Blog :: 2014

Don't Consider Appreciation or Tax Savings

mortgage calculator

Appreciation and tax savings are legitimate contributors to an overall rate of return on the rental real estate but what if you didn't consider them at all? If you only looked at one or two, very conservative measurements, you might decide to invest especially knowing that there are more benefits that will accrue to your investment.

If we bought a property for cash, collected the rent and paid the expenses, the amount left would be called Net Operating Income. In the example below, if would generate $7,200 a year which would be a 7.02% cash on cash rate of return which is considerably higher than the current 10-year treasury rate of around 2.3%.

If we place a mortgage on that property, the rate of return actually increases due to leverage. After the principal and interest are paid, the net operating income obviously decreases but the cash on cash rate of return increases to 9.10% because the borrowed funds mean less cash invested.

Another contribution to the investment's rate of return occurs with the mortgage due to amortization: the principal reduces with each payment made which increase the investor's equity. In this example, the equity build-up divided by the initial investment yields a 5.25% rate of return in the first year.

Single family home for rental purposes offer the investor high loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with tax benefits, reasonable control and an opportunity to earn higher than normal rates of return. Contact Kathy if you'd like to talk about what kind of rental opportunities are available.

Equity Buildup


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    Verify with Your Lender

    Property Tax

    IRS requires that expenses must actually be paid in the year that a deduction is to be taken. If you have a mortgage with an escrow account to pay your property taxes and insurance, you expect the company servicing your loan to pay this year’s taxes this year so that you can deduct them on your 2014 income tax return. After all, your monthly payment includes 1/12 the annual amount so there will be money available for them to be paid on time.

    The predicament occurs when you’ve made your payments but the mortgage company didn’t pay the taxing authority in the tax year they were due. If they paid your 2014 taxes in January of 2015, they wouldn’t be deductible for you until you file your 2015 income tax return.

    Verify with your lender after you make the December payment that they did indeed pay your property taxes. The question for your lender’s customer service is: "Have you or will you pay the 2014 property taxes this year so I’m eligible to deduct them on my 2014 income tax return?”

    For more information and all your questions, contact Kathy today.


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      Money Down the Drain

      tech <img alt="Money Down the Drain" src="" style="float: right; height: 300px; width: 200px; margin: 5px;"><p>Imagine your money down the drain...private mortgage insurance is necessary for buyers who don't have, or choose not to put 20% or more down when they purchase a home. <strong>If this is you, take heed.</strong></p> <p>It is required for high loan-to-value mortgages. It also provides an opportunity for many people to get into a home who would otherwise not be able.</p> <div>But, avoid money down the drain!  Eliminate the expense as soon as possible - you'll lower your monthly payment!</div> <div> </div> <p>FHA loans made after 6/1/13 that have 90% or higher loan-to-value at time of purchase have a mortgage insurance premium (MIP) for the life of the loan. FHA loans made prior to 6/1/13, can have the MIP removed after five years, if the unpaid balance is 78% or less than the original loan-to-value.</p> <p>VA loans do not require mortgage insurance. Conventional loans, in most cases, with higher than 80% loan-to-value require mortgage insurance. </p> <h4>The cost of that insurance varies but with a $250,000 mortgage, it could easily be between $100 and $200 a month!</h4> <p>Your monthly mortgage statement should itemize what your monthly fee is for the mortgage insurance. Unlike interest that is deductible, most homeowners are not able to deduct mortgage insurance premiums.</p> <p>If you plan to remain in the home or to stay there for a considerable number of years, the solution may be to refinance the home. If the home has increased since it was purchased, the loan-to-value at its new appraised value may not require PMI. Who might even be fortunate enough to obtain a lower rate than you currently have.</p>


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        Make your good offer even better!


        Good offer, or better offer?

        Your chance to make a good offer, better.

        It is time to make your good offer even better! ...It happens all the time: you fall in love with a home, are already planning your furniture layout, and the annuals you will plant out front, and you submit your offer. Aahh, your future is in hand! But not so fast. Your offer may not be accepted. More often than not, losing a home you really wanted to buy is discouraging in the least, and for some simply devastating! Do all that you can to avoid the disappointment. It is a hard lesson, but learning it before you place that offer will soften the blow: just because you place an offer, does not mean it will be accepted, or even counter-offered. A state of low inventory is everywhere and low inventory plus an increasingly positive economy means buyers are returning to the market and there is not much available to receive them. That is right...this means you have got competition for that house of dreams. It is time then to strategise! Lets up your chances for success! Check out this list on how to make your good offer even better, and attend to these suggestions wherever and whenever possible.

        1. Make your best offer initially; you may not get a chance to accept a counter.
        2. Submit a written per-approval letter from the lender.
        3. Increase earnest money above what is considered normal.
        4. Make a larger down payment.
        5. Eliminate unnecessary contingencies.
        6. Dont ask for personal property not included in the listing agreement.
        7. Pay your own customary closing costs.
        8. Shorten the inspection period.
        9. Buy the home as is subject to inspections which still allows you to get your earnest money back if the inspections are unacceptable but does not require the seller to make repairs.
        10. Write the seller a hand-written, personal letter telling them why you want their home; include a picture of your family.
        11. Offer to use the sellers or listing agents preferred title company.
        12. If you can pay cash, do so and arrange financing after closing. Be prepared to show proof of available funds.
        13. Schedule the closing as soon as possible but let the seller know you can be flexible.
        14. Once you decide on a home, act with expedience.
        15. Ask your real estate professional if they have any other suggestions.
        Making an offer is quite like applying and interviewing for a job. You want to make your best impression and show why you are the best choice. You wont always know whether there are multiple offers, and if you are lucky, there are not any, but be prepared, because your competition will be. For more great reading, check out's article "5 ways to make your home offer stand out."


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          Your IRA as a Source for Down Payments?


          illustration IRA and cash

          Your IRA for a Down Payment?

          There is an alternative source for down payments if you are a first-time home buyer! Keep this in mind if you fall into this category...

          Most taxpayers know that they will pay a 10% penalty if they withdraw funds from their IRA before they turn 59.5 years old. There is an exception for first-time home buyers that allows a penalty-free withdrawal of up to $10,000 per person if they havent 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. Yes, penalty free! In many cases, the money would be used for a down payment or closing costs. An additional added benefit - by increasing their down payment, some buyers will qualify for a loan without mortgage insurance.Of course you should always "read the fine print": 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 therefor tax must be paid when the funds are withdrawn. The exception is for owners of a Roth IRA, made with after-tax dollars, where there is no tax due when the funds are withdrawn. Another notable fact - the taxpayer making the withdrawal can help a qualified relative which includes children, grandchildren, parents and grandparents. Whether you are the withdrawing taxpayer, or you're lucky enough to have a relative withdrawing on your behalf, this is additional good news! Homebuyers who are considering using IRA funds for a home purchase should get expert advice from their tax professional concerning their individual situation. The variables of every situation make for a unique set of circumstances. For more info, check out this article from US News & World Report online: Using Your IRA for a Down Payment. Or this article from Using An IRA to Make a House Down Payment.


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            Taxation: Maintenance vs. Improvements


            file folder

            Taxation: maintenance vs. improvements? HOW you spend on your home makes a difference, when it comes to taxation and potential gains.

            Repairs to maintain your homes condition are not deductible (unlike rental property owners who can deduct repairs as an operating expense).On the other hand, capital improvements to a home will increase the basis and therefore affect the gain when you sell, which may save taxes. Additions to a home or other improvements that have a useful life of more than one year may be considered an increase to basis or cost of the home. Other increases to basis may include special assessments for local improvements like sidewalks or streets and amounts spent after a casualty loss to restore damage that was not covered by insurance.

            Unlike repairs, improvements add to the value of a home, prolong its useful life or adapt it to new uses. Home Improvements may be considered as:

            • the addition to or alteration
            • conversion
            • improvement
            • modernization
            • remodeling, or
            • replacement of a building or part of a building or a structure adjacent to that building
            • or an improvement to land adjacent to the building
            There's a great explanation and example to help illustrate the equation on - it may help to check it out. Remember that to qualify, the dwelling cannot be used for income as a rental property. So, rest assured, your improvements are a great thing, now and for the future (just remember that unless you maintain the improvements and the rest of your home, your wallet will have little to show for all your hard work!). You can read more about improvements and see examples beginning on the bottom of page 8 of IRS Publication 523. For a form to keep track of money you spend, print this Improvement Register.


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              Fixed or Adjustable Rate - It Depends!


              mortgage rate comparison chart 2013

              In 2013, the Types of Mortgages Acquired Shows the Trend...But Should You Follow Suit?

               Fixed or Adjustable Rate - IT DEPENDS! 94% of purchasers last year opted for a fixed-rate mortgage at some of the lowest rates in home buying history. Yet, some of them will pay more in interest than necessary, based on the time theyll own the home. For how long do you plan to own your home? Let the answer play a large role in your decision making between mortgage options. If a person only plans to be in the home a few years, the adjustable-rate can offer significant savings. Not only is the interest rate on the adjustable-rate lower than the fixed in the initial period, amortization on a lower interest rate amortizes faster than a higher interest rate. In the example shown below, a $200,000 mortgage for 30 years is compared using a 4.25% fixed-rate to a 3.25% 5/1 FHA adjustable rate. The first five years of the ARM generates a $113.47 a month savings which accumulates to $6,808.20. In addition, due to faster amortization on lower interest rate loans, the unpaid balance at the end of five years will be $3,001 lower on the ARM for a total savings of $9,801. Assuming the adjustable-rate mortgage was to escalate the maximum allowed at each period, the breakeven would occur in 8 years and 6 months. If a person were to sell the home prior to this point, the ARM would provide a lower cost of housing for the homeowner. When will your breakeven occur? Define your intents to make the best decision. You'll find a helpful calculator here, to compare financial outcomes dependent upon several variables. For some people, the uncertainty of how the interest rate may change is not acceptable. On the other hand, for the risk tolerant individual who may be more confident in financial matters or who may know when theyll be moving next, the ARM can be a smart choice. To make projections using your individual numbers, see the Adjustable Rate Comparison. rate comparison One Scenario - Ask, What Are the Variables in Your Decision on Rate?


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                Section 1031: How Exchanges May Help Your Real Estate Investments Grow

                example, sale and exchange table

                Your taxes may have been filed, but here's an opportunity for Real Estate Investors, to grow their proceeds through the Section 1031 exchange. Section 1031 exchange for rental and investment real estate, is a tool that allows investors to move the gain from one property to another without immediate income tax consequences. An instant benefit is to postpone the tax due which gives the investor a larger amount of proceeds to invest.

                In the example shown, the investor has 21% more proceeds to invest and grow over time than if he had paid the taxes due instead of exchanging. A legitimate long-term goal might be to make qualified exchanges from one property to another until the investor dies. The heirs would then receive a stepped-up basis on the property based on the market value at the time of the decedents death and possibly avoiding taxes altogether. There are specific requirements to be met in order for the exchange to qualify.

                For more information on exchanges, see IRS publication 544; the Sales and Exchanges explanations begin at the end of page 2. In addition to enlisting the services of a real estate professional familiar with investment property, seek the help of a Qualified Intermediary to facilitate the intricacies of the exchange.

                Is the Window Closing on Record Low Interest Rates?

                Window With interest rates lower than they've been in over 40 years, it may be difficult to think of a window of opportunity closing. Consider this - rates will only go up from here. It may be a slow rise, but a steady one (the rise of home prices illustrates the same trend). Zillow recently reported results from a nationwide study that home values are expected to appreciate by 4.5% through the end of the year.

                Coupled with Freddie Macs projection that rates are going up, the cost of housing for buyers by the end of the year will be higher than it is now. While the uncertainty of the future can stagnate some people, the fear of loss can be much more devastating when a person realizes that the amount they pay to live and enjoy a home could have been considerably lower had they acted when prices and mortgage rates were lower.

                The following example considers a $250,000 purchase today with an FHA mortgage compared to what it might be at the end of the year with a higher price and interest rate as discussed earlier. The net effect is that it will cost $191.87 more per month to live in the very same home if you wait. To see what the cost might be for your price range, use this Cost of Waiting to Buy spreadsheet.


                cost of waiting to buy


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                  Prepaid Interest - What is the Point?

                  Take note!

                  sticky note


                  Prepaid interest, sometimes called points, is generally tax deductible when a person pays them in connection with buying, building or improving their principal residence. When points are paid on a refinance, they are not a current deduction but have to be taken pro rata over the life of the mortgage.

                  For instance, if $3,000 in points were paid on refinancing a 30-year mortgage, a deduction of $100 per year is allowed. When the loan is paid off or replaced by refinancing again or the home is sold and the mortgage paid off from the proceeds, the balance of any un-deducted points may be taken in that tax year. Your tax professional needs to be made aware of any of these situations so that he or she can accurately reflect the deductions in your return.

                  Currently, the most common situation is homeowners may be refinancing their home for the second, third or even, fourth time. If there are points that have not been completely deducted, they need to be treated in the year of refinancing. For more information, see points in IRS Publication 936; there is a section on Refinancing in this publication. For advice considering your specific situation, contact your tax professional. Need to find one? Click here for additional information.

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