Invest in Equity Build-up

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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 (480) 797-4884.

America Still Considers Real Estate the Best

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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 Stella.Bonin or (480) 797-4884.

Determining Property Type

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The Internal Revenue Service considers four different types of real estate. Specific types of properties have benefits based on their classification. The determination does not depend on the property itself as much as it depends on how the property is used and what the owner’s intentions are.

Principal Residence … a principal residence is the place a person lives or expects to return if they are temporarily away from it. It could be a single family, detached home or condominium or a duplex, tri-plex or four-unit. The owner(s) can deduct the qualified mortgage interest and property taxes on the schedule A of their tax return. There is a capital gains exclusion on profit of up to $250,000 for a single taxpayer and up to $500,000 for a married taxpayer.

Income Property – is improved property that is rented or leased to tenants as opposed to using it personally. It can include houses and condos, apartment buildings, office complexes, shopping centers, warehouses and other commercial buildings. Depreciation is allowed on the improvements. For property held more than one year, the profits are taxed at long-term capital gains rates. This type of property is eligible for a tax deferred exchange.

Investment Property … can be raw land or improved property that is not rented or leased. This property is not subject to depreciation. If the property is held for more than one year, the profits are taxed at long-term capital gains rates. It is also eligible for a tax deferred exchange.

Dealer Property … this type of property is primarily considered inventory because the intention is to sell it without intentionally holding it for more than a year. It could be new construction such as a home builder. It could be an investor who buys a property and expects to sell it for more. There is not a requirement to make improvements. The profits on dealer property are taxed as ordinary, “sweat of the brow” income. Dealer properties cannot be exchanged.

A second home is like a principal residence in that you can deduct the interest and property taxes on your Schedule A, up to the limits. A second home, as well as a principal residence, can be rented out up to 14-days a year without threatening the status of the property. Seconds homes are not eligible for exchange because personal use properties are not allowed. A second home is not a principal residence and profits are taxed like an investment property. If you own it for more than a year, it is taxed at long-term capital gains rates.

Vacation homes are rented for more than 14 days a year and are like income property but with some additional rules that apply. If your personal use is 14 days or less or 10% of the time it is rented, your expenses can be deducted in excess of income. If you use it for more than 14 days or more than 10% of the number of days it is rented, it is considered personal use and your expenses are limited to the amount of income collected with no losses being deductible.

Taxpayers can strategically change the property type based on their intentions. A principal residence can be converted to income property. Dealer property could become a principal residence. A rental property could become a principal residence.

Professional tax advice is always recommended to be able to understand the information and how it applies to your specific situation.

What are my tax deductions when I become a homeowner?

When owning a home, your income tax reporting deductions arise out of three types of expenditures:

• the interest paid on your purchase-assist and equity mortgages;

• the premiums paid on mortgage insurance (MI) when your down payment is less than 20%; and

• the property taxes and bonded assessments you pay on the home.

Federal housing policy by design uses the tax code to encourage leveraged homeownership. The code permits a personal deduction for interest paid on mortgage debt incurred to acquire a home for your family use — called the mortgage interest deduction (MID). You are allowed to reduce your federal and state income taxes by use of
the MID when you finance the purchase of a principal residence or vacation (second) home. You may deduct interest accrued and paid on:

• purchase or improvement mortgages up to $1,000,000 principal; and

• home equity mortgages up to $100,000 principal.

Ownership of a personal residence and second home allows you to itemize accrued mortgage interest you have paid and deduct the amounts from your adjusted gross income (AGI), with limitations on the very wealthy.

The amount of tax reduction you experience is based on the amount of your AGI and tax bracket.

When financing the purchase of your principal residence, loan points (origination fees) and MI you or the seller pay to originate the mortgage are a type of interest payment
you also itemize and deduct from your AGI. All other lender closing charges are non-recurring costs that are part of the cost of acquisition of your home and may not be written off as a deductible expense.

Property taxes you pay based on your home’s assessed value are also itemized and deducted from your AGI to further reduce your income taxes. Deductible property taxes are often prepaid at closing to reimburse the seller for the portion they paid that accrues after the date you acquire ownership. Any supplemental property taxes paid due to reassessment are also deductible.

Annually, you itemize and deduct each year’s property taxes paid on the home whether paid directly by you or indirectly through the lender under an impound account arrangement.

Ready to shade yourself from the sun in a new home? Call me to make an appointment!

Stella Bonin
Associate Broker

480.797.4884 / 619.250.6214

stella.bonin@yahoo.com

Coldwell Banker Residential Brokerage (Arizona)
Burke Real Estate Consultants (California)

http://www.CallStellaBonin.com (AZ MLS Search)

Follow me on Twitter: @StellaBRealtor

Join my Facebook International Real Estate Group: https://www.facebook.com/groups/irealestate/

https://www.facebook.com/myrealestateservices/

I am licensed in California and Arizona and we have a great team to serve you with members around the world.

California Bureau of Real Estate Lic. # 01222569
Arizona Department of Real Estate Lic. # BR550696000

“Equal Housing Opportunity”

Get Leverage Working for You

Leverage is an investment term that describes the use of borrowed funds to control an asset; sometimes referred to as using other people’s money. Borrowed funds can affect the investment in your home positively.

For instance, if you had a $100,000 rental property, collected the rents and paid the expenses and had $10,000 left, you would earn a 10% return (divide the $10,000 by the $100,000.) With no loan on the property, there is no leverage.

If you decided to get an 80% mortgage at 8%, you would owe an additional $6,400 in expenses leaving you only $3,600 net. However, your return would grow to 18% because your investment is now $20,000 in cash (divide the $3,600 by $20,000.)

Leverage, the use of borrowed funds, causes the return to increase in this example. While, most people associate leverage with rental properties, it also applies to a home. The larger the mortgage, the more leverage you have. A FHA mortgage with a 3.5% down payment has more leverage than an 80% loan.

Assume we’re looking at a $295,000 purchase price with 3% closing costs and a 4.5% mortgage for 30 years with a five-year holding period. The following table shows the return based on different down payments and appreciation rates. The initial investment is the down payment plus closing costs. The equity build-up at end of year five is the result of normal principal reduction and appreciation.

Down Payment 1% Appreciation 2% Appreciation 3% Appreciation
3.5% 21% 28% 34%
10% 12% 17% 21%
20% 7% 10% 13%

Another way to look at the 3.5% down payment example with 3% appreciation would be to say that a $10,325 down payment plus $8,850 in closing costs could grow into $82,482 of equity in a five-year period producing a 34% rate of return on the initial investment.

Estimate what your initial investment could grow to using this Stella.Bonin

Maximize your property with an ADU

Maximize your property with an ADU

Need more room or extra income? New California laws make it easier than ever to build an accessory dwelling unit (ADU) on your property.

An ADU is a secondary housing unit on a single family residential lot. It can be attached to the primary house like a converted garage, or unattached like a freestanding cottage. You can create an ADU from a new or existing structure.

ADUs are affordableflexible and raise your property’s value. They are an excellent way for seniors to downsize while staying close to family. Homeowners can also bring in extra income by renting out their ADU.

These cozy additions are surging in popularity thanks to new California legislation. Now is the best time to start planning your ADU and reap the benefits.

Ready to discuss your property with a local real estate expert? Contact me to learn about more ways to maximize your property’s resale value.

Stella Bonin
Associate Broker

480.797.4884 / 619.250.6214

stella.bonin@yahoo.com

Coldwell Banker Residential Brokerage (Arizona)
Burke Real Estate Consultants (California)

http://www.CallStellaBonin.com (AZ MLS Search)

Follow me on Twitter: @StellaBRealtor

Join my Facebook International Real Estate Group: https://www.facebook.com/groups/irealestate/

https://www.facebook.com/myrealestateservices/

I am licensed in California and Arizona and we have a great team to serve you with members around the world.

California Bureau of Real Estate Lic. # 01222569
Arizona Department of Real Estate Lic. # BR550696000

“Equal Housing Opportunity”

Show Them You’re Serious

June and July are the busiest home sale months of the year. When inventory is in short supply and you may be competing with other offers, it is important to show the seller you’re serious. Make your offer look as good as possible because you may not get the chance to make or accept a counter-offer.

Put yourself in the seller’s shoes.  Your home has just gone on the market.  There is lots of activity and suddenly, there is more than one offer to purchase.  The seller’s first consideration may be to accept the highest offer but there are many other things to consider like closing dates, closing costs, possible repairs, contingencies and of course, the ability of the borrower to get a loan.

Offer a fair price for the property in your initial purchase agreement.  It shows sincerity and good faith that you’re actually trying to purchase the home and not trying to take advantage of the seller.  The old adage that you can always go up later may never happen if there are multiple offers on the property in the beginning.

  1. Remove the uncertainty that you may not be approved for a mortgage by having a pre-approval letter from your mortgage company.
  2. Show your sincerity by increasing the normal amount of earnest money customary for the area and price of the home.  The earnest money will be applied toward your down payment and closing costs.  Consider placing even more money in escrow when the contingencies have been met.
  3. Specify a closing date in the contract but acknowledge that you can be flexible to accommodate the sellers’ moving date.  If it becomes an issue, it still must be mutually agreed upon.
  4. Make the contingency periods shorter if possible to make the seller feel that they’ll know sooner that the offer is solid.
  5. If the contingency really isn’t important to you, leave it out of the offer.  The more contingencies included in a contract, the more the seller will wonder what might happen to keep it from closing.
  6. Write a personal note to the seller explaining why you like and want their home.  Consider including a picture of your family and pets.
  7. If you’re not using a digital contract, physically sign the offer with a felt tip pen of contrasting color.  You’d be surprised how this adds a personal touch to the offer.

One way to eliminate the competition of multiple offers is by not procrastinating.  When you have decided to write a contract, don’t wait; do it immediately and ask your agent to deliver it quickly.  As your agent, I will be able to help you craft a solid offer that makes you look serious and can give you advice that may be unique to your situation.

Thinking about buying? Let me help make your home buying or sell a success or if you’re ready to begin the buying or selling process, give me a call today!

Stella Bonin
Associate Broker

Coldwell Banker Residential Brokerage (Arizona)
Burke Real Estate Consultants (California)

http://www.CallStellaBonin.com (AZ MLS Search)

Follow me on Twitter: @StellaBRealtor

Join my Facebook International Real Estate Group: https://www.facebook.com/groups/irealestate/

https://www.facebook.com/myrealestateservices/

I am licensed in California and Arizona and we have a great team to serve you with members around the world.

California Bureau of Real Estate Lic. # 01222569
Arizona Department of Real Estate Lic. # BR550696000

“Equal Housing Opportunity”

Protect your health and home with a filtration system

Do you know the quality of the water in your home?

90% of American homes have hard water, according to the U.S. Geological Survey. Some of the highest levels are in Southern California. Hard water is water with high levels of calcium and magnesium.

Hard water can cause issues by:

  • leaving hard-to-remove spots on plumbing fixtures and dishes;
  • reducing the effectiveness of soap and detergent;
  • fading and staining laundry;
  • drying out skin and hair;
  • leaving scale buildup in boilers; and
  • clogging pipes.

Fortunately, hard water can be softened. A whole-house water filtration system that uses reverse osmosis is an ideal solution for California & Arizona homes with very hard water. Not only does it soften hard water, but it also removes any unusual odors, tastes, and colors without the use of harsh chemicals. This system protects your health and home with clean, pure water.

Want to learn more about home improvement solutions that boost your home’s resale value? Contact me to make sure your home sells fast.

Stella Bonin
Associate Broker

480.797.4884 / 619.250.6214

stella.bonin@yahoo.com

Coldwell Banker Residential Brokerage (Arizona)
Burke Real Estate Consultants (California)

http://www.CallStellaBonin.com (AZ MLS Search)

Follow me on Twitter: @StellaBRealtor

Join my Facebook International Real Estate Group: https://www.facebook.com/groups/irealestate/

https://www.facebook.com/myrealestateservices/

I am licensed in California and Arizona and we have a great team to serve you with members around the world.

California Bureau of Real Estate Lic. # 01222569
Arizona Department of Real Estate Lic. # BR550696000

“Equal Housing Opportunity”

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 the 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.

Ready to shade yourself from the sun in a new home? Call me to make an appointment!

Stella Bonin
Associate Broker

480.797.4884 / 619.250.6214

stella.bonin@yahoo.com

Coldwell Banker Residential Brokerage (Arizona)
Burke Real Estate Consultants (California)

http://www.CallStellaBonin.com (AZ MLS Search)

Follow me on Twitter: @StellaBRealtor

Join my Facebook International Real Estate Group: https://www.facebook.com/groups/irealestate/

https://www.facebook.com/myrealestateservices/

I am licensed in California and Arizona and we have a great team to serve you with members around the world.

California Bureau of Real Estate Lic. # 01222569
Arizona Department of Real Estate Lic. # BR550696000

“Equal Housing Opportunity”

 

Renters insurance: the no-lose policy

Renters insurance is a personal insurance policy purchased by renters in possession of the landlord’s property. Standard renters insurance policies offer the tenant coverage for the tenant’s personal property losses and tort liabilities the tenant may incur.

The tenant’s personal property includes anything moveable — jewelry, electronics, furniture, etc., but not any real estate they own or possess. Tort liability refers to the tenant’s responsibility for an injury they may cause to another person or another person’s property, such as the landlord and his rental property.

When a tenant is responsible for harming the landlord or the landlord’s property, the tenant is required to pay the costs incurred by the landlord to repair the damage. Renters insurance covers the tenant’s liability owed the landlord and relieves the insured tenant of the burden of paying the landlord’s costs.  Under the policy, the tenant’s liability for losses becomes the obligation of the insurance company.

A nonresidential tenant searching for a renters insurance policy will not find it under that name. Renters insurance is available only to residential tenants.

However, nonresidential tenants will find similar coverage under a business owners insurance policy, which insures the moveable property, including company inventory, as well as damage the tenant might cause to the leased property.

Personal property coverage

Requiring residential tenants to purchase renters insurance significantly reduces a landlord’s risk of loss caused by a tenant renting his property. It serves as both a partial replacement for a large security deposit and source of recovery for losses caused by the tenant in amounts larger than the amount of the security deposit, excluding rental payment amounts.

Whenever property — the landlord’s or the tenant’s — is damaged, disputes inevitably ensue over who is responsible for payment of the costs to repair or replace (restore) the damaged property. The burden of restoration may sometimes fall on the landlord, regardless of how much insurance either he or the tenant has. In most cases, the landlord’s expenses to correct damage to his property caused by the tenant can be significantly reduced by the coverage offered by a tenant’s renters insurance.

Many lease agreements include a provision exempting the landlord from any liability related to the rental property. However, this provision may not prevent a discontented tenant from demanding reimbursement for damage to his personal property whether or not it is due to the landlord’s negligence.

A landlord may legally include a provision in a residential lease agreement, requiring the tenant to obtain renters insurance.
A landlord may legally include a provision in a residential lease agreement, requiring the tenant to obtain renters insurance. This practice is even recommended by experts on landlord-tenant law. [Alexander v. Security-First Nat. Bank (1936) 7 CA2nd 718]

To confirm the tenant continues to comply with the terms of the lease, a landlord may also include a provision requiring the tenant to name the landlord as an “additional insured” on the renters’ insurance policy. This does not require the landlord to make any payments toward renters insurance or give him any additional responsibility. However, as an additional insured, the landlord will receive notification from the insurance company when the renters’ insurance policy is altered, canceled or expired.

Tenants with renters insurance have no need to seek satisfaction from the landlord, as their personal property is insured and will be restored through their insurance company, subject to a deductible provision amount.

Tort liability

However, much more advantageous to the landlord than coverage of a tenant’s personal property is coverage of a tenant’s personal liability for losses they inflict on the landlord by their conduct. While a security deposit is the primary cash source for recovery, renters insurance provides an added guarantee that the landlord will be covered should the tenant be responsible for damage to the landlord’s property.

Policy limits, of say $100,000, when compared to a security deposit equal to one month’s rent as a source of recovery, provide the strongest inducement for a landlord to require renters insurance of his tenants, new or existing.

Also, should a guest of the tenant be injured on the landlord’s property, the tenant’s insurance policy covers costs incurred by that guest, subject to a ceiling amount.  Essentially, the coverage removes a potential financial obligation from the landlord’s shoulders.

When a residential property is damaged by a tenant causing a loss to the landlord, the tenant’s renters insurance pays the landlord for the cost to restore the landlord’s property.  The security deposit then remains intact for collection of any unpaid rent and the costs to correct extraordinary wear and tear.

Because the cost of restoring the rental property is picked up by the tenant’s insurance, the landlord is able to avoid filing a claim with his insurance carrier.  Thus the landlord avoids an increase in the premiums he would have to pay for his coverage.

Not a substitute for the landlord’s own coverage

“Fantastic!” landlords may say, “I can cancel my landlord insurance policy and let the renters insurance pay for any damage to the property while the tenant is in possession.”

Renters insurance is not a substitute for landlords insurance or homeowners insurance.
But renters insurance does not act as a substitute for landlords insurance or homeowners insurance (or a security deposit). The landlord’s insurance policy insures the real estate which is the rental property possessed by the tenant.

Thus, if the property is damaged by the tenant or others, the landlord knows the losses are covered by the insurance carrier and the cost of restoration will be paid by that insurer (after the deduction is applied, of course).

Because the real estate is owned by the landlord, the landlord alone can insure against losses due to damage to the real estate. Renters insurance covers only the named tenant’s personal liability for causing any damage to the landlord’s property; it does not insure the landlord’s interest in that real estate against any loss.

Thus, a landlord can only count on renters insurance to provide financial reimbursement to cover the restoration of his property and then only if the tenant is liable for the cost to repair or replace the property damage. If the tenant is not liable, then renters insurance does not apply to the property damage.

Landlords cannot rely solely on renters insurance to protect their property; they must invest in homeowners insurance or landlords insurance to cover losses for which the tenant is liable as well as look to the security deposit which may be inadequate.

Sell your tenant on renters insurance

Landlords requiring renters insurance of their tenants have no need to secret from their tenants the benefits of this tenant coverage. Renters insurance acts in the best interests of the tenants, not just for the landlord.  Rather than look first to the security deposit for reimbursement, then pursue the tenant for greater amounts due, the landlord looks to the insurer for payment and the security deposit remains intact.

Minimum loss coverage under a renters insurance policy is $25,000 for personal property and $100,000 for personal liability. This is greater financial coverage than most tenants will need. Best of all, the annual cost to the tenant will be around $100. For the relatively low cost, tenants receive financial protection and at the same time strengthen their image with the landlord as an individual responsible for their actions.

This improves the relationship between landlords and tenants, as landlords are more comfortable renting property to tenants who are insurable and forward-thinking enough to invest in an insurance policy, and who display a measure of concern for the care and protection of the property.

Renters insurance protects the landlord, protects the tenant and his security deposit, and creates a cooperative and peaceful relationship between the two parties. Is it worth the trouble to include an additional lease provision at around ten bucks a month paid by the tenant? Definitely.

                                                                                             Information provided by FirstTuesday

Thinking about buying? Let me help make your home buying success or if you’re ready to begin the buying process, give me a call today!

Stella Bonin
Associate Broker

480.797.4884 / 619.250.6214

stella.bonin@yahoo.com

Coldwell Banker Residential Brokerage (Arizona)
Burke Real Estate Consultants (California)

http://www.CallStellaBonin.com (AZ MLS Search)

Follow me on Twitter: @StellaBRealtor

Join my Facebook International Real Estate Group: https://www.facebook.com/groups/irealestate/

https://www.facebook.com/myrealestateservices/

I am licensed in California and Arizona and we have a great team to serve you with members around the world.

California Bureau of Real Estate Lic. # 01222569
Arizona Department of Real Estate Lic. # BR550696000

“Equal Housing Opportunity”