Friday, June 24, 2016

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.tax brackets.png

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.

Consider having this discussion with your tax professional.

Friday, June 17, 2016

Increase Your Marketability

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If a home is in poor or outdated condition, updating can be done to make it show favorably with other homes that are currently on the market.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.Marketability-250.jpg

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 as some.


Friday, June 10, 2016

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.get in the game-250.jpg

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.


Friday, June 3, 2016

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.kids to college.png

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.

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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.