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Depending on the Price, You’re Going to Need Advice

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Depending on the Price, You’re Going to Need Advice

 

Depending on the Price, You’re Going to Need Advice

To understand today’s complex real estate market, it is critical to have a local, trusted advisor on your side – for more reasons than you may think.

In real estate today, there are essentially three different price points in the market: the starter-home market, the middle-home market, and the premium or luxury market. Each one is unique, and depending on the city, the price point in these categories will vary. For example, a starter or lower-end home in San Francisco, California is much more expensive than almost any other part of the country. Let’s explore what you need to know about each of these tiers.

Starter-Home Market: This market varies by price, and these homes are typically purchased by first-time home buyers or investors looking to flip them for a profit. Across the country, homes in this space currently have less than 6 months of inventory for sale. That means there aren’t enough homes on the lower end of the market for the number of people who want to buy them. A low supply like this generally increases competition, drives bidding wars, and sets up an environment where homes sell above the listing price. According to data from the National Association of Realtors (NAR) on realtor.com,

“The desire for affordability continues to push down the inventory for homes listed for less than $200,000.00.”

Middle-Home Market: This segment is often thought of as the move-up market. Typically, the buyer in this market is moving up to a larger, more custom home with more features, all coming at a higher price. Across the country, this market is looking more balanced than the lower end of the market, meaning it has closer to a 6-month supply of inventory for sale. This market is more neutral, but leaning towards a seller’s market.

Premium & Luxury Home Market: This is the top end of the market with larger homes that have even more custom features and upgrades. Nationwide, this market is growing in the number of homes for sale. In the same realtor.com article, we can see that year-over-year inventory of homes in this tier has grown by 4.7%. Today, there are more homes available in the premium and luxury space, leading to more of a buyer’s market at this end.

Bottom Line

Depending on the segment of the market and the price point you’re looking at, you’re going to need the advice of a true local market expert to help you successfully navigate the home-buying or selling process.

 

Freshen Up On The 7 Financial Benefits Of Home Ownership This Tax Season

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Freshen Up On The 7 Financial Benefits Of Home Ownership This Tax Season

7FinancialBenefits

Indeed, there’s no place like home.

Let’s examine how homeownership makes “cents” –  from the tax benefits, to good old fashioned financial stability.  The financial benefits of homeownership are evident year round, but particularly around tax time – they seem to jump off the page!

1. Homeownership Builds Wealth Over Time

We were always taught growing up that owning a home is a financially savvy move. Our parents knew it, and their parents knew it. But this past decade of real estate turbulence has shaken everyone’s confidence in homeownership. That is why it’s so important that we discuss this again now that we’re in a ‘new market.’ Homeownership can be a very savvy financial move – but only if people buy homes they can actually afford. In 2014, this idea of sticking to a home you can afford to gradually build wealth is a “rule” that just happens to be new and old at the same time.

2. You Build Equity Every Month

Your equity in your home is the amount of money you can sell it for minus what you still owe on it. Every month you make a mortgage payment, and every month a portion of what you pay reduces the amount you owe.  That reduction of your mortgage every month increases your equity. That is especially true now with the elimination of risky mortgages like negative amortized and interest-only loans – thanks to the new “Qualified Mortgage” rules. The way mortgages work is that the principal portion of your payment increases slightly every month year after year. It’s lowest on your first payment and highest on your last payment. Thus, as the months and years go by, your equity grows!

3. You Reap Mortgage Tax Deduction Benefits

  • Mortgage deduction: The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people this is a huge deduction, since interest payments can be the largest component of your mortgage payment in the early years of owning a home.
  • Some closing cost deductions: The first year you buy your home, you are able to claim the points (also called origination fees) on your loan, no matter whether they are paid by you or the seller. And because origination fees of 1 percent or more are common, the savings are considerable.
  • Property tax is deductible: Real estate property taxes paid on your primary residence and a vacation home are fully deductible for income tax purposes.

4. Tax Deductions on Home Equity Lines

In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan (or line of credit). This allows you to shift your credit card debts to your home equity loan, pay a lower interest rate than the horrendously exorbitant credit card interest rates, and get a deduction on the interest as well.

5. You Get a Capital Gains Exclusion

If you buy a home to live in as your primary residence for more than two years then you will qualify. When you sell, you can keep profits up to $250,000 if you are single, or $500,000 if you are married, and not owe any capital gains taxes. Now, it may sound ridiculous that your house could be worth more than when you purchased it after these past several years of falling house prices. However, if you purchased your home anytime prior to 2003, chances are it has appreciated in value and this tax benefit will come in very handy.

6. A Mortgage Is Like a Forced Savings Plan

Paying that mortgage every month and reducing the amount of your principal is like a forced savings plan. Each month you are building up more valuable equity in your home. In a sense, you are being forced to save—and that’s a good thing.

7. Long Term, Buying Is Cheaper than Renting

In the first few years, it may be cheaper to rent. But over time, as the interest portion of your mortgage payment decreases, the interest that you pay will eventually be lower than the rent you would have been paying. But more importantly, you are not throwing away all that money on rent. You gotta live someplace, so instead of paying off your landlord’s home or building, pay off your own!

5 Reasons for Investing in Land

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5 Reasons for Investing in Land

reasons for investing in land

Investing in land is something that provides you, the investor, with a tangible asset. Property tends to increase steadily with the price of inflation or go up in value even more rapidly in rural and undeveloped areas. Investing in land with developments may be somewhat riskier. However, there are still plenty of regions where land investment is a safe place to put your money.

1) Residual Income

Cropland rents for 100 to 200 USD an acre, on average. Pasture rents for 20 to 30 USD an acre, on average, according to the USDA.

  • Hunting rights,
  • development rights, and
  • other opportunities can make investing in land a profitable opportunity.

It can also provide you with the opportunity to develop that land yourself in the future. It is relatively easy to find hunting property for sale or other undeveloped land parcels that are already perfect for many income opportunities with little to no development on your part.

2) Reduced Taxes Compared to Other Investments

With state and federal programs for land reserve and “set-aside”, it’s possible to not only have zero property taxes but even to be paid to leave the land you have purchased alone. You can still hunt, forage, and use the land in these programs as a grazing area in many cases.

This allows you to have a virtually hands-off investment that costs you nothing after your initial investment. Then you could sell hunting, grazing, or forage rights. Further, by setting the land aside for these purposes, you are helping bolster the local environment.

3) Protecting the Environment

Investing in land isn’t just good for your financial future or investment portfolio. It can also help protect and safeguard the environment.

  • By buying land and placing it in a set-aside program, or
  • by allowing a conservation agency to develop it on your behalf for a set number of years…

…it will help protect invaluable natural resources.

4) Land is Tangible Investment

People can buy and sell stocks, and even currency electronically, but property remains a tangible asset. It holds value and cannot lose that value due to a computer glitch or a new piece of technology. Land is the same as it has ever been. Though with the human population rising steadily and there being no “new” land creation, its value is steadily increasing over time with good care.

5) High Availability, Lower Competition, Great Potential for Value Increase

Farmland of all kinds has been going up in value, keeping pace with inflation and more, for the last two decades. Since 2003, a single acre of farmland is now worth, on average, triple what it was worth then. This is true for both crop land and the less valuable “pasture” land.

With the 1.89 billion acres of land that make up the United States of America having a total value of at least $23 trillion, investing in land allows you to take advantage of an asset that will never increase but may, in fact, decrease over time, driving up its value.

Are You Ready to Start Investing in Land?

Investing in land won’t make you wealthy overnight, but it’s often a much better investment than a savings account…even a high-interest savings account! And quite honestly, the risk might actually be less. No one can physically steal the ground, and there’s a very low likelihood of your property being damaged. Once you buy it, you know where it is and what it is. It’s pretty basic stuff.

The question now is, are you ready to start investing in land? Why or why not?

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Facts About the American Dream Downpayment Initiative

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Facts About the American Dream Downpayment Initiative

A Federal Grant Program to Increase Homeownership

Enthusiastic, affectionate couple hugging in new home, unpacking cardboard boxes

President George W. Bush signed the American Dream Downpayment Initiative (ADDI) on December 16, 2003. The program provides grants to help lower income and minority homebuyers with down payments and closing costs. 

President Bush said at the time, “Today we bring many thousands of Americans closer to the great goal of owning a home. The American Dream Downpayment Initiative will help American families to achieve their goals, strengthen our communities, and our entire nation.”

The American Dream Downpayment Initiative’s Goals

The idea behind ADDI is to increase the homeownership rate, especially among minority groups that tend to have lower rates of ownership when compared to the national average. The ADDI also aims to lower closing costs by approximately $700 per loan in order to stimulate homeownership for all Americans. By extension, this helps to upgrade neighborhoods.

The initial, upfront costs of homebuying can be prohibitive, and the American Dream Downpayment Act strives to lighten this burden by providing funding to make these expenses more manageable so more people can afford to buy homes. 

Eligibility Requirements

Grant recipients must be first-time homebuyers with annual incomes that do not exceed 80% of the county’s median income based on the number of people in the household. Recipients must also complete eight or more hours in a homebuyer counseling class.

For purposes of eligibility, a first-time homebuyer is defined as someone who has not owned a home in the previous three years. When buyers are married, neither spouse can have owned a home during this time period.

The Dollar Amount of Grants

The maximum down payment grant is $10,000 or 6% of the purchase price of the home, whichever is greater. The average subsidy is approximately $7,500. The money can be used toward a down payment or for closing costs and other fees associated with the home buying transaction. It can also be used on rehabilitation costs that might be necessary to make the dwelling safely habitable. 

What Can You Buy?

The American Dream Downpayment Act covers a wide range of dwellings. It’s not restricted to single-family homes. One- to four-family dwellings are acceptable, and the ADDI includes condominiums, co-ops, and manufactured homes as well.  

How Is This Program Different? 

The ADDI differs from other down payment assistance programs because homebuyers using this federal program receive their American Dream grants directly from the government. This is accomplished through the HOME Investment Partnerships Program which funds the Department of Housing and Urban Development as well as local housing agencies. 

Traditional down payment programs are funded by home sellers who agree to provide funds for buyers but usually tack the “donated” amount onto the price of the house. The Housing and Economic Recovery Act of 2008 eliminated these down payment programs. 

The American Dream program is administered by HUD. It became part of its existing HOME Investment Partnerships Program which sought to improve the availability of rental housing and stimulate homeownership throughout the country.

Borrow Money to Fund a Land Purchase

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Borrow Money to Fund a Land Purchase

Dream House

Buying land allows you to build the home of your dreams or conserve a slice of nature. However, land can be expensive in high-demand areas, so you may need a loan to fund your land purchase. You might assume that land is a safe investment (after all, “they’re not making any more of it”), but lenders see land loans as risky, so the approval process can be more cumbersome than standard home loans.

The ease and cost of borrowing will depend on the type of property you’re buying:

  1. Land that you intend to build on in the near future
  2. Raw land that you don’t intend to develop

For the most part, land loans are relatively short term loans, lasting two to five years before a balloon payment is due. However, longer term loans exist (or you can convert to a longer term loan), especially if you’re building a residential home on the property.

Buy and Build in One Step

Lenders are most willing to lend when you’ve got plans to build on your property. Holding raw land is speculative. Building is also risky, but banks are more comfortable if you’re going to add value to the property (by adding a home, for example).

Construction loans: You might be able to use a single loan to buy the land and fund construction. This allows you to suffer through less paperwork and fewer closing costs. What’s more, you can secure funding for the entire project (including completion of the build) — you won’t be stuck holding land while you look for a lender.

Building plans: To get approved for a construction loan, you’ll need to present plans to your lender, who will want to see that an experienced builder is doing the work. Funds will be distributed over time, as the project progresses, so your contractors will need to follow through if they expect to get paid.

Loan features: Construction loans are short term loans, typically using interest-only payments and lasting less than one year (ideally the project is completed by then). After that time, the loan may be converted into a standard 30-year or 15-year loan, or you’ll refinance the loan using your newly-built structure as collateral.

Down payment: To borrow for the land and construction costs, you’ll need to make a down payment. Plan to come up with 10 to 20 percent of the future value of the home.

Finished Lots vs. Raw Land

If you’re buying a lot that already has utilities and street access, you’ll have an easier time getting approved.

Raw land: Raw land can still be financed, but lenders are more hesitant (unless that’s typical for your area — for example, some areas rely on propane, wells, and septic systems). It’s expensive to add things like sewer lines and electricity to your property, and there are numerous opportunities for unexpected expenses and delays.

Down payment: If you’re buying a lot (in a developing subdivision, for example), you might be able to put down as little as 10 or 20 percent. For raw land, plan on a minimum of 30 percent down, and you may have to bring 50 percent to the table to get approved.

Loan features: Finished lots are less risky for lenders, so they’re more likely to offer single-step construction loans that convert to “permanent” (or 30-year) mortgages after construction is completed. With unfinished lots, lenders tend to keep loan terms shorter (five to ten years, for example).

Reducing lender risk: If you’re buying raw land, you’re not necessarily going to get a bad loan. You can improve your chances of getting a good deal if you help the lender manage risk. It may be possible to get longer term loans, lower interest rates, and a smaller down payment requirement. Factors that help include:

  1. A high credit score (above 680), showing that you’ve successfully borrowed and repaid in the past.
  2. Low debt to income ratios, indicating that you have sufficient income to make required payments.
  3. A small loan amount, resulting in lower payments and a property that is most likely easier to sell.

No Plans to Develop

If you’re going to buy land without plans to build a home or business structure on the land, getting a loan will be more difficult. However, there are several options to get funding.

Local banks and credit unions: Start by inquiring with financial institutions located near the land you plan to buy. If you don’t already live in the area, your local lenders (and online lenders) may be hesitant to approve a loan for vacant land. Local institutions know the local market, and they may have an interest in facilitating sales in the area you’re looking at. Although local institutions may be willing to lend, they may still demand up to 50 percent in equity and relatively short term loans.

Home equity: If you have significant equity in your home, you may be able to borrow against that equity with a second mortgage. With that approach, you might be able to fund the entire cost of the land and avoid using additional loans. However, you’re taking a significant risk using your home as collateral — if you’re unable to make payments on the loan, your lender can take your home in foreclosure.

The good news is that interest rates on a home equity loan could be lower than rates on a land purchase loan.

Commercial lenders: Especially if you’ll use the property for business purposes or an investment, commercial lenders might be an option. To get approved, you’ll need to convince a loan officer that you’re a reasonable risk. Repayment may only last ten years or less, but payments might be calculated using a 15-year or 30-year amortization schedule. Commercial lenders might be more accommodating when it comes to collateral. They may allow you to make personal guarantees with your residence, or you might be able to use other assets (like investment holdings or equipment) as collateral.

Owner financing: If you can’t get a loan from a bank or credit union, the property’s current owner may be willing to finance the purchase. Especially with raw land, owners may know that it’s difficult for buyers to get financing from traditional lenders, and they might not be in a hurry to cash out. In those situations, owners typically get a relatively large down payment, but everything is negotiable. A 5- or 10-year repayment term is common, but the payments may be calculated using a longer amortization schedule. A benefit of owner financing is that you won’t pay the same closing costs you’d pay traditional lenders (but it’s still worth paying to research the title and boundaries — honest landowners can make mistakes).

Specialized lenders: If you’re just waiting for the right time to build or you’re picking a design for your house, you’ll probably have to use the solutions above. But if you have unusual plans for your property, there may be a lender that focuses on your intended use for the land. Unlike banks (working with people building houses, for the most part), specialized lenders make a point of understanding the risks and benefits of other reasons for land ownership. They’ll be more willing to work with you because they don’t have to figure out a one-off deal. These lenders may be regional or national, so search online for whatever you have in mind. For example:

  • Conservation of natural resources
  • Outdoor recreation on private property
  • Solar or wind farms
  • Cellular or broadcast towers
  • Agriculture or livestock use, including ranching, organic farms, hobby farms, and horse boarding

Tips for Buyers

Do your homework before buying land. You might see the property as a blank slate full of potential, but you don’t want to get in over your head.

Closing costs: In addition to a purchase price, you may also have closing costs if you get a loan. Look for origination fees, processing fees, credit check costs, appraisal fees, and more. Find out how much you’ll pay, and make your final financing decision with those numbers in mind. For a relatively inexpensive property, closing costs can amount to a substantial percentage of the purchase price.

Get a survey: Don’t assume that current fence lines, markers, or “obvious” geographic features accurately show a property boundary. Get a professional to complete a boundary survey and verify before you buy. Current property owners may not know what they own, and it’ll be your problem after you buy.

Check the title: Especially if you’re borrowing informally (using your home equity or seller financing, for example), do what professional lenders do — a title search. Find out if there are any liens or other issues with the property before you hand over money.

Budget for other costs: Once you own the land, you may be on the hook for additional expenses. Review those expenses in addition to any loan payments you’ll make for the land. Potential costs include:

  1. Municipal or county taxes (check with your tax advisor to see if you qualify for a deduction)
  2. Insurance on vacant land or abandoned buildings
  3. Homeowners’ association (HOA) dues, if applicable
  4. Any upkeep required, such as repairing fence lines, managing drainage, etc.
  5. Building costs, if you ever decide to build, add services, or improve access to the property
  6. Permit fees, for any activity you have planned on the property

Know the Rules

When you see vacant land, you might assume anything is possible. However, local laws and zoning requirements limit what you can do — even on your own private property. HOA rules can be especially frustrating. Speak with local authorities, a real estate attorney, and neighbors (if possible) before you agree to buy.

If you discover any issues with a property you have your eye on, ask about making changes. You might be out of luck, or you might be able to do what you want after following the proper procedures (by filling out paperwork and paying fees). It will probably be easier if you ask for permission instead of upsetting your neighbors.

WHY INVESTING IN COLLEGE TOWN REAL ESTATE CAN BE SMART

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WHY INVESTING IN COLLEGE TOWN REAL ESTATE CAN BE SMART

Why Investing in College Town Real Estate Can Be Smart

Real estate has long been one of the most popular methods for wealth generation. Most people consider their primary residence a substantial investment. Some folks have chosen to “flip” houses by buying homes in need of repair, repairing them, and then selling them for a profit. Others have chosen to become landlords and bought one or many houses to rent out, thereby letting their renters pay the monthly mortgage on the property.

Regardless of which method, or combination of methods, you choose to participate in, the fact remains that investing in real estate is an excellent way to generate wealth.

If you pay attention to real estate trends or are already in the business, then you have heard the phrase “location, location, location!” This is a simple phrase which refers to the importance of buying a property in the right area. Knowing which streets in a neighborhood are the most popular will drastically increase the value of your property, and increase your chances of selling it for a premium. Knowing where the trendy area of town is will help you make strategic real estate decisions.

Whether you choose to buy and hold, flip, or rent your properties, you should invest your money in a stable and growing market. I define this as one where the property values have increased over the last 10 years and where the properties do not sit idly for sale longer than 90 days. If you choose to rent, then you need to be sure that there is a stable community of people looking to rent.

The best locations that I have found which rank very highly in all of these areas are college towns!

Buy Real Estate in a College Town

It’s no secret that college students need a place to live. The vast majority of colleges and universities do not build enough on-campus housing to contain all of their students so they depend on the housing options close to the campus to provide adequate housing for their students. Most of this housing comes in the form of apartment complexes, but a growing trend has been for college students to rent out single-family homes, duplexes, or condos.

This is an incredible opportunity for you as an investor.

I work at a college in the southeast, and the average rental rate for a three-bedroom apartment is between $1,200 and $1,500. This increases for most single family homes or condos. The average price for a condo is around $130,000 and the average home price is around $150,000. If you were to purchase one of these properties with a generous 5% APR mortgage, your monthly mortgage payment would be $700 to $1,000. You tack on taxes and rental property insurance, and you’re still only around $900 to $1,200 in total costs.

Renting this property at the above rates would allow you to cover all of your expenses each month and receive a few hundred dollars extra. This additional money could be saved for repairs, or used to pay down the principal on your mortgage.

Many people would be nervous about renting to college students. I admit, this is a legitimate concern. The good news, however, is that the vast majority of college students (whether we agree with this or not) receive the funds for their housing either directly from their parents or from student loans.

You can also structure your lease agreement to a flat rate for the property. So if you have six tenants living under the same roof it becomes the responsibility of all six of those tenants to pay rent each month. If the total rent is not met each month, all six tenants are affected rather than just one. Peer pressure is powerful! Also, you can require a security deposit from each tenant. This allows you to have some protection if they trash the place as they leave and you have to pay for repairs.

Buy a Home for Your Own College Student

Another excellent way to invest in real estate in a college town is to buy a home in the college town where your child attends. This works even better if you have multiple children going to the same college or university, but it can still work with just one child. Buying a home as an investment, and allowing your child to stay in that home during their college years lets you invest the money you would otherwise pay to the college or some other apartment complex, into your own property. You are essentially paying yourself.

The beauty of this scenario is that your child can also bring in roommates who are charged a rental fee, thus offsetting your costs for the home even further. In many cases you’ll be able to cover the entire cost of the property through the rental rates of the roommates, thus securing free housing for your child.

When your child has graduated you can then decide to either keep the property and rent it out to future generations of college students, or sell it and recoup your investment. Either way, you should come out with a tidy profit.

The Bottom Line

Investing in real estate always comes with risks. Investing in real estate in a college town does not avoid those risks, but it does minimize the most costly ones. You will always have a thriving rental market, people will always be looking to buy property in that area, professors and professional staff will always be looking to buy and sell homes, and your property values will continue to increase. I encourage you to consider a college town for your next real estate investment.

Preferred Properties of Texas

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