Appreciation and tax savings are legitimate contributors to an overall rate of return on 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 means 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 homes 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. Call if you’d like to talk about what kind of rental opportunities are available.
A good neighbor might be characterized as someone who’ll look after your home when you’re out of town by picking up your mail and watering your plants. You’d most likely reciprocate for anyone who’d be so generous toward you.
In some cases, you might only be able to name one or two of your neighbors who would step up to that level of service. Wouldn’t it be nice if more people on your street would be happy to make that offer?
The solution may just start with being a better neighbor first. The following suggestions go a long way to improving your neighborhood and making new friends at the same time.
- Meet your neighbors and exchange phone numbers and email addresses. Agree with each other that you’ll let them know if you see something strange going on at their home.
- Slow down when driving through the neighborhood; it will make it safer and everyone will appreciate it.
- Control your dog: keep it on a leash; pick up after it; don’t let it bark too much.
- Don’t park in front of your neighbor’s home.
- Notify your immediate neighbors when you’re having remodeling done and ask them to let you know if any of the contractors cause damage to their property.
- Let your neighbors know when you’re having a party and that there will be more cars on the street than usual.
- Maintain your home and yard so that it adds to the beauty of the neighborhood.
- Put your garbage out for collection on the correct day and bring the containers back in promptly.
In reality, it is fairly obvious; you just have to think of the things that you’d want from your neighbors. Be friendly; don’t be noisy; offer a helping hand when available and respect each other’s boundaries. Having a sense of community and that you all share the neighborhood can be underlying principles that will guide your behavior.
A good neighbor would be aware of suspicious activity and would call their neighbors and the police if warranted. This might be something you can discuss with your neighbors. Click here for a template to record your immediate neighbor’s contact information and keep readily available if needed.
Fresh holiday trees are beautiful, smell great and really add to the spirit of the season. Following some proven safety tips might help you avoid a disaster and keep the Grinch away.
- Select a tree with fresh green needles that don’t fall off when touched or when the trunk is tapped on the ground.
- When trees are cut too early, they have a greater risk of drying out and can become more dangerous especially with electrical lights.
- Cut 1” to 2” off the base of the tree before placing it in the stand to facilitate it drawing water to the limbs and quills.
- Trees require water similar to cut flowers or they’ll dry out. Tree stands should hold at least one gallon of water and it should be checked every day. A six foot tree could use up to a gallon of water every two days.
- Position the tree a minimum of three feet or further from heat source like fireplaces, space heaters, heat vents or candles. Do not allow the tree to block an exit.
- Lights should be labeled from an independent testing laboratory and intended for indoor use.
- Follow manufacturer’s recommendations for how many strings of lights can be connected to each other.
- Turn off all tree lights when you go to bed or leave the home.
- If the tree becomes dry and begins shedding needles, it can be a fire hazard and should be removed from the home. Even if the holidays are not over, it is not worth the risk to keep it in your home.
- After the gifts have been opened, don’t return the paper and boxes under the tree.
- Remove the tree as soon as possible after the holidays.
- Trees should never be burned in a fireplace. The trees will burn very hot and quickly when they are dry and could spread outside of the fireplace which could cause an unfriendly fire.
- Check to see if there is a recycling program for holiday trees in your community.
The National Fire Protection Association reports that “one of every three home Christmas tree fires are caused by electrical failures and a heat source too close to the tree causes roughly one in every six of the fires.”
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.
IRS requires that expenses must actually be paid in the year that a deduction is to be taken.
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?”
With fixed rate mortgages as low as they are, most purchasers or owners wanting to refinance might not even consider an adjustable rate loan. The determining factor should be how long the person plans to be in the home and which mortgage will provide the cheapest cost of housing.
For instance, if you compare a $300,000, 30 year term mortgage with a 4.125% rate on the fixed and a 3.25% on the 5/1 adjustable, the breakeven point would be almost seven years assuming the rates adjusted the maximum that they could in each year.
Therefore, if a person is going to stay in the house less than 7 years, the ARM would provide the cheapest cost of housing. This example shows that at the end of five years, the ARM would generate almost $13,000 savings over the fixed-rate.
On the other hand, this could be a good time for homeowners with an existing adjustable rate mortgage to consider refinancing into a fixed-rate mortgage. The longer that they intend to stay in their home, the more advantageous it might be for them to convert their mortgage to lock-in their payment and fix their housing costs.
A trusted mortgage professional can analyze the alternatives to provide you with the information necessary to make a good decision. You can try the Adjustable Rate Comparison with your own numbers to see the effect.
A homeowner’s tax saving benefit is generally realized when they file their federal income tax return after the money has been spent for the interest and property taxes. Some people look forward to the refund as a means of forced savings but some people need to realize the savings during the year.
It is possible to adjust the deductions being withheld from the homeowner’s salary so they realize the benefit of the savings prior to filing their tax returns in the form of more money in their pay checks. Employees would talk to their employers about increasing their deductions stated on their W-4 form.
By increasing the exemptions or deductions, less is taken out of the check and the employee will receive more in each pay check. If a person over-estimates their exemptions and therefore, underpays their income tax, they might incur interest and would have additional tax to pay when they filed their tax return.
Buyers considering this strategy should seek tax advice and discuss it with their human relations department at work. Additional information is available on the Internal Revenue Service website about Completing Form w-4 and Worksheets.
A list of talking points can be very valuable to guide the conversation with an agent that will lead to a decision to have him or her represent you in the sale of your home. If you haven’t been through the process before or it has been a while, the answers to these questions can reveal things about the experience and where-with-all of your candidate.
Even if you only intend to interview one agent and maybe they are a trusted friend, it is appropriate to understand how different issues will be handled. Professionals should not feel challenged to discuss these important concerns.
1. Tell me about your experience and training.
2. Do you work real estate full-time?
3. Are you a REALTOR® and a member of MLS?
4. What is the average price of the homes you have sold and how many did you sell last year?
5. Which neighborhoods do you primarily work?
6. How many homes have you sold in my neighborhood?
7. What is your list price to sales price ratio?
8. How many buyers and sellers are you currently working with?
9. Tell me about the positives and negatives of my home?
10. Describe your marketing plan for my home and if you will use outside professionals.
11. Specifically address Internet exposure, open houses and showings.
12. Describe how you’ll keep me informed all along the way.
13. Will I work directly with you or with team members?
14. Can you provide me with three recent references?
You might have noticed that price was not in the list of talking points. The seller sets the price but the market and the buyer determine the value. The agent can advise you about the proper range that will insure activity and ultimately affect your final proceeds. The advice should be based on facts that are available to all agents as well as the prospective buyers and the appraisers.
The decision to list a home with a particular agent and company should never be based on the listing price suggested by the prospective agent.
Is the stock market keeping you up at night? Are you consuming more antacids than ever before? Are the ups and downs causing more stress than you want or need? There is a simple alternative in rental real estate.
Single family homes for rental purposes offer an excellent rate of return in an investment that most people understand better than other investments. The concept is simple: stay with predominantly owner-occupied homes in a slightly below average price range. In most areas, tenants are easy to find and they’ll usually stay two to three years or more.
For the person who doesn’t want to be bothered with calls from tenants, professional management is available and commonly won’t dramatically affect the rate of return. Managers can achieve economies of scale that individuals can’t due to managing multiple properties and having good connections with the best workmen.
Unlike most commercial property, single family homes are much more liquid because of the higher demand for residential property. Single family homes offer the investor the opportunity to borrow high loan-to-value mortgages at fixed interest rates, for long periods of time on appreciating assets with tax advantages while providing the investor a higher than normal level of control.
Spend an hour investigating the benefits and you might sleep better at night, eat less antacids and find yourself more mellow than you’ve been in years.
If you invest in a savings account, you’ll make less than 1% and would have to pay income tax on the earnings. On the other hand, contribute something extra to your house payment and you’ll earn at the mortgage interest rate which is certain to be more than you are earning in the bank.
Making additional principal contributions on your mortgage will save interest, build equity and shorten the term. An extra $100 a month in the example shown will save thousands in interest and shorten the term of the mortgage as well.
Reducing your cost of housing is another way to improve the investment in your home. Becoming debt free is a worthy goal that is achieved with discipline and good decisions. Suggestions like this are part of my commitment to help people be better homeowners when they buy, sell and all the years in between.
Check out what would happen if you were to make additional payments on your mortgage.
Homeowners can raise the basis or cost in their home by money spent on capital improvements. The benefit is that it will lower their gain and may save them taxes when they sell their home.
Improvements must add value to your home, prolong its useful life or adapt it to new uses. Repairs are routine in nature to maintain the value and keep the property in an ordinary, operating condition.
Additions of decks, pools, fences and landscaping add value to a home as well as new floor covering, counter-tops and other updates. Replacing a roof, appliances or heating and cooling systems would be considered to extend the useful life of the home. Completing an unfinished basement or converting a garage to living space are common examples of adapting a portion of the home to a new use.
Other items that can raise the basis in your home are special assessments for local improvements like sidewalks or curbs and money spent to restore damage from casualty losses not covered by insurance.
Here’s a simple idea that could save you money years from now.
Every time you spend money on your home other than the house payment and the utilities, put the receipt or canceled check in an envelope labeled “Home Improvements.” Regardless of whether you know if the money would be classified as maintenance or improvements, the receipt or cancelled check goes in the envelope.
Years from now, when you’ve sold your home and you need to report the gain on the property, you or your accountant can go through the envelope and determine which of the expenditures will be adjustments to your basis.
Some people disregard this idea because of the generous exclusion allowed on principal residences. At the unknown point in the future when you sell your home, circumstances may have changed and the proof of these expenditures will be valuable. The tax laws could lower the exclusion amount or eliminate it altogether. Your marital status may change because of death or divorce. The market value of your home may skyrocket.
Since the future is unknown, it is better to keep track of the improvements as they are made and how much is spent on them. Download an Improvement Register and examples or read more in Publication 523 on Increases to Basis.