Draw Me Self

Unlike the offerings from Wall Street, investment real estate is not limited to future appreciation or dividend pay out (rental income can be construed as the same as a stock dividend for comparative purposes) for its value/profit creation, nor is real estate investing as speculative and/or volatile as the stock market (if done properly).

Here are the 10 ways a real estate investor can profit from investment real estate:

1). Rental Income. The cash flow or rental income derived from investment real estate is a dependable source of income, with the potential for future growth and has an effective safeguard against the profit eroding natures of inflation. When comparing investment real estate to other investment options remember this---an investment that fails to deliver sufficient income (whether it be stock dividends or rental income) will in time suffer in value---conversely, investments that yield higher cash flows will show higher rates of appreciation. Don’t buy an asset, buy the current and future cash flow.

2.) Accelerated Mortgage Payoff. Anytime you pay off the mortgage on an investment property early, you create an equal amount of appreciation/equity. Success in this regard is particular sweet, when you are afforded this luxury as a result of your tenants.

3.) Property Improvements/Enhancements. Property Improvement can be loosely defined as anything that increases the current market value of the property---activities like expansion/build outs, rehabilitation and reconfigurations are examples of property improvement that can affect cash flow and profits.

4). Purchase Profits (buying at a discount). Making a profit on the front end of the transaction serves to mitigate your overall risks and increases your chances for greater profits/ROI (return on your investment) during the holding & selling phases of the investment real estate ownership life cycle.

5). Government Benefits (tax credits, tax deductions, rent vouchers, etc.). Real estate is the only investment that offers tax benefit/deductibility when you buy, hold and eventually sell the investment.

Here are a few of the tax benefits:

- Mortgage Interest Paid

- Property Tax Deduction

- Prepaid interest paid at settlement (for the tax year after purchase)

- The cost of discount points (same as above)

- Certain selling expenses (when you sell the property)

- Any seller concessions (same as above)

- Capital gains deferment (1031)

- Proceeds from cash out refinance in some cases are tax free

6). Strategic Property Management. Examples of strategic property management would be:

- Activities that would allow you to increase rent roll. - Activities that would allow you to decrease tenant turnover/vacancies. - Activities that would allow you to reduce operating expenses and increase net operating income.

7). Property Appreciation. Historically speaking, real estate has proven to be offer good appreciation rates over time---compounded this with the concept of leveraged capital & equity, makes real estate the clear winner in the long run.

8). Inflation. rent is subject to inflation (inflation is nothing more then the tendency for expenses [the price of goods & services] to rise over time). For example, a current rent roll of 800 with a 5% rate of inflation would be worth 1,303 in 10 years.

9). Leveraged Capital & Equity. To learn more about the power of leverage in investment real estate, see my article on “Real Estate Vs. Stocks - The Other Side Of The Story Every Real Estate Investor Needs To Know”.

10). The Law of Supply & Demand. Land is constantly being diminished (due to development and expansion) without being replaced---this fuels the “supply side” of the equation. Shelter is a necessary evil (everybody needs a place to live)---this fuels the “demand side” of the equation.

Investment real estate thrives in times of higher interest rates and or when affordability is an issue---when people can’t afford to “own”, they MUST therefore “rent”.

An In Depth Look At Real Estate Transactions

I don't know what percentage of American financial portfolio's contain real estate, but my guess is many. Properties will likely range from principal residences, to second homes and rental properties. There can also be the instance where multiple properties are owned in a given portfolio giving rise to what is known as the qualified real estate professional. Please take the time to review this article carefully, ponder its message, and incorporate it into the most valued and sacred set of financial plans, past, current, and future; your own.

Let's begin with the principal residence. Ask any American walking about what advantages exist through home ownership and they will respond with; "it is a great investment", and "it will provide income tax breaks". Yes indeed, the principal residence is an asset in anyone's estate and it will provide income tax breaks through mortgage interest deductions and real estate taxes. Believe it or not, the knowledge necessary for home ownership does not end with these two basic considerations. Selling the principal residence has income tax consequences. What if there is a home office taking up part of the space within the principal residence? What happens with improvements made over time? What happens when the homeowner passes to the next life? As is always the case in our culture, there's more to a situation than meets the eye. Knowing the rules of the game and keeping careful records will lead to significant financial gain through tax savings.

The basics of home ownership mean that we will get a home mortgage interest tax deduction. There will also be a deduction for real estate taxes paid. The limit for deductibility of home mortgage interest expense is $1,000,000 of original acquisition. There is also allowed a home equity line of up to $100,000. In addition to the principal residence, a taxpayer can deduct mortgage interest expense on a second home of his choice. The $1,000,000 acquisition limit includes both the principal residence and the second home. An example would be that a given taxpayer purchases a principal residence and takes out a mortgage of $500,000. This same taxpayer purchases a second home with a mortgage of $400,000. Because the sum of the mortgages is less than a million dollars, this taxpayer will be able to deduct the mortgage interest expense on both properties as qualified home mortgage interest.

If the mortgages had totaled $1,100,000, the taxpayer would still be able to take interest on both properties in full by using the original acquisition limit plus the home equity loan limitation of $100,000. If the sum of these to mortgages happened to sum to $2,200,000, the taxpayer would be limited to deducting 50% of mortgage interest paid based on the following ratio: $1,100,000/$2,200,000. My guess is that many of you are thinking so what. My mortgage or mortgages are far under the appropriate thresholds. Let's review for a moment what happens when one decides to refinance the principal residence. What if a home was purchased in 2001? In 2006, the homeowner refinances and takes money out of the property for assorted reasons. If the home purchase was for $200,000 with a $150,000 mortgage back in 2001, let's assume that the refinance amount was for $400,000 in 2006, where the original mortgage amount was paid down to $140,000. The taxpayer's new mortgage is now $400,000. Will there be a tax deduction under qualified mortgage interest rules for the entire mortgage amount? A taxpayer is limited to the original acquisition mortgage plus the $100,000 home equity loan.

In our example, the taxpayer would be able to deduct mortgage interest up to $250,000 of mortgage. The ratio for mortgage interest deductibility would be $250,000/$400,000. The remaining balance of mortgage interest expense could be deductible under other areas of the tax return subject to the interest tracing rules. If some of the loan proceed were invested in the stock market, this would give rise to investment interest deductions subject to that set of limitations. If loan proceeds were used to start a new business, the mortgage interest expense would be deductible as trade or business expense. To the extent the home owner makes improvements to his principal residence, the original mortgage acquisition amount is increased. In this example, if the taxpayer made home improvements totaling $150,000 or more, the entire mortgage of $400,000 would yield mortgage interest expense that would be totally deductible as qualified home mortgage interest expense. I don't know about everyone else, but his fascinates the life right out of me. It should shine a new light on mortgage interest expense and it related deductibility.

In so far as thinking of one's home as an investment, there will be many school's of thought dealing with the principal residence. One thought is that if one sells a home, there will be need to acquire another one. The idea here is that proceeds from the sale of the residence will not be used in any other way aside from a new home acquisition. The home is an asset regardless of its view as an investment, but keep in mind that there are taxpayers who actually by down in a new residence. They may even change its location to an entirely new environment such as a different location in the country where the standard of living is less expensive. Why is this important? Remember the old rules for dealing with gain on the sale of one's principal residence? There once was a time when a taxpayer had to purchase a new home that was greater or equal to the value of the one sold. This was old code section 1034. The gain would be rolled into the cost basis of the new home acquired.

When a taxpayer reached the age of 55, he could make a once in a lifetime election to permanently exclude gain not exceeding $125,000 from income tax. The current rules are entirely different. There is no longer a requirement to purchase a new principal residence. In addition, the gain exclusion increases to $250,000 for individuals and $500,000 for married couples filing a joint income tax return. The once in a lifetime requirement of old code section 121 has also been eliminated. Now the aforementioned exclusions will apply in unlimited fashion as long as the following requirements are met. The home must be a principal residence for 2 years out of a 5 year period. The 2 years need not be consecutive. There can be only one sale of a principal residence in a 2 year period. There is more opportunity to have the principal residence be counted under the investment column of one's portfolio thanks to the new tax law regarding this area.

With the advent of new code section 121 and the permanent repealing of code section 1034, it still becomes necessary to track one's basis in a principal over time. The original cost of the home is easy. To this original cost, the taxpayer should keep record of all improvements made to the dwelling. This will include roof repairs, swimming pools, new windows, landscaping, and much more. In addition to tracking improvements, there may also be the need to track fair market value step-ups. Suppose that husband and wife purchase a home in 1990 for $200,000. For a ten year period, husband and wife made $100,000 in improvements. In 2005, wife passes away when the home's fair market value is $800,000. During 2006, husband meets a hot young woman and decides to take up residence at the beach (I thought this might add some spice to the story).

He is going to sell the residence in 2007 or 2008. What is his exposure to gain? Well, the original cost basis of the home plus improvements is $300,000 of which husband will get half or $150,000. He then gets a step-up of $400,000 from wife's share of the residence. Husband's total basis in the principal residence is then $550,000. If he sells the residence in 2007 for $800,000, he will have no taxable gain as the selling price less his basis and $250,000 exclusion (for being a single homeowner) equals zero. Knowing the rules is essential. As an aside, if husband sells the home if 2005, in the year of wife's death, he will not only get a step-up in his basis for wife's one half basis, he will also get the full $500,000 gain exclusion under code section 121. After the year of death, a surviving spouse will only get $250,000 in gain exclusion.

Rental Properties

Real estate also takes form of rental or investment property in a portfolio. If a taxpayer is gainfully employed in another line of work, the rental properties will take on an investment role. Let's have a quick review of the rules governing rental real estate in the world of income tax. Rental activity is defined as being passive. For income tax purposes, passive income is netted with passive losses. If passive losses exceed passive income, this loss is suspended and carried over either to be offset with other future sources of passive income or to be realized when the activity generating the losses is sold or terminated. There is a special rule for those owning rental properties where they maintain active participation in the activity. Active participation is defined as having the obligation or right to make decisions regarding the activity. This qualification is easily met as the property owner must make decisions regarding property repairs, rent levels or increases, and the like.

When the taxpayer meets the active participation requirement, he then will receive benefit of losses from the property so long as they do not exceed $25,000. In addition, the taxpayer will lose benefits of these losses as adjusted gross income exceeds $100,000. The $25,000 loss limit is phased out 50 cents for each dollar that adjusted gross income exceeds $100,000. If a taxpayer has adjusted gross income of $125,000 before rental activities, the loss limit is reduced to $12,500. If losses from rental activities are $15,000, the taxpayer will get to deduct $12,500 currently and will carry over the remaining $2,500. If adjusted gross income is $150,000 or more, losses will not be currently deductible unless there is income from passive activities. Here is another point where knowing the rules will be a huge benefit. Adjusted gross income in excess of the $150,000 limit does not have to eliminate the ability to gain income tax benefits. Earlier, there was mention that passive income will net with passive losses. If a taxpayer could receive passive income from other sources, he could use passive losses to offset it regardless of his adjusted gross income level. Passive income can be generated by investing funds in real estate ventures that pay returns on the investment. An example would be an organization like AEI that puts together real estate deals that are economically sound and will generate, and pay out, this passive activity income. This could make for a sound development of one's portfolio while taking advantage of income tax attributes at the same time. Passive losses suspended from previous years, as well as those generated currently and in the future, can offer income tax advantages when netted against passive income.

What about the qualified real estate professional? They are not subject to passive activity limitations nor are they subject to the rules of active participation. If a taxpayer is able to demonstrate that he spends as much time performing real estate functions as he does other activities, he has met level one of the test. He must also demonstrate that he spends at least 750 hours a year on real estate related functions. This is roughly equivalent to 15 hours per week and must be met by either the taxpayer or his spouse, but not combined. When the classification of qualified real estate professional is reached, a mountain of other issues and considerations will arise. This will be beyond the scope of this article but as always, there is a standing invitation to be in attendance for the "most complete business program on radio".

It was a real estate boom like no other. Interest rates were dropping incredibly, homes were garnishing appreciation by the week, the stock market wasn't moving and first time home buyers were getting their piece of the American dream. Mortgage brokers, Real Estate Agents and New Home builders were raking in the cash. It seemed like it would never end. Month after month, year after year the sales of new and existing homes climbed. Investors threw their money into the housing market and then as fast as it came it went thud.

The thud started around November of 2006. It started incrementally with a slower than expected August, a quiet November and the news articles started to reflect which was inevitably going to commence. In January of 2007 the Real Estate Taxes were due and crash it went. What seems to be happening now is a rush to unload. From the outside looking in you can see the stock market rise as the housing market falls. New home builders with still a glimmer of hope increase the price of new homes yet offering larger than expected home incentives. Upgrades galore, creative financing, buyers agents bonuses and yet they continue to build on the land they have allocated for future expansion. If it seems familiar, it is. It has an uncanny sense of 1983 all over again.

How did this happen and what makes this housing thud different from the last? There are some minor differences that make this more unique than the last housing crash. Back in the 80's interest rates were at sometimes 16%. At that point it made sense to try to assume a mortgage that was a lower interest rate and throw your cash into their equity. But it wasn't realized equity. It was an inflated sense of a market share. As prices dropped home owners found they were in an over valued situation and as the job market suffered they could no longer pull their money out of their house to move on with their lives. It caused a ripple affect of people walking away from thousands of dollars just to save what they had left. Real estate was sold at auction in a manner that you would buy livestock or sheriff's sales and the late night infomercials were non-stop. "No Money Down" was the catch phrase. You can still find those publications that cite 20% interest rates and how finding a home with a 10% interest rate was a real steal.

So what happened in the last decade? Feeding on that premise that no money down is something of a desired situation and interest rates dropping most people would assume the best investment was their home. Out the window went the premise of paying down your note and having a secure position in your most valued asset. For some time it was just a matter of the educated investor refinancing a higher note and gaining equity in their home just by dropping their interest rate. It was a normal progression of an intelligent move. Refinancing could shorten the length of your home loan in some instances by 15 years and also lower your monthly payment. And then arose the hungry new home builder, the starving loan officer competing in a new market and the incredible increase of Real Estate Agents flooding the market.

Here's how it worked. In most instances this was a first time home buyer. They were to purchase a house no money down. There would be two loans. The 80% back loan that was a fixed rate of sometimes as low as 5% and then the front loan. The front loan represented the 20% down that was typically the homeowner's down payment. That 20% loan was an adjustable rate mortgage that was incrementally to increase over 5 years and then a balloon was to sit waiting at the end. The buyer confused by all this new jargon would ask, and then what? It was explained with the advent of interest rates dropping it was standard practice at that point to refinance that loan with another fixed rate loan or refinance the entire note at one fixed rate. It became such a standard practice that the next step made even less sense. Why not just incorporate your closing costs as well? And they did. Up to 6% of your closing costs could be rolled back into your loan. The buyer would ask what their monthly payment was and assumed that was an affordable note and there you have it. It was a disaster waiting to happen.

The second victim was the investor. The investor that in most instances was watching their money sit either in CD's that showed a dropping interest rate or a stock market that refused to move. The investor would buy these new homes with incredible incentives and it was explained that the home had these upgrades to the standard built home, the home would ofcourse appreciate to where they could sell in 5 years and realize the equity of a moving home market, and then reinvest. They even came with appliances so that they could rent them immediately. Could there be a catch?

So here's where it all plays out now. The new home buyer is in the home of their dreams. And the interest rates instead of dropping are now increasing. So incrementally their payment increases. Then to add insult to injury the home they purchased had an estimated tax base of an empty lot. So the taxes figured at closing were estimated on a fraction of the value of completed construction. Here comes the new appraisal on completed construction and your tax base increases by 150%. These new home buyers revisit that 20% loan and notice that the note is coming due. Struggling to understand the increase in their monthly mortgage payment, coming up with the added cash for their balloon, compounded with the increase in gas and consumable goods is overwhelming. So, as suggested by their loan officer they search to refinance.

What was not explained to them is with the rush of foreclosures on the market and millions of people in the same situation, you must have equity to refinance. You must show the ability to be able to support your note. And they are turned away.

The investor finds themselves in a new subdivision competing with new home sales and no equity. The builder has built in their contract that they can not erect a sign in their yard advertising the property for sale until the subdivision is completed. There are not to hang a lock box on the door. So basically they must rely on the local MLS to market their property. To add insult to injury now the new homes are selling the exact same house they purchased 2 to 5 years earlier for less than they purchased it and adding more upgrades and incentives to new home buyers.

This created a flood of foreclosures on the market. People frustrated are electing to walk away from the home and their good credit rating. Lenders are found at the court house steps now purchasing these homes, fixing them up and reselling them. In some instances the homes are not even rehabbed but placed back on the market sold "as-is, where-is". That would be the new catch phrase.

In order to circumvent the costs of the foreclosure the lending market created an alternative for a homeowner to stop their foreclosure. This system has now been name a "short sale" or a "pre-foreclosure". The short sale is handled this way. The homeowner without any equity in their home approaches the mortgage company and requests a short sale. They are to fill out financial information substantiating that they are no longer able to pay the note. Upon acceptable of the package the home is then listed by a real estate agent on the local MLS and marketing as a "short-sale" or "pre-foreclosure". The offers are then submitted directly to the lender and the lender will make the decisive move as to whether to accept the offer or renegotiate. The homeowner at this point is nothing more than a signature on the listing agreement or the closing statement.

Once the lender comes to an agreement with a prospective buyer the closing date is set and the house changes hands. In most instances the loan is reported as being satisfied and the homeowner now can relax and move to a more comfortable situation. There are floods of new seminars on purchasing property in this type of distressed situation and even though it is a reliable way to purchase property the best case scenario is ofcourse an end user. This is a particularly good way for a home buyer to purchase a property in relatively good condition for a discounted price.

As a real estate agent in the Houston area I have found it difficult to find documentation to send my sellers to to educate them in the process. Most websites are about buying real estate in a short sale situation but I have been limited in finding documentation to support how you would sell such home. Henceforth the publication of this article.

A Home Mortgage and a Retiree do not make a good fit, do they? A person nearing retirement would definitely prefer a hassle-free post-employment phase in his life, but more often than not, most retirees are still faced with the burdens of mortgage on a real estate investment and the scythe of foreclosure looming just above their heads.

Two options are available in this situation: 1) pay it off, or 2) refinance it.

It is a sad plight for a 65-year old to be still worrying where the next mortgage payment would come from at a time that he should be spending his retirement fund on pleasant surprises that life can still offer him, like travels and vacations, golf trips, or a day at the beach. On a sadder note, there are those worrying over mortgage payments, while stacks of hospital bills to pay pile up on their side trays. In both situations, paying up for the loan PRIOR to retirement is the best option. However, when one is left with no choice, but to carry his mortgage over to his retirement, he can decide either to pay it off or refinance it.

The million-dollar question: which is the best way to take?

First, determine the remaining balance on your mortgage. Can you manage to fully pay it off? When resources are available, why not? Nothing beats the peace of mind derived from being debt-free. When this is the option you will take, you can make temporary "trade offs" or bargaining agreements with yourself and with those who will be directly affected by your decision. Wanting to pay off a major account entails sacrifice - you may consider taking on another job even after you have retired, or you may opt to forego some wants, and focus on your immediate needs.

Second, consider refinancing when the outstanding balance on your mortgage is still way too high for you to fully pay off at a time. Consult a trustworthy mortgage investor nearest you. He can offer you advices akin to his expertise, and could assist you in coming up with an informed and intelligent choice.

Third, do the math. How much is the interest rate of your mortgage? If you invest your money elsewhere, can you generate interest that can surpass or compensate the cost of your money gone on interest payments of your mortgage? If this is possible, then by all means, opt for refinancing, which usually provides lower interest rates; otherwise, pay the balance in full.

Ideally, retirement should not be weighed down by concerns that should have been addressed during one's productive years. But life is far from being ideal to most, and that they have to face up to the rigors of saving up payments to their mortgage even during retirement.

It is advisable to consult a reliable mortgage investors companyfor sound advice whenever necessary. Its expertise and competence in handling mortgages can redirect your path to the best option you can take, while on retirement. When you do, you can look forward to really blissful "sunset" years ahead of you.

If you requested both: a mortgage loan and a home equity loan, you can refinance both loans and get only one loan together with a single monthly payment but with the same or better terms than the average of both outstanding mortgage loans. This can be done by applying for a refinance mortgage loan!

Home equity loans (also so called 2nd mortgages), are secured with the same asset as the main mortgage loan. With other words: when refinancing the home loan, you can include also your 2nd mortgage or home equity loan. This can have many advantages like:

Fewer monthly payments;

Saving lots of money on interests;

Receiving lower installments;

Less overall debt exposure.

Refinancing can save you thousands of dollars on interests! Home equity loans normally come with higher interest loan rates than mortgage loans. By obtaining a lower rate refinance home loan, you will be saving money on your mortgage loan but also saving (even more money) on your home equity loan.

In case of refinancing you will unify both loans and therefore get a longer repayment program & lower monthly payments. The loan installments will be definitely lower than the combination of mortgage loan payments and the home equity loan payments when they are separately. This will improve and ease your financial situation and income!

Another benefit of Mortgage loans is that there are a variety of ways in which you can repay a mortgage loan. The repayments may depend on locality, tax laws and prevailaing culture. The most common way to repay a loan is to make regular payments of the capital, also called principal and interest over a set term. This is commonly referred to as (self) amortization in the U.S. and as a repayment mortgage in the UK. A mortgage is a form of annuity and the calculation of the periodic payments is based on the time value of money formulas. Certain details may be specific to different locations: interest may be calculated on the basis of a 360-day year.

LendAdvisors.com - Blog that helps you with Real Estate, Mortgages & Refinance.