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John Riggins
Displaying blog entries 111-120 of 260
Where Is It Invested?
You’ve saved for a rainy day or retirement. Congratulations but don’t get too comfortable yet; where is it invested? It’s estimated that over 25% of Americans have their long-term savings in cash instead of investments like stocks, bonds or real estate.
The memories of the financial crisis of 2008 are recent enough to understand why some people may want to avoid the stock market and real estate. Even though Wall Street and housing have rebounded considerably, uncertain investors are sitting on their cash. However, trying to avoid a bad decision can have serious costs too.
If your money is not earning at least at the current inflation rate, you’re losing the purchasing power of your dollars. Bankrate.com estimates the average money-market deposit yields 0.11% and the average five-year certificate of deposit currently yields 0.78%.
Rents are continuing to rise and there is a shortage of good, affordable housing. Single family homes have a significant advantage over many other types of investments. They have high loan-to-value mortgages available at fixed interest rates for long-terms on appreciating assets with distinct tax advantages.
The cash flows are considered to be one of the most attractive features of rental properties. Some investors think of it as a growth stock that pays substantial dividends. In the example shown below, a $125,000 rental with an 80% loan-to-value mortgage at 5% that rents for $1,250 per month, has a positive cash flow before taxes of $3,000 a year.
The rate of return on rental property can be substantially higher than other investments while allowing the investor control that isn’t available in alternatives.
It Can't Hurt to Wait, Can It?
It’s been said that more money has been lost due to indecision than was ever lost because of a bad decision. Regardless of whether you agree with the statement, delaying the decision to buy in today’s market is going to cost the buyer more.
Home prices have gone up considerably in almost every market in the country in the past year and while inventories are beginning to grow, prices are expected to continue to rise. Mortgage rates jumped 1% from the beginning of May to now. They could easily reach 5% by the end of the year and continue to rise in 2014.
Many of the financial experts in the country believe that the economy will not be strong until rates are in the 7% area.
The two components that move the cost of housing are price and mortgage rates. Escalation of either one will have an affect but when both are going up simultaneously, it is dramatic. It can literally eliminate buyers who could have purchased earlier.
The following example shows what would happen to the payments on a $200,000 home if the price were to go up 3% at the same time that the mortgage rates went up 1%. Not only would the payments go up by $150.81 per month, the price of the home would be $6,000 more. Even though the down payment may not change much, the new owner would have to borrow more money. By not acting, it is costing them more in price and payment. The loss of the appreciation would have been equity had they purchased prior to the rise in price.
Check out the Cost of Waiting to Buy to see what the effect will be using your own projections.
If I'd Known...
We’ve probably all said or at least thought “if I knew then, what I know now, I would have done things differently.” We should have stayed in school longer. We should have listened to our parents. We should have bought Apple stock in 2002 for $8.50 that sells for $400 today. Or we could have bought gold in 2000 for under $300 for a four-fold profit today.
Years from now, if we look back at 2012, we may say that it was the best buyer’s market ever. Even now, in 2013, it’s apparent that both housing and mortgage prices are going up and they may never return to the record low levels.
The housing affordability index, which is considered to be good at 100, had increased to over 200 this past December, January and February. Shrinking inventories and rising prices in most markets have caused the index to fall to 172.7 for May 2013.
This market applies equally to acquiring a home to live in or a home to use as a rental. It is estimated that about 30% of the property purchased last year was done by investors. It is understandable because the positive cash flows far exceed most other investment alternatives.
Homeowners moving up in a rising market may sell their home for more by waiting but it will also cost them more for a new house. Typically, a person buys a 50% larger home when they move up. If they wait for prices to go up 10% on the $150,000 home they're selling, they’ll realize $15,000 more but will pay $22,500 more for the new home purchase. They’ll actually net $7,500 less by waiting for prices to go up and may have to pay a higher mortgage rate too.
The question homebuyers and investors alike are faced with today is whether they will be saying years from now that they seized or missed an opportunity of a lifetime.
Many times a homeowner might feel relieved being out from under the obligation of a mortgage they can’t afford even though the property was lost due to foreclosure or short sale. If a lender cancels or forgives debt, a taxpayer must include the cancelled amount in their income for tax purposes depending on the circumstances. The tax significance could be serious.
Congress enacted the Mortgage Relief Act specifically to help homeowners who might be affected in the housing crisis that started approximately in 2007. The Act expired on 12/31/12 but was temporarily extended by Congress until December 31, 2013.
This relief only applies to a taxpayers’ principal residence which does not include second homes and investment property. The maximum amount is limited to $2 million of mortgage debt forgiveness or $1 million if filing separately.
Another provision is that the debt relief is limited to acquisition indebtedness used to buy, build or improve the property. It excludes cash equity loans whether made separately or in a refinance of the original mortgage.
Due to the serious consequences involved in short sales and foreclosures, it is advised that homeowners faced with this possibility should seek expert advice from their legal and tax professionals.
Rising interest rates are great if you are renewing a certificate of deposit but not so much when you’re borrowing money. With interest rates on the rise as well as home prices, housing affordability is a concern for would-be homeowners.
A rough rule of thumb is that a person’s or family’s housing should not exceed 28% of their monthly gross income. While rental rates and home prices have been consistently increasing, mortgage rates have been soaring in the past month. In one week, according to the Freddie Mac Primary Mortgage Market Survey, they jumped by .5%.
This means that people have to pay a larger percentage of their income for housing unless their incomes have been increasing at an equal pace. A $200,000 mortgage would be over $100 more per month if closed in July compared to closing at the interest rates available in January of 2013.
If rates increase by .5% by the time you close on the same size mortgage, payments would increase by almost $60 per month. In order to keep the payments the same, a borrower would have to put an additional $11,000 down to lower the mortgage amount.
Check out how your payment would be affected if interest rates continue to rise.
The National Association of REALTORS® suggests that housing is more affordable now than one year ago. However, with all of the variables in play including inflation that was not addressed in this piece, it is unclear how long conditions will remain “affordable”.
Some homeowners, who were not able to sell during the Hawaii Real Estate recession, chose to rent their homes instead. In some cases, they didn't need to sell their home at the depressed prices and opted to rent it until the market recovered.
It's a valid strategy but there are time restrictions that could have serious tax implications for some homeowners.
The section 121 exclusion for gain in a principal residence requires that the home is owned and used as a main home for at least two years during the five year period ending on the date of the sale. This allows a homeowner to rent their home for up to three years and still have some part of the exclusion available.
The sale of a home with a $200,000 gain that qualifies as a principal residence would result in no tax being paid by the owner. Comparably, a rental property with the same gain could have a $30,000 or higher tax liability depending on the length of ownership and tax brackets of the investor.
The housing market has dramatically improved in the last year. If you have a gain in a home that has been your principal residence and it has been rented less than three years, you might want to consider selling it while you qualify for the exclusion.
If you are considering a sale on your principal residence that has been rented, consult with your tax professional for advice on your specific situation. For additional information, see IRS Publication 523.
It's estimated that 10% of the homes sold in 2013 will be to buyers who lost a home in the past five years. Approximately 500,000 buyers who may have thought they wouldn't own a home anytime in the near future will be homeowners again.
It's estimated that several million of these previous homeowners will purchase again in the next eight years. This kind of activity will contribute significantly to the housing recovery.
Some people thought that the housing crisis would cause a shift in values placed on owning a home but the boomerang buyers definitely don't support that theory. Having a home of your own, where you can raise your family, share with your friends and feel safe and secure is still part of the American Dream.
The rising rents, increasing prices and low, low mortgage rates are also influencing buyers into the market. In many cases, it is cheaper to own that to rent.
All new buyers, including those who have experienced foreclosures or bankruptcies, must have good credit history and the ability to repay the loan. It just may not take as long to reestablish the credit as some would-be buyers might have thought.
Read more about Bidding Wars This Spring, Spring's Wild Card and Boomerang Buyers.
One of the drawbacks to low mortgage rates is that the total interest and property taxes paid for the year may be lower than the standard deduction. A little planning might be able to help you at least every other year.
Most homeowners know they can deduct their qualified mortgage interest and property taxes on their Schedule A of their 1040 tax return or to take the standard deduction if it is greater. See Your Deduction...Your Choice.
Deductions are taken in the year that they're actually paid. If a homeowner paid their 2012 property taxes in 2013, they would not be deductible on their 2012 tax return. Then, if the 2013 property taxes were paid in 2013, both the 2012 and 2013 taxes could be deducted on the 2013 Schedule A.
By delaying the payment of the 2012 taxes until 2013, the combination of the 2012 and 2013 taxes might exceed the 2013 standard deduction and provide a higher deduction.
Other Schedule A expenses such as charitable contributions and medical expenses may be bunched also. From a practical standpoint, since most mortgage payments are due monthly, the mortgage interest would not be bunched.
This information should be discussed with your tax advisor to see how it might apply to your individual situation. The key is you must be aware of the strategy early to be able to use it.
Some people refer to the heating and air conditioning systems as the "comfort systems." If you've ever had to be without one in the dead of winter or the heat of summer, lack of comfort may be an understatement. Simple maintenance with a HVAC checklist is something that every homeowner can perform.
Periodically
Annual, in spring
Even with the attention that perfoming this list will provide, it is recommended that you have your units serviced annually by a licensed contractor. Furnaces can be inspected for carbon monoxide leaks and preventative maintenance may help avoid costly repairs. Click Here if you'd like a recommendation.
Taxpayers are allowed to decide each year whether to take the standard deduction or to itemize their deduction when filing their personal income tax returns. Roughly, 75% of households with more than $75,000 income and most homeowners itemize their deductions.
The 2012 standard deduction, available to all taxpayers, regardless of whether they own a home, is $11,900 for married filing jointly and $5,950 for single taxpayers.
Let's look at an example of a homeowner couple with a $150,000 mortgage at 3.5%. The standard deduction would give them $2,650 more than the total of their interest paid and property taxes of approximately $9,250. If they were in the 28% tax bracket, the actual tax savings would be $742.00.
When mortgage rates were considerably higher, many people expected the interest and property taxes to easily exceed the standard deduction but with today's low rates, a comparison is certainly justified.
There are other things that could come into consideration like charitable contributions, medical expenses and casualty losses. Tax professionals will compare available alternatives to find the one that will benefit the taxpayer most.
For more information, see www.IRS.gov and consult a tax advisor.
