Monday, August 19, 2019




Invest in Equity Build-up

Equity build-up could be one of the biggest advantages to buying a home.  There are two distinct dynamics that take place to make this happen: each house payment applies an amount to reduce the mortgage owed and appreciation causes the value of the home to go up.
It is easy to make a projection based on the type of mortgage you get and your estimation of appreciation over the time you expect to own the home.  Even conservative estimates can produce impressive results.
Let's look at an example of a home with a $270,000 mortgage at 4.5% for 30 years and a total payment of $2,047.55 payment including principal, interest, taxes and insurance.  The average monthly principal reduction for the first year is $362.98. If you assume a 3% appreciation on the $300,000 home, the average monthly appreciation is $750 a month.
The total payment of $2,047.55 less $1,112.98 for principal reduction and appreciation makes the net monthly cost of housing, excluding tax benefits, $934.57.  If this hypothetical person was paying $2,500 in rent, it would cost them $1,565.43 more to rent than to own.  In the first year, it would cost them over $18,000 more to rent.
Together, the items in this example contribute over $1,100 to the equity in the home .  This is one of the reasons a home is considered forced savings.  By making your house payments and enjoying increases in value, the equity grows and the net cost of housing decreases by the same amount. 
In this same example, the $30,000 down payment grows to $133,991 in equity in seven years.  While this is equity build-up, the extraordinary growth is attributed to leverage.  Leverage is an investment principle involving the use of borrowed funds to control an asset.
To see what your net cost of housing and the effect of leverage will have on a home in your price range, see the Rent vs. Own.  If you have questions or need assistance, contact me at (256) 705-0733.

Monday, August 12, 2019

America Still Considers Real Estate the Best


35% of respondents, in a recent annual Gallup poll that dates back to 2002, identified real estate as the best long-term investment option compared to 27% who identified stocks.
The top choices included real estate, stocks, savings accounts and gold.  Even with the remarkable prices of the different U.S. stock indices recorded in 2019 through April and May, homes have the highest confidence in the minds of the respondents.
This seems to be based on the stability of the housing market and the expectation that home prices will continue to rise.  Homeowners build equity from both appreciation as well as reducing principal with each payment made. These same factors exist for investors of rental homes in predominantly owner-occupied neighborhoods.
Real estate has another dynamic working to produce favorable investment results due to leverage.  Leverage occurs when borrowed funds are used to control an asset.  When the borrowed funds are at a lower rate than the overall investment results, positive leverage occurs which can increase the yield from an all cash investment.
Gold and savings accounts must be funded with cash.  The maximum borrowed funds allowed for stocks is 50% and generally, at a rate higher than typical mortgage rates.
Homes are a particularly attractive investment because you can enjoy them personally by living in them.  The interest and property taxes are deductible and gains on the profit are excluded up $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly. 
Many people consider an investment in a home for a rental property an IDEAL investment: Income, Depreciation, Equity Build-up & Leverage.
If you have questions or are curious about the process, contact me at Bob@BobGifford.com or (256) 705-0733.

Monday, July 1, 2019

Building Equity


Owning a home is the first step to building equity.  Tenants build equity but not for themselves; they build it for the owners.
Equity is the difference in the value of the home and what is owed on the home.  There are two dynamics that cause this to grow: appreciation and principal reduction.
As the home increases in value, it is said to appreciate.  Various authorities will annualize an appreciation rate based on average sales prices from one year to the next.  Since appreciation is based on supply and demand as well as economic conditions, it will not be the same year after year. 
If you looked at a ten to twelve-year period, some would be higher than others and there may even be some individual years that it is flat or even declined.  For the most part, values tend to appreciate over time.
Most mortgages are amortized which means that a portion of the payment each month is applied to the principal in order to pay off the loan by the end of the term.  A $300,000 mortgage at 4.5% for 30 years has $395.06 applied to the principal with the first payment.  A slightly larger amount is applied to the principal each following month until the loan is paid with the 360th payment.
If additional principal payments are made, it will save interest, build equity faster and shorten the term of the mortgage.  Using the previous example, if an additional $250.00 principal contribution was made with each payment, it would only take 270 payments to retire the loan instead of 360.  It would save $69,305 in interest and shorten the mortgage by 7.5 years.
To see the dynamics of equity due to appreciation and principal reduction, look at the Rent vs. Own.  To see the effect of making additional principal contributions on your equity, look at the Equity Accelerator. 

Monday, June 24, 2019




Taxes and the Homeowner

Whether you're an owner now or expect to be one in the future, it is important to be familiar with the federal tax laws that affect homeownership.  Since personal income tax was enacted in 1913 with the 16th amendment, homes have had preferential treatment.
The mortgage interest deduction is based on up to $750,000 of acquisition debt used to buy, build or improve a principal residence.  In addition to the interest, the property taxes are deductible, limited to the new $10,000 limit on the aggregate of state and local taxes (SALT).  The taxpayer may also deduct interest and property taxes subject to limits on a second home.
Homeowners can decide each year whether to take itemized personal deductions or the allowable standard deduction which was significantly increased under the Tax Cuts and Jobs Act of 2017.
Single taxpayers may exclude up to $250,000 of capital gain on the sale of their home and up to $500,000 if married filing jointly.  They must have owned and lived in the home for at least two of the last five years.  For gains more than these amounts, a lower, long-term capital gains rate is paid rather than one's ordinary income tax rate.
Capital improvements made to a home will increase the basis and lower the gain.  Homeowners are probably familiar that large dollar expenses like roofs, appliances or major remodeling are capital improvements.  However, many lower dollar items may also be considered improvements if they materially add value or extend the life of the property or adapts a portion of the home to a new use. 
Homeowners are urged to keep records of money they spend on the home that they own over the years so that their tax professional can decide at the time of sale what they must report to IRS.
You can download a helpful Homeowners Tax Guide that explains in more detail and includes a worksheet to keep track of the basis of your home and capital improvements.

 

Monday, May 13, 2019

Comfort Systems

Heating and air-conditioning are frequently referred to as the "comfort systems."  If one has gone out in the dead of winter or the heat of summer, lack of comfort becomes a primary concern.  Regular maintenance with a HVAC checklist is something that homeowners can do themselves to ensure that the units operate properly.
Periodically
  • Change your filter every 90 days; every 30 days if you have shedding pets. 
  • Maintain at least two feet of clearance around outdoor air conditioning units and heat pumps.
  • Don't allow leaves, grass clippings, lint or other things to block circulation of coils.
  • Inspect insulation on refrigerant lines leading into house monthly and replace if missing or damaged.
Annually, in spring
  • Confirm that outdoor air conditioning units and heat pumps are on level pads.
  • Pour bleach in the air conditioner's condensation drain to clear mold and algae which can cause a clog.
  • Avoid closing more than 20% of a home's registers to keep from overworking the system.
  • Replace the battery in the home's carbon monoxide detector.

While using this list will provide some things that may impede the comfort system's proper performance, it is recommended that you have your units serviced annually by a licensed contractor.  Furnaces should also be inspected for carbon monoxide leaks. Preventative maintenance may help avoid costly repairs.

Wednesday, April 24, 2019

One Loan for Purchase & Renovations
The FNMA Home Style conventional mortgage allows a buyer to purchase a home that needs renovations and include them in the financing. This facilitates the purchase of the home and the renovations in one loan rather than getting a separate second mortgage or home equity line of credit.

Monday, April 15, 2019

Get Rid of Things You Don't Need


Periodically, you need to rid yourself of things that are taking up you time and space to make room for more of what you like and want.
There's a frequently quoted suggestion that if you haven't used something for two years, maybe it isn't essential in your life. 
If you have books you'll never read again, give them to someone who will.  If you have a deviled egg plate that hasn't been used since the year your Aunt Phoebe gave it to you, it's out of there.  Periodically, go through every closet, drawer, cabinet, room and storage area to get rid of the things that are just taking up space in your home and your life.
Every item receives the decision to keep or get rid of.  Consider these questions as you judge each item:
  • When was the last time you used it?
  • Do you believe you'll use it again?
  • Is there a sentimental reason to keep it?
You have four options for the things that you're not going to keep. 
  1. Give it to someone who needs it or will appreciate it
  2. Sell it in a garage sale or on Craig's List.
  3. Donate it to a charity and receive a tax deduction
  4. Discard it to the trash.
Start with your closet.  If you haven't worn something in five years, get rid of it.  Then, go through the things again and if you haven't worn it in two years, ask yourself the real probability that you'll wear it again.
Another way to do it is to move it from your active closet to another closet.  If a year goes by in the other closet, the next time you go through this exercise, those clothes are on their way out.
If the items taking up space are financial records and receipts, the solution may be to scan them and store them in the cloud.  There are plenty of sites that will offer you several gigabytes of free space and it may cost as little as $10 a month for 100 GB at Dropbox, to get the additional space you need.  It will certainly be cheaper than the mini-storage building.