Start Early and Live Happily Ever-after


As storybooks go, the character is introduced, they meet their love interest, a villain thwarts their intentions, true love overcomes, they marry and live happily ever-after. It’s a very familiar formula.

Similarly, there is a formula that couples follow in real life. They go to college, get a good job, rent a home, fall in love, get married and buy a starter home. They start a family, move into a larger home, save for their children’s education, start planning for their retirement and if they live within their means, they invest their surplus funds.

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An alternative to this might be to start investing in rental homes early in their adult life before their standard of living becomes so expensive that they don’t feel like they have the money to purchase rentals. There are infinite possibilities but let’s say a single person, after getting a good job, buys a small three or four-bedroom home with an owner-occupied, minimum down payment. They move into the home and possibly, rent out the bedrooms to other singles who need a place to live.

At some point, they decide to buy another home to live in with a minimum down payment and either rent out their bedroom in the first home or rent the whole home to a tenant. And they repeat the process again with the second home.

This could continue until they acquired several homes. Let’s say, that in the meantime, they have met their love interest, decide to get married and together, they buy a starter home for them to live in.

This concept advances the investment in rental homes from the latter part of their lives to the early part of their life. The early investment gives them more time for appreciation and wealth accumulation. A simple principle of investing is that sooner is better than later. By delaying gratification to own your “dream home” early, a person may be able to accumulate more net worth in the same period of time.

Buying a property initially as owner-occupied permits a lower down payment of 3.5% compared to a typical down payment for non-owner-occupied properties is 20%. By using more borrowed funds, leverage can increase the yield on the investment.

It may be too late for some people reading this article to adopt this strategy but if they have kids in college, it may be something for them to consider.

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It’s Not Just the Tax Benefits


When the standard deduction for married couples filing jointly was increased from $12,700 to $24,000 for 2018, there was some speculation that the bloom was off the rose of homeownership. The thought was that if the tax benefits from being able to deduct the property taxes and interest was less than the standard deduction, that maybe, the buyer would be better off continuing to rent.

With mortgage rates as low as they have been for the past eight years, payments have been lower and so has the amount interest that was paid. This and the fact that sales and local taxes, which include property taxes, are limited to $10,000 a year on the Itemized Deduction form have made it harder to reach the increased standard deduction.

The reality of the situation is tax benefits are only one of the components that make a home an excellent investment and it probably contributes the least of the top three benefits. Principal reduction and appreciation build an owner’s equity in an automatic way that is like a forced savings account.

In today’s market, it is common for the total house payment to be lower than the rent a first-time home buyer is currently paying. As a homeowner, the buyer would have additional expenses like maintenance and possibly, a HOA.

To illustrate the net effect, let’s look at a purchase price of $275,000 with 3.5% down payment on a 4.75% 30-year FHA loan. We’ll assume the home appreciates at 3% annually and the buyer is currently paying $2,000 a month rent.

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The total payment is $2,115 including principal, interest, property taxes, property and mortgage insurance. However, when you consider the monthly principal reduction, appreciation, maintenance and HOA, the net cost of housing is $1,181. It costs $819 more a month to rent than to own. In a year’s time, it would cost $9,831 more to rent than to own which is more than the down payment required to buy the home.

In seven-years, the $9,625 down payment would grow to over $58,000 in equity. The equity build-up far exceeds the tax benefits which some people would have as an additional incentive. Use this Rent vs. Own to see what the net cost of housing would be using a home in your price range or call me at (503) 289-4970 and I’ll do it for you.

Experts Suspect Buyers to Dominate the Housing Market In 2019


Up Your Fashion Game

The news is good for potential Denver Metro residents. Recent Real Estate data and housing market trends predict that there will be a flood of lower housing prices in the market come 2019. Chief Economist of Zillow, Svenja Gudell, highlights the cause of these lower prices: “As the number of homes for sale increases and home value appreciation slows, we expect the market to meaningfully swing in favor of buyers within the next two to three years”.

 

This is highly apparent in Denver as housing prices are suspected to fall an estimated 30% by 2019, according to data conducted by Location, Inc. The local company out of Denver collected data from more than 200 variables in Denver, Boulder, Fort Collins and Greeley. The data was conclusive in deciding that the housing market is estimated to shift from a sellers to a buyers market.

 

Not only is this data…

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HELOCs Becoming More Expensive


In September, the Federal Reserve raised interest rates for the third time in 2018 and they’re expected to go up one more time this year and three times next year. If you have a Home Equity Line of Credit, HELOC, you’re paying more to use that money and it is going to become more expensive.

It may make sense to refinance your home and consolidate the balance of your HELOC to lock in a lower mortgage rate. Most lenders require that the combination of these loans should not exceed 80% of the home’s fair market value and that you have good credit and adequate income to support the payment.

A HELOC is a first or second mortgage that allows the borrower to withdraw money as needed, up to the line of credit provided by the lender. A draw period is established where the borrower is only required to pay interest.

Since all HELOC loans are variable rate mortgages, during periods of rising rates, the cost of the funds increase. However, unlike adjustable rate mortgages that have specified adjustment periods and caps, a HELOC adjusts when the prime interest changes.

The formula for determining available funds on a refinance are to take 80% of the fair market value, which will probably have to be verified by appraisal, less the existing first mortgage and the costs to refinance. The balance would need to cover the cost of replacing the HELOC. Any remaining balance may be available for cash to be taken out.

Now is a great time for a mortgage review.In many cases, the equity you have in your home may allow you to eliminate mortgage insurance and substantially lower your monthly payment.As with all tax matters, always consult with a tax professional before making any decisions.Call us at (503) 289-4970 for a recommendation of a trusted mortgage professional.

Fast Track Rental Property


FHA allows owner-occupants to purchase up to a four-unit property with a minimum 3.5% down payment. The rent collected on three units could be used to make the payment and the owners’ pro-rata share would be less than ¼ of the payment itself.

The owner-occupied unit would be considered their principal residence. The other three units are treated as rental property and eligible for cost recovery, a non-cash deduction plus all the normal business expenses. The rental income of the three remaining units is calculated as income and assists the buyer in qualifying.

A homeowner could buy a four-unit, live in one for two years, buy another four-unit with a minimum down payment, move into one unit, rent the other three as well as the previous unit in the first property. Then, after another two years, repeat the same process over again.

The fifth year, the homeowner/investor would have a total of 11 rental units plus the one that they are occupying. An acquisition strategy like this might be difficult for a family with children and a single person or couple might find it easier to move more frequently.

As the equity increases in these properties, due to appreciation and amortization, the money could be pulled out through refinancing to purchase additional income properties. Another objective might be to pay the mortgage off as soon as possible and any cash flow after tax could be applied directly to the principal.

FHA has a nationwide mortgage limit for a four-unit of $521,250 but some high-cost areas have been designated with increased limits. There are also loan programs for two and three-unit properties with limits of $347,000 and $419,425 with similar exceptions for high-cost areas.

The low mortgage rate and minimal down payments for owner-occupied FHA mortgages makes this strategy attractive because it gives investors an opportunity to highly leverage their investment. Most non-owner-occupied (investor) mortgages would require 20-25% down payment and have a slightly higher interest rate than for an owner-occupant.

To learn more about this opportunity, call (503) 289-4970 and we can give you information on specifics in a variety of areas.

Land of the Free: Don’t let bad credit stop you


Ask Carolyn Warren

As we celebrate living in the Land of the Free and Home of the Brave, it occurred to me that being strapped with bad credit is the opposite of freedom. When you can’t enjoy life because you’ve got creditors hounding you to pay bills, that is not freedom. When you can’t get a decent interest rate on a car loan or decent insurance premiums because of a low credit score, that is not fun.

I urge you to take control of your credit and finances. No matter where you are today, you can make a plan for your future. It might not happen overnight, it might take some self-discipline, and some work — but that is what our legacy is all about.

Our forefathers and foremothers — all of them, not matter where they came from, whether rich or poor — wanted to be free. Let’s grab hold of that…

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Credit News for U.S. Veterans!


Ask Carolyn Warren

New credit leniency and protections for our highly respected U.S. Veterans have been signed into law. Here are the important points to know:

  • Medical debts/collections incurred cannot be reported to a veteran’s credit report for one full year from the time the medical service was provided.
  • If any medical debt has been reported as delinquent, a collection, or a charge-off, it must be removed from the veterans credit report once it has been satisfied.
  • If a medical debt is in the process of being paid by the VA, and the Veteran provides the proper documentation to the credit bureaus, it must be removed from their credit report.
  • Veterans on active duty are to receive free credit monitoring that will alert them to any material changes on their credit reports.

Thanks to the Economic Growth, Regulatory Relief and Consumer Protection Act initiated by Senator Mike Crapo (R-ID) and signed…

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