is an important decision to finalize a divorce.  The exercise looks relatively simple: assign a value for each of the assets and divide them based on a mutual agreement between the parties.

The challenge is to make a fair division which requires an analysis to determine their value after they’re converted to cash.

Assume the two major assets in the example, a retirement account and the equity in the home, are equal at $100,000.  It might seem logical to give the home to one spouse and the retirement account to the other.  However, if the person receiving the home decides to sell the home, the net proceeds could be considerably less than the spouse receiving the retirement account.

Let’s pretend that the spouse with the home negotiates a lower price of $475,000 due to current market conditions.  The former couple had owned the home for many years and refinanced several times, pulling money out of the home each time.  When the remaining spouse sells the home, there could be a considerable gain that was never recognized.

As a single person, he or she is now only entitled to $250,000 exclusion and would have to pay tax on the excess gain.  After paying the sales costs, outstanding mortgage balance and the taxes due on the gain, the remaining spouse would have net proceeds of $24,375 compared to the $100,000 that the former spouse received in the settlement.

The message in an example like this is to examine and consider the potential expenses that may be involved with converting the assets to cash after the divorce. Obviously, expert tax advice is valuable in making such decisions.
 

Lower Anxieties/Improve Marketability

One of the anxiety highpoints during the sale of a home is waiting for the buyer’s home inspection report.  Most sellers willingly disclose what they know about their home to any potential buyers.  The concern stems from the inspector finding something that they’re totally unaware of and that it will either cost them a lot of money to correct or the buyer will simply use it to void the contract.

If the inspection does reveal some unknown problem with the home, it’s probably as big a surprise to the buyer who is not as emotionally or financially invested as the seller.  It is human nature to fear what you don’t understand and when a report identifies defects, they may simply opt-out of the home.

The solution to the situation may be for the seller to have the home inspected prior to putting it on the market.  There is still a risk of becoming surprised by an unknown defect which at that point, would have to be disclosed to potential buyers or repaired by the seller.  The advantage is that it creates a baseline to compare discrepancies that may arise when a future buyer has the home inspected.

If the seller’s inspection report is made available during the marketing process, it could give buyers a sense of confidence about the home even though they may still choose to have the home checked by their own inspector.

The cost of the inspection, possibly $500, keeps some sellers from taking this initiative when selling their home.  In an effort to minimize their expenses, they forego getting valuable, disinterested 3rd party advice that could help sell their home.  On a $175,000 home, the fee for the inspection will probably be less than 3/10 of one percent of the sales price.

Another option to the seller to increase marketability of the property and bolster buyer confidence in the home would be to offer a home protection plan.  Generally, the seller doesn’t incur cost for this coverage until the home is sold and there may even be some coverage for the seller during the listing period.  The benefit to the buyer is avoiding unanticipated expenses for specific items that are covered during their first year of ownership.

Contact me for recommendations of home inspectors or home protection plans.

Equity Dynamics

Equity is the difference in what your home is worth and what you owe. Ideally, as the value goes up and the unpaid balance goes down with each amortized payment made, the equity grows from two directions.

This dynamic leads to increasing a person’s net worth much faster than many other investments.

A homeowner has minimal control over value. It is necessary to maintain the property to avoid depreciation and make good decisions on capital improvements. After that, appreciation is generally controlled by supply and demand and the economy.

Mortgage management is something that the homeowner does have control. Making the decision to select a shorter term mortgage at a lower interest rate can have an impact on equity build-up. Lower interest rates amortize faster than higher interest rates which will also affect equity growth. Currently, it is possible to get a 1% lower rate on a 15 year mortgage than a 30 year mortgage.

Compare two alternatives of a 30-year and a 15-year mortgage. The payments will definitely be higher on the shorter term because it pays off quicker. However, if a person can afford the higher payments of $362.53 more per month in this example, the equity will be greater. Even after you take into consideration the higher payments, the increased equity is $17,236 at the end of the seven year holding period.

Another decision that can affect equity build-up is making additional principal contributions along with the regular payments. Whether you’re making an occasional lump sum payment toward principal or regular monthly contributions, it will save interest, build equity and shorten the term on a fixed rate mortgage. Estimate your personal savings with this Equity Accelerator.

If you are in the process of purchasing your home and are worried about the government shutdown, recent news from Freddie Mac may have you sleeping a little better.

The announcement, effective October 8, 2013, allows lenders to use signed federal tax returns as income verification rather than a tax transcript for loans, loan modifications, and certain other home loan programs.

Asking lenders nationwide to “minimize disruptions” in a recent bulletin about the shutdown, Dave Lowman, Executive Vice President, of Single-Family Business at Freddie Mac said, "We're issuing this guidance to help ensure the continued smooth operation of the mortgage market during the temporary shutdown of the federal government.”

“Today's bulletin [issued October 7, 2013] is intended to give lenders the certainty to continue approving and delivering new mortgages that meet Freddie Mac guidelines to eligible borrowers, such as federal employees and contractors, during the temporary shutdown,” he explained. This news should comfort many potential homeowners affected by the government shutdown, in public and private employment, who temporarily find themselves without an income.

Lowman also reiterated the presence of forbearance provisions, which can be made available for a time period of three to twelve months to qualifying borrowers. “We are also reminding servicers of our forbearance options to assist qualified homeowners with Freddie Mac mortgages,” he added, “to minimize the shutdown's impact on our nation's families and communities."

Find out more about how the temporary government shutdown may affect your home ownership by clicking here.

The Rules

The profit potential in single family homes for investment has been a consistently good long-term investment. They offer investors the opportunity of high loan-to-value mortgages at fixed interest rates for 30 years on appreciating assets, tax advantages and reasonable control that other investments don’t offer.

Last year, Warren Buffett said that if he had a way of buying a couple hundred thousand single-family homes, he would load up on them. Blackstone group L.P. (BX) has now purchased over 30,000 homes and American Homes 4 Rent (AMH) has more than 19,000 for rental purposes.

Individual investors actually have an advantage over the institutional investor but if they are not familiar with rental real estate, some basic rules could be very helpful.

1. Invest now to get more in the future. 
    Whether it is time, effort or money, the prudent investor is willing to forego immediate gratification for something more at a later date.

2. Real estate is an IDEAL investment. 
    IDEAL is an acronym that stands for income, depreciation, equity build-up, appreciation and leverage.

3. Invest in single family homes in predominantly owner-occupied neighborhoods at or below average price range. 
    This strategy should involve homes that will increase in value, rent well and appeal to an owner-occupant in the future who will pay a higher price than an investor.

4. Location, location, location. 
    The same homes in different areas will not behave the same. You can improve the condition, modify the terms or adjust the price but the location can’t be changed.

5. Understand your strategy – buy and sell, buy and hold or buy, rent and hold. 
    These three distinct strategies involve big differences in acquisition, management and taxation.

6. Know where your profit is coming from before you invest. 
    The four contributors to profit are cash flow, appreciation, amortization and tax savings. They don’t contribute equally or the same in all investments.

7. Profit starts with purchase. 
    Buying the property below market value builds profit into the investment initially.

8. Risk is directly proportionate to the reward involved. 
    An investment that has a high degree of upside also will have considerable downside possible.

9. Avoid functional obsolescence unless you have a plan before you buy. 
    The lack of usefulness or desirability of a home that exists when you buy it will still be there when you sell it. Unless it can be cured, it will affect future profit.

10. Good property + good tenant + good management = great investment. 
These are three solid components for a successful investment.

11. Problems left unresolved have a tendency to get worse. 
    It is generally cheaper in time or money to fix a problem earlier rather than later.

If you’d like more information about the opportunities in our market, contact me.

Find the "Right" Agent Before the "Right" Home

It’s a common practice for buyers to make a list of what they want in a home during the search process and to explain it to their agent. However, maybe the first list they should make would have the skills they want their agent to have.

The Profile of Home Buyers and Sellers identifies what buyers want most from their agents and as you’d expect, help with finding the right home was ranked highest most often. While it is important, it may not be the most unique of the desired area of expertise.

Equally essential to the success of the transaction are the combination of help with price and terms negotiations and assistance with the paperwork, comparable sales, qualifying and financing.

To summarize the responses in the survey, Buyers want help from their agents with two things: to find the right home and to get it at the right price and terms. Some agents are actually better equipped with tools and acquired knowledge to assist buyers with financial advice and negotiations.

Since an owner’s cost of housing is dependent on the price paid for the home and financing, a real estate professional skilled in these specialized areas can be invaluable in finding the “right” home. An agent’s experience and connections to allied professionals and service providers is irreplaceable.

Ask the agent representing you to specifically list the tools and talent they have to address these areas.

A Home is More Than an Address

A home is a place to call your own, raise your family, share with your friends and feel safe and secure. It is also one of the largest investments most people have.

Leverage is the ability to control a larger asset with a smaller amount of cash through the use of borrowed funds. It has been described as using other people’s money to increase your yield and it applies to homeowners and investors alike. Positive leverage causes the yield to increase as the loan-to-value increases. 

Even a modest amount of appreciation combined with the amortization of a loan can cause a substantial rate of return on the down payment and closing costs.

Homes build equity as the price goes up due to appreciation and the unpaid balance goes down due to amortization. 

The example above indicates the yield on a home considering 3% acquisition costs on the home with a 4.5% mortgage rate and the resulting equity at the end of five years. The different down payments will affect the yield based on the leverage effect. 

Whether you rent or buy the home you live in, you pay for what you occupy. The question a person is faced with is whether they are going to buy it for themselves or their landlord. Take a look at the cost of Renting vs. Owning.

Get Regular Check-ups

Following his heart surgery last week, after an issue was discovered during his annual physical, former President George W. Bush encouraged everyone to get regular check-ups. 

Another important checkup that should be done on a regular basis and can be just as beneficial for your finances is an annual homeowner advisory. Why would you treat your investment in your home with less care than you treat your car or even your HVAC system?

Consider investigating the following:

• Know the value of your home by obtaining a list of comparable sales in your immediate area as well as what is currently on the market for sale.

• Have you compared your assessed value for tax purposes to the fair market value in order to possibly reduce your property taxes?

• Even if you’ve refinanced in the last two years, can you save money and recapture the cost of refinancing in the time you plan to remain in your home?

• Have you considered reducing your mortgage debt with low-earning cash reserves that will not be needed in the near future?

• Have you considered investing in rental homes in good neighborhoods to increase your yields and avoid the volatility of the stock market?

• Recommendations of repairmen and other service providers from a trusted source who deals with them more frequently than you do.

Our goal is to create a lifelong relationship to help you be better homeowners. We want to be your “go to” person whenever you have a real estate question. We want to help you not only when you buy and sell but all of the years in between.

We want to provide good, consumer-based information about homeownership on a regular basis through email and social networking. If it benefits you by helping you be a better homeowner, hopefully, you’ll consider us your real estate professional for life.

Anytime you or your friends need help, please call. Knowing where to get the answer is just as important as knowing the answer. If you’d like information on any of the items we suggested, please let us know.

There's been lots of talk of mortgage rates and tax credits and cuts in the news lately and it can be hard to understand how it all applies to you and your home. A recent analysis by economists at the National Association of Home Builders (NAHB) on the mortgage interest deduction (MID) delves into how this particular tax provision benefits homeowners. Scrutinizing data collected by the IRS and the Census Bureau, NAHB released this information, explaining how MID effects your home and those around it.

NAHB dispelled many commonly accepted claims seen in the media with their investigation, showing that the majority (86%) of homeownership MID tax benefits are received by middle-class households and that nearly 70% of those homeowners currently use the deduction. In fact, they state that at some point every home buyer benefited from it. Their findings also argued that declines in home sale prices would likely occur if MID was repealed, since it would reduce buying power for many homeowners.

How Does the Removal of the MID Affect Your Home?

Also discussed in the recent NAHB release was whether the removal of MID is considered progressive, negatively impacts those who seek to invest, it's affect on renters, and how the tax credit rate impacts individuals, landlords, and the housing market. To learn more or view the release, please click here.