I came across this good article which has a practical example on how Real Estate investment can be an effective arsenal for retirement. So thought of sharing to you all without any changes.
Banking on real estate to fuel your retirement
Be smart about where and how you invest
By Bernice Ross – Inman News
If you are searching for a way to build a nest egg for your retirement or to put aside enough money to send your kids to college, one of your best possible strategies is to invest in real estate and to hold that property for an extended period of time.
I once remember reading that 90 percent of the fortunes made in this country were based upon owning real estate. Given the market downturn over the last few years, many people took serious losses in the value of their real estate holdings. Nevertheless, real estate investment is still one of the soundest financial moves that you can make, provided you are smart about where and how you invest.
This is especially true now due to the low prices and the low interest rates. Moreover, property values generally keep pace with inflation. This also means that you are paying off today’s purchase with tomorrow’s inflated dollar.
The people who build major fortunes in real estate tend to be contrarians. They buy when others are selling and sell when others are buying. They also avoid flipping, because, as one investor put it, “Flipping is nothing more than a Ponzi scheme.” Instead, they consistently build their real estate portfolio by buying and holding their investment properties.
While the value of your property may go up and down, very few properties ever go to zero value. This means that if you pay off your property in 15 years, you will have an asset that has cash value that also functions much like an annuity. Here’s a real-life scenario to illustrate this point:
A buyer who wanted to establish additional cash flow for retirement purchased a duplex for $245,000. The buyer put 20 percent down. The property required minor repairs and ran about $700 per month negative. (Under normal circumstances, this property would have been about $100 per month negative if the client could have taken the depreciation and other allowable deductions. He was unable to do so due to the alternative minimum tax requirements.) The client elected a 15-year loan to pay off the property as quickly as possible. That was 16 years ago. Here is where he is today:
1. Despite the real estate downturn, the property is currently worth $550,000 (i.e., it has more than doubled in value over the last 15 years). Even though the property was under rent control, the owner was able to increase the rents sufficiently to break even after five years.
2. Current operating expenses are about $12,000 per year (this includes reserves for repairs, taxes, vacancies and other operating expenses).
3. Gross income (the amount earned prior to expenses) is currently $36,000 per year with net income at $24,000 per year.
4. To sum up, the property is now free and clear. The buyer has recuperated all of his down payment and has an asset worth $550,000 that spins off $24,000 per year in net income.
Compared to other investments, a CD at 2 percent would require an investment of $1.2 million to generate an income of $24,000 per year. A stock investment that yielded a 6 percent return of $24,000 per year would have required a $400,000 investment. In this case, the buyer’s initial investment was only $49,000 plus closing costs.
The buyer is approaching retirement age and would like to maximize the cash he has tied up in his real estate investment. He could sell the property and pay the capital gains tax. A different alternative is to do a 1031 exchange for a single-family residence that he rents out for the first 12-24 months he owns the property. He can then move into the property and live in it as his primary residence. When he sells, he and his wife could take $500,000 of the money from the sale and pay capital gains only on the amount above $500,000.
What are the downsides? Tenants can be a nightmare, and a vacant or damaged property can quickly eat up cash reserves. Furthermore, like any other investment, real estate investments can go down in value. It is also unclear what the current tax consequences will be in terms of capital gains, dividends and alternative minimum tax requirements.
In spite of these issues, the 1031 exchange provisions are an important plus. Because owners can exchange up (i.e., buy a more expensive property), they can continue to grow their wealth more quickly because they are able to defer their taxes until they cash out. As a result, real estate may become an even more attractive vehicle for increasing wealth in the future as well as providing a powerful hedge against inflation.
The question is how can one find, buy and rent an investment property? See Part 2 of this series to learn more about the secrets of “Hold.”
Riverstone
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Bridgeland
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Real Estate and Retirement…
Getting a gift or loan for your Down Payment – Good or Bad?
This is a well conversed and debated topic these days due to the fact that many home buyers are scrambling to find money for their down payment. Housing market is really attractive with low mortgage rates but on the other hand home prices are slowly creeping up to pre-recession level in many parts of the country. So many consumers are now jumping in to the bandwagon in buying their new home taking advantage of low rates before prices go up way high. But many realize that they don’t have a lot savings to pay their down payment. Some decides to get help from their friends and families whereas others withdraw from credit card. That’s where this important question pop’s up, is it good to get gift or loan from friends?
I was asked similar question from my friends few weeks ago who was approached by this friend asking for money as gift to pay his down payment. Also yesterday, one of my client told me that he is planning to do balance transfer from a 0% credit card to pay his down payment. I told him that’s its really going to be an issue and it became one as lender didn’t accept that fund. But since he already had enough money to cover his down payment they didn’t consider that amount and he is moving forward with the closing. Anyway, let’s see some pro’s and cons on these two different avenues of getting last minute funds for down payment.
Gift Money
It is not a bad idea to get help from friends and families to pay for your down payment. Nobody will say we cannot take that money but you and your donor should be open for some scrutiny with recent guidelines changes. Lender might want to have a gift statement signed by your donor that the money is gifted to you. They might even want to see your donor’s bank statement where it came from before he donated to you. There is a reason behind it.
Lenders are basically operating under the idea that if your donor actually earned or otherwise owns (rather than borrowed) the cash to make you a gift, then the chances that you’ll be subjected to repayment pressures that disrupt your ability to make your mortgage payment are minimal. To ensure this is the case, lenders ask to see where your donor got the cash — if from the donor’s own accounts, they want the account statement. Not only that, if the money came from a relatively recent deposit to the donor’s account, they might even ask to see documentation of where the funds for that deposit came from (e.g., a paycheck stub, etc.).
Lenders are more cautious these days to cover their base to make sure they follow the guidelines of Fed agencies like Fannie Mae or Freddie Mac to whom they will be selling their loans. They have to adhere to their rules and guidelines if they need to sell the loans to them. That’s why they tighten every hole and make sure the loan is good.
As per tax implications on the gift received, you don’t have to pay any taxes. Gifts are not considered income if comes from the right source and no taxes to be paid by you. Their might be tax implications for the Donor depending on how much was donated. Consult your CPA or tax professional for more details.
Loaned Money
People do weird things when they are in the panic mode. First of all, you should never open any new debt account when you started your loan process until the home closes. It is bad idea. Some lender even run credit report few days before the closing for the underwriters to approve the loan. The reason, it will changes your credit score, your debt-to-income ratio and the reserve cash that you’ve shown as a cushion to make sure you’ll be able to make your mortgage payment even if you have a rough month or so.
It doesn’t mean that you cannot get loan money from your friend or families or even credit card for that matter. Just need to be aware that new debt payment adding to your new mortgage payment goes over the 36% of debt-to-Income ratio. If you are under the limit, you should be alright but you should give proper documentation regarding your loan and payment details to your lender. This loan will also have consequences in your income tax return and you need to show that properly and cannot claim the interest paid. Talk to your CPA or tax professional.
What’s the work around?
If there is a problem, there is always a solution. First, you can get your donation few months before you start your loan processing atleast 2 months in advance. If you are building a new home, plan accordingly and get the donation from your donor 2-3 months in advance to your account. Lender usually don’t ask for details about gift to you account if its more than 2 months. It becomes your money. Also if you getting a loan from friend, get it in advance and have a payment schedule attached to make sure it doesn’t hinder your expected mortgage payment. That way you are prepared for your new monthly payment.
I know it is not easy to save up for down payment in this economic conditions. When you decide to save up and wait for it to grow, rates might go up. It is like catch 22 and we cannot do anything about it. It depends on individual how they want to take the situation and go with their home purchase. I always suggest my clients to don’t time the market, just start planning and start saving for you new home and when the rates are low when you are ready it’s your blessing.
Again, DO NOT OPEN ANY DEBT ACCOUNT WHILE YOUR LOAN IS UNDER PROCESSING.
How to choose a right handyman for the job?
I get an average 5 calls a week from my clients asking for referrals to service people or Handyman’s. I usually give out from the list of personnel I have for every job which I either used them myself in the past or got their name referred by other clients. If I refer people for a service, I usually send few with my personal comments and ask them call and find the right person depending on the cost and job accordingly. I also try to get feedback about their service from the clients afterwards and try to weed out bad ones in the list and add new ones. That’s how I have used many handyman’s in the past either by taking a chance trying them out first time to judge their capability on the job and decide to keep them in my list to refer to clients.
So my question to you all, How do you choose a right Handyman for the right job? It may be easy nowadays to go to craigslist.com or angielist.com to find an handyman to do any job. But how do you know whether they are really qualified and capable to do the job they say can do it. Let me share few hints which I look out in a service person/handy man depending on the job.
First of all, no handyman is made equal. They are all different depending on the job they do, amount they charge and what they say they can do. Don’t underestimate or overestimate an Handyman by just how much they charge. A right man knows how much is worth for his job and at the same time a landlord/homeowner should know how much a job usually could cost. If a handyman calls himself as jack of all arts, they may be but its a very rare commodity. As they say, it is too good to be true. Don’t hesitate to doubt them and don’t waste all your money. Good idea, try them out for small jobs and make your decision accordingly. I usually differentiate handyman’s two types, Investor Handyman and Homeowner Handyman.
Investor Handyman
An Investor handyman usually works with flippers or real estate investors who usually have to do fix lot of things in a property which they bought and need to go back to the market. They are also called as rehab handyman’s. They work themselves in the field with other helpers to get the job done. There is also another type, they are called rehab contractors who hires subcontractors or handyman’s to do the job. If you are an investor looking for a handyman, it may be good idea to give the job to a contractor and forget about it. But first thing, he won’t save you money because he has to put his profit on top of paying those handyman’s doing the job which will be always expensive. It may cost you more to hire them compared to hire handyman’s separately to do each job. For Investor’s, it is important to limit the expense to get some ROI on your investment. Think about it.
Many Investor handyman’s know that the house fixed by them might be a rental property or property which needs to go back to the market. They suggest you to NOT to spend too much on fixing everything with every expensive part to make it look like your own house. They like to do a good job, inexpensive way to save you money so they can be called back again. They also like to fix all problems themselves if they are related instead of giving to another handyman. If you feel they are capable, go with them otherwise check them out first and make your call. You may also be able to learn few things from them like how to fix few things or buy cheaper/used parts around town. Keep your eye and ears open.
Homeowners Handyman
These type of handyman’s are specialized in their job and always like to do a good job by fixing to make it perfect. They also like to charge little bit more as they won’t get called back again by the homeowner. If they are lucky, they might get referrals from the Home owner. If they cannot fix it, they usually tell you and refer you to another person to get it done. They also like to use parts which are good quality and not used part to make the Homeowner feel good about it. They take pride in their job and don’t like to do for cheap.
Depending on your preference you can either settle for better quality provided by homeowner handyman or reasonable quality for less money delivered by Investors Handyman. If don’t want to bother with it, you can always call me and I can send the right list of handyman’s for you to choose avoiding confusion in your decision making process. I know it is always a tough process and I am happy to help you.
Texas ranks No.2 among Top 10 States for Technology
In July 2012, we were shared with the happy news that Texas Tops as No.1 on the list on Top 10 States for Business. Now this news about Texas going to Top 2 spot on technology surpassing California which used to be breeding ground for any start ups is really another big milestone.
Texas ranked 4th position in both years 2010 and 2011 and now stepping up a notch to get to Top 2 position as Newyork getting to No.1 knocking off California to 3rd position as per CNBC.
How Texas made it?
An influx in medical research funding and an increase in high-tech businesses helped boost the Lone Star State to the number two spot this year. Texas, home to companies including Dell, Texas Instruments and AT&T, came in second though behind California as the most-connected state and the number of awarded patents. The state’s capital, Austin, has also gained traction as one of the start-up hubs of the nation.
What are the criteria’s?
An environment for innovation is crucial to becoming a top state for business but the right technological infrastructure must also be in place to support and attract businesses. As part of our annual study, America’s Top States for Business, we grade states on several criteria in this important category of Technology & Innovation.
States were evaluated on their support for innovation, the number of patents that were issued to their residents, deployment of broadband services and the number of high-tech businesses that were formed.
Also considered was how much each state received in federal health and science research grants, which tend to spawn private-sector applications.
All of the states ranked in the top ten in 2012 are at the cutting edge of ingenuity and the road to a more connected, yet wireless, world.
It is always good to hear our state in the news which is reassuring that its heading the right path which is good for the residents to grow and contribute to the growth of the state overall. It is going to help real estate as well by bringing more jobs and more people to our state. To see the full list of other top states, click here.
Source: CNBC
Asking price are rising faster – Is it early signs of trend change in Housing Market?
Few weeks ago, I wrote a blog Texas Real Estate arena is changing towards seller’s from buyer’s market a year or two ago. It is a good sign and welcome one for Real Estate which was in deep trouble few years ago and everyone thought it will ever revive back. But at the same time it is a concern for buyers who are just starting to coming to the market. Too much price increase might also shoot back at ya and can slow down again depending on the economic developments. Similar price change seems to happening the housing market all over the nation according to the Trulia’s recent Price monitor and report.
In October, asking prices rose 0.7% month-over-month, for a 2.9% year-over-year increase – the biggest yearly gain in the Trulia Price Monitor to date. More than two thirds of large metros – 69 out of 100 – had year-over-year price increases. The month-over-month and quarter-over-quarter price increases are larger when foreclosures are included than when they’re excluded – which means foreclosure prices are now rising faster than prices on non-distressed homes.
|
October 2012 Trulia Price Monitor Summary |
|||
|
% change in asking prices |
# of 100 largest metros with asking-price increases |
% change in asking prices, excluding foreclosures |
|
| Month-over-month, seasonally adjusted |
0.7% |
(not reported) |
0.5% |
| Quarter-over-quarter, seasonally adjusted |
1.8% |
76 |
1.4% |
| Year-over-year |
2.9% |
69 |
3.6% |
Do you want to know how does the market now compare to 4 years ago when Obama took his first time? Here is the answer,
Home prices at the end of 2012 should be 1.1% below the level when he took office in January 2009. Here’s why: according to the latest Case-Shiller data, sales prices fell 3.3% between January 2009 and August 2012. Looking forward, the Trulia Price Monitor shows that sales prices should rise another 2.3% from August to December because asking prices rose by that amount from June to October and tend to lead sales prices by two months. Altogether, we expect the overall change in housing prices from January 2009 to the end of Obama’s term to be -1.1%.
As per the map price change map above, it clearly shows the Texas is in green with a moderate price change from 2-2.5% proving the point again underlined in Texas Real Estate Housing Report I posted few weeks again in my blog. This price change may cause little worry but don’t. It is just few signs of improvement in the Real estate arena which is positive one and hope it continues to improve and help the economic growth to move forward.To read the full report from Trulia, click here.
