Archive for November, 2007
Buy 10 Properties And Your Kids Could Get A Free Education
November 28th, 2007 Categories: Real Estate Investment Notes
You are now a proud parent looking at your son or daughter now lying in your arms and it dawns on you that they may want to go to college.
You are imaging that they may want to become a doctor, dentist, perhaps a veterinarian or pilot. To be sure schooling will be expensive.
And who is going to pay for this? Well….look in the mirror and you will see. How will you pay for this?
Buy One Property Each Year For 10 Years.
It may be quite simple. Buy real estate.
Each year for the next 10 years buy a rental property, recognizing that after every 7 to 10 years the property will appreciate about 50% and in some cases 100%. That appears to be the norm for the last 50 years and it is anticipated that this norm will continue.
Be Smart.
Purchase properties in developing areas and priced around $ 150,000. Purchase new properties. Try to limit the loan amount to $ 100,000 at 6% fixed interest, 30 year period. At this loan amount the monthly principal and interest will be about $ 600 per month.
Add approximately $ 50 per month for insurance. Estimate real estate taxes at about 2% of the purchase price (depending on State). Add 7-10% for property management and do not forget homeowner association dues which can range from $ 125/month on up.
Buy properties around $ 125,000.
With a real estate purchase of approximately $ 125,000, with 20% down per property you should be able to rent the property for most of your costs. You could end up with a small positive cash flow of $ 25-$ 50 per month. Be happy.
But circumstances may be such that you will have a monthly negative cash flow. Limit this to $ 100 per month or less.
The Good And The Bad.
Why is this good. It is good for the following reasons:
-First and foremost someone is helping you to pay off the property. You are building tangible equity.
-Your negative cash flow (if there is one) is limited
-The property is appreciating (which is what you want).
-During your ownership you will have some rental tax deductions on your personal return (limited to $ 25,000 per year).
Keep in mind that real estate appreciates about 50% to 100% every 7 to 10 years. So the math suggests that your first property could be worth $ 187,500 up to $ 250,000 in 7 years.
Keep it for 14 years and the property could be worth $ 281,250 to $ 375,000 or more. So in 14 years you will have approximately $ 181,000 equity in the first home for your child’s schooling.
Do this 10 times and your son(s) and daughter(s) education will be paid for because the pattern will be about the same for each property.
The bad side.
-Tenants move so there will be periods where you have no income from the rental but still must manage the monthly obligations.
-Tenants may damage the property.
-Mother nature may damage your property.
-You may not be land lord material. You must exam your own temperament. Can you be a landlord even with or without a property manager?
-Don’t forget future tax payments. If you sell the property the depreciation you deducted over the years will be added back as ordinary income in the year of sale unless you do a 1031 exchange (which is another story). You will also be exposed to capital gains tax of 15% if todays tax laws exist.
Be Smart. Understand the Risk versus Reward Scenario.
When looking to buy a property be sure you look all over and beyond your own State. There can be some excellent properties one can buy out of state.
But the option to buy rental properties for your childs (or childrens) education should be considered even before buying stocks or putting the money away in a bank account.
If your child (or children) don’t go to college you may elect to give them a home and set aside the other properties for your retirement. Now that would be something.
Keep in mind.
If today’s tax laws stay as they are you could move to the rental properties, make them your home for five years and possibly end up with a tax free transaction depending on whether you are married or single. Do that two, three or more times and you will have some serious savings.
Just start.
The earlier you start this saving type of plan the better off you are but it can be instituted at any time. The driving force in not doing it…..fear to act.
You do not want to later start thinking ” well I should of…….well I could of…….well I needed to…….well…” and opportunity has gone by the way side.
Think of the risk. Manage the risk. BUT DO IT!
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Getting In The Mood….With Flooring.
November 28th, 2007 Categories: Home Fixin's, Findings and Planting
When people enter a home, or room in a home, their eyes generally focus on furnishings, the furniture, a picture or something unique. Flooring is the step-child. But flooring is the mood setter for the whole home.
So take time to set the right tone and mood with good flooring. Flooring is one of six surfaces that makes up a room. With the wide selections available one can really create a great and lasting mood. For example:
Stone
Stone is a very good flooring material especially for homes that are located in hot areas such as the desert. Stone keeps a home cooler. Typical stone flooring include limestone; traverstine; polished marble; slate; granite; mosaic; porcelain and terracotta. This is the high end of the cost spectrum but the investment will be worth it especially on the re-sale side when you wish to move to another home.
Natural or simulated woods
Natural woods is an excellent selection and investment. To-days’ simulated and laminate woods are also very good and reasonable. Not only do they add good visual flooring texture, they are a much better product than their predecessors. An array of choices include Brazilian cherry; bamboo; Victorian ash; Australian cypress; Tasmanian oak to name a few.
Carpeting and Tiles
Carpet tiles (modularize flooring) are good if you maximize a visual pattern. Leather tiles create a soft and easy going look for a study, sitting rooms or library. I once read where a dance studio used leather for its dance floor and had great success with its longevity.
Carpeting can always be used and is a modest expense as a floor covering but it appears to be losing some of its market luster. Simulated woods and wood flooring appear to be high on most peoples list.
Carpeting can be cut pile (less resistant to crushing); cut and loop (sculptured for durability); level loop net pile (Berber for example); and multi-level loop pile for high traffic areas.
A Good Mix Can Really Set The Mood.
Today area rugs, coupled with stone or natural woods are used extensively to define changes in colors or a break in rooms of a home. Selection includes chic, twists, tweeds and Varese.
Keep the walk flow in mind.
Start your flooring plan in the middle of the home and then add those materials that are similar, cohesive and do well with the homes traffic patterns. Mix and match and you will see that flooring does set the mood.
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Don’t Read This If You Want To Pay More Taxes Than You Should On Real Estate Transactions
November 26th, 2007 Categories: Taxes, Taxes and Taxes
There are two things one has to do to overcome being tax dumb: show documentation and the flow of the money.
One needs to do both to sustain an audit and decrease exposure to capital gains taxes.
Be it an investment property, one’s home or simply an itemized deduction, keeping solid documentation and knowing the sources of money are strong support actions you can take to handle a tax audit and perhaps lessen the tax burden.
For this discussion the focus is on real estate documentation.
When entering or closing real estate transactions one ends up with 20 million pieces of paper, of a print size necessitating a magnifying glass to read the documents.
Consider all of these papers as important and put them in a folder.
Listed below is how I manage my documentation but to be sure you can add or subtract as you see fit.
My folder includes the following sections:
The Tax Documentation Section Should Cover All:
-Offers and counter offers
-Preliminary HUD (mortgage cost)
-Home inspection (even on a new home)
-Structural inspection (if necessary)
-Pest control reports
-Soil reports (if you buy on a hillside or know that the land is unstable)
-Warranties and associated manuals including the builders home warranties
-Home Owners Associations bylaws (if applicable).
-All email and written notes about the transaction
-Pictures of the property (inside and out)
-Any repair reports if purchasing a used home.
If buying a ranch……..
Have a well and water check. This should be a normal action taken by the buyer’s agent but if it is a private sale one would want a well test and water test for purity and pressure. A smart lender will insist that this be done.
Septic tanks. Get all documentation and tests previously done and ask if there had been any repairs to the tank. A septic tank test will last for about 24 hours with water running into it continuously to determine its draining capabilities. Find out how old the tank is and when it was cleaned last.
Water rights. More important than gold.
The Flow of Money Section Should Include:
-Appraisals
-Capital improvements (such as an addition).
-Contracts and information about the method of payment (checks/automatic transfers).
-Most definitely show the source of the funds (line of credit, savings or loan) for purchase and improvements.
The IRS loves to ask “Where did the funds come from to …….?”
Proof of Basis Section: You will need—-
-Final settlement statements (Purchase and sale).
-Mortgage notes, loan addendums and lines of credit
-Deed
-Plat map
-Title insurance
-Escrow instructions
-Reconveyance documentation
If it is an Investment Property, Include This Section
-Property management agreements and addendums
-Tenant agreement and addendums
-Credit reports
-Pictures of the property inside and out before the tenant moves in.
Have a Section For Insurance:
-Hazard
-Liability
-Umbrella
-Rental insurance
-Loss of income and home warranty insurance policies.
No matter what, strive to keep track of where the cash came from.
Keep copies of your checks and receipts. Make a copy of your bank statement(s) and show notes of funds deposited and payments. If an investment property have a separate bank account. You will be glad you did.
Make copies.
Keep one set of the copy material close at hand. Keep another set (the originals) at a different location (bank deposit box). In the event of a fire, flood, etc., it is nice to know that all of your key documentation are available.
The main thing is to show the flow of money…..how you got it and how it was dispersed.
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