Tag: Equity Loan

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Build a business platform that qualifies you to receive additional loans for your business. Over time you can establish a larger line of credit.

 

Flip For Profits, Or …
With the popularity of “Flip or Flop” on HDTV buying auctioned property and foreclosures to upgrade and place on  the market quickly is growing in interest.

 

An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.

Part Four in a 5-Part Series: Is An Investment in Real Estate Right for You?

Part One: FOMO

Part Two: Real Estate Investment Types

Part Three: Building Your Rental Business

One of the more popular topics in books, seminars and training sessions was called “Mortgaging Out.”

Gaggle of Real Estate Professionals
  • The way it works, they said, was you get a property that you actually own.
  • But, the beauty of this method is you are the one paid for taking it over.
  • Instead of the normal approach when you pay for the property.
  • Using this methods delays taxes on the cash you receive, until you decide to sell the property.
  • If then, they said.
Dot the i’s and cross the t’s

Obviously this is a more sophisticated financial scenario which requires guidance from a CPA and an attorney.

Swim with the Sharks on Your Side

You want to structure your investment for an annual cash flow.

  • When you do, you build a  business platform that qualifies you to receive additional loans for your business.
  • Over time you can establish a larger line of credit.
  • And, out of the cash flow you can repay small bills.
Cash is King

With reasonable caution you can tap unusual sources to generate even more cash flow according to the pros.

Consider All Your Options

Look into:

  • Lines of credit on credit cards
  • Second mortgage lenders eager to package all kinds of unusual loans
  • Investors wanting real estate in their portfolio
  • Hard-money lenders willing to charge high interest rate loans for short periods of time
  • Property improvement loans
  • Development cost loans
  • Seller refinancing

After you’ve mastered a couple of these deals it’s time to take your business seriously and look for multiple zero cash deals.

You’ll need to line up down payment loan sources ahead of time and develop a longer term business relationship with them.

At the core of the relationship you’ll want to evaluate and tap into their capacity to fund your business plan to take over, say two or more properties a month, on a consistent basis.

And they may turn out to be a tremendous local source for locating potential properties.

Other sources to monitor?

Internet Sites to Monitor
  • Newspapers
  • Local and national real estate magazines
  • Internet sites featuring properties for sale
  • Bank fliers offering Real Estate Owned (REO) properties
  • Sheriff and tax sale bulletins offering foreclosed properties
  • Get on real estate broker lists for free information and leaflets on available properties.
  • And join an “apartment owner association” and study their publications.

For each investment you want to locate owners who feel they want to get out of their property they’ve held for too many years.

Motivated?

They represent your best opportunity for successfully proposing a zero cash offer – a motivated seller.

They are more likely to entertain one or more of your proposals.

  • How would you like to sell at 10% more than your asking price?
  • How would you like to sell your property to me in just days?

Reassure them that you’re dedicated to upgrading and improving every piece of real estate you own.

Prepare for your negotiations by meeting the seller’s needs with a reasonable, but lowball offer.

  • Refer to what you discovered in your research.
  • They’ll recognize that you’ve done your homework which places your offer in a favorable light.
  • Highlight local and national market conditions, for instance.
  • Consider taking advantage of any time pressures your seller may have with an offer to close the deal quickly.
  • Make sure your offer reflects your business plan and takes into account possible negative scenarios.

“The What Ifs.”

Hidden Fees You Want to Avoid

What if you had purchased rental units just before a prolonged recession?

Check into local area recession data to determine the degree of overhang in previous recessions.

  • In some areas the upper end is 12%.
  • That is expect 88% of your units will be producing income.
  • Your area may vary.
  • Factor in a conservative estimate for a decrease in net cash flows by 12% to 15%.
  • Together with an increase, of say a 30%, in costs.
  • In your business plan calculations appreciation doesn’t play into your monthly operations, because it won’t be realized until at the time of the sale.

Will your offer still hold up?

In slow real estate times condo units being auctioned off still in new condition can present new opportunities

  • Typically, they are sold to highest bidder regardless of price
  • The seller offers investor financing of 90%
  • Auctions close deals quickly to move units
  • No repairs of any kind need be made — these are new units with all fixtures and equipment guaranteed
  • Once the deal closes it represents significant savings to you

With the popularity of “Flip or Flop” on HDTV buying auctioned property and foreclosures to upgrade and place on  the market quickly is growing in interest.

Flip For Profits, Or …
  • Lenders or government agencies offer foreclosures to investors.
  • The inventory of properties grows when people bought more expensive homes than they really could have afforded.
  • Or developers fail to analyze the market for their property correctly.
  • And investors didn’t factor the impact of tough times and tighter attitudes of bank lenders into their business plans.
Risk of Foreclosure

But you did.

Where else can you find deals?

  • Try special rehabilitation or historical building incentives.
  • When you weigh the pros and cons you see that tenants generate rental income already.
  • You’ll need to do your due diligence, but in most cases the units have good bones – sound construction.
  • They occupy good locations that appeal to low- and middle-income renters.

Steps:

(22) Selectively evaluate the best quality-of-life communities to live in and weigh the tradeoffs of risk and rewards for accruing real estate appreciation along a progression of rural and small towns that meet what your pocket books can afford.

(34) On your visits look for any newer developments that may trigger changes in neighborhood patterns. New construction in or around the neighborhood? Major regional economic adjustments? Transition from households with children to ones that are empty nests? Rezoning, and dramatically rising/falling land values?

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Two Ways to Stay Home

Part Four in a 4-part series weighing the pros and cons of investing in real estate over the course of a life time.

Peace of Mind that Home Equity Affords
Pulling the trigger on any major decision like this one with consequences (intended or unintended) will significantly impact the rest of your life.

Back in February of 2007 I read a FidelityReport published by Fidelity Research Institute that compared unlocking equity for investments to risks and relative returns of stocks, bonds and cash.

NOTE: Don’t take what follows as financial advice. If you haven’t consulted professionals, well, what are you waiting for? Do so at once!

Part One

Part Two

Part Three

DOUBLE AND TRIPLE CHECK YOUR SCENARIOS WITH A FINANCIAL PLANNER WHOSE FIDUCIARY DUTY IS TO YOU!

Option Four – Stay in your home, invest your equity

Two Tactics.

Reverse Mortgage or

Home Equity Line Of Credit (HELOC)

HELOC scenarios:

HELOC rate is 8.0%; this is based on a loan for 80% of the home’s value and is .25% below prime (Source: Countrywide).

Assume that there is one refinance after 10 years.

HELOC mortgage interest deduction is limited to the interest on the first $100,000 of the loan.

Assumes home is sold off to pay the loan; if another mortgage is taken out, transaction costs could be lower. 

Pros: 

  • Allows both couples to live in their home.

    Enjoying the Fruits of their Labor
  • Works well when the home continues to appreciate in value.
  • The HELOC debt is covered by the increase in value.
  • After paying off the credit line heirs receive substantial legacies

Remember both couples could deduct the mortgage interest by itemizing on Federal taxes attributable to the first $100,000 of the loan.

HELOC transaction costs are also quite low at about 1% of the loan and the credit line offers flexibility in timing any drawdown.

Cons: 

  • The costs and responsibility of home maintenance.
  • As cost of living expenses increase both couples may be tempted to spend down more than the initial 80% debt value ceiling.
  • Or, as their home value increases they may  continually ramp up their debt.

    Risk of Foreclosure

Of course, they will need to make regular monthly payments on their HELOC or face the risk of foreclosure.

Reverse Mortgage scenarios:

Assumes that proposed legislation is enacted that would change housing limits to a national limit of $417,000.

Limit increases at 4% annually.

Assume current interest rate of 7% – includes the 6.5% interest rate and the .5% insurance premium.

Monthly servicing fee of $30/month is added annually.

This scenario assumes that interest rates stay fairly constant.

Reverse mortgage interest deduction is limited to the interest on the first $100,000 of the loan; accrued interest is deductible by the heirs in the year that it is paid. 

Leaving a Legacy for Heirs

It is assumed that the heirs will be able to deduct the mortgage interest in the year that it is paid, and that the heirs will be able to utilize $100,000 of that interest deduction. 

The utility of the deduction will depend on the individual tax situation of the heirs.

Assume home is sold to pay off loan; if another mortgage is taken out, transaction costs could be different.

Reverse mortgages

Enable these couples to receive regular payments (actually loans) secured against the value of their homes and be assured that they can remain in those homes for life. 

Pros: 

  • Homeowners live in their homes and tap into their substantial amount of equity.
  • Depending on their age.
  • Home value.
  • Prevailing interest rates.
  • As long as they live in their home, life is good.

No payments need to be made on the reverse mortgage (though they must, of course, cover the home’s routine expenses and maintain it). 

Better still, loan payments to the borrower may feel — and function — like ordinary income, but they are not taxable income. 

Under current law, payments received by a reverse mortgage borrower don’t count towards Medicaid resource limits provided they are spent each month and not accumulated. 

Here’s the bonus while you live in your home.

They don’t count toward the income threshold for determining whether regular Social Security payments are subject to federal income tax. 

Social Security Income and Taxes

Also, reverse mortgages do not count toward the $500,000 – $750,000 home equity test for nursing/long-term care assistance under Medicaid. 

Here’s the bonus for your kids.

Heirs to a home carrying reverse mortgage debt do sell, they should be able to deduct the mortgage interest (subject to any applicable limitations).

Cons: 

During 2007 Fidelity cautioned.

  • Because the reverse mortgage market is still emerging, upfront costs are much higher than a HELOC — up to several percent of the loan value. 
  • The product is complex and the amount available for lending is inversely correlated to interest rates — which are difficult to predict and impossible to control.

Are these five options the only scenarios for both couples?

It is possible to combine these strategies in various ways. 

Both couples could choose to combine the first scenario, 

Sell Home and Buy a Less Expensive Home, with either a HELOC or a Reverse Mortgage on the new home. 

Why would this be in their best interests?

They could generate incremental cash flow. 

Heirs would benefit from the new home.

Equity could be extracted for their comfort or future investments

But, here’s the kicker.

  • Time to age 94.

    How Long Before Age 94?
  • One couple’s planning horizon is 32 years while the other is just 19 years.

What’s yours?

You need to take into account the difference in possible home values, cash flows and other variables.

Think of it this way — if these couples chose one of these options in the (year 2016) — the results we project would be realized for the Walkers (by 2035)… the Smiths would not see the results the table suggests until (2048 )— the last year of their 32-year planning horizon. 

Since this age and timeframe difference is so substantial, the only meaningful comparisons to make are among each couple’s own options. 

Takeaways?

Remember, don’t rely solely on your home equity as a significant retirement funding source.

  • Recurring cyclical downturns in real estate can inflict severe damage.
  • Investment returns on residential real estate have been lower historically than
    Nest Egg

    on stocks and bonds.

  • If you pour all your funds into your home you’ll have nothing left to invest for higher marginal returns.

Don’t count out the emotional components of owning a home.

The emotional aspects of homeownership can also present significant barriers to the use of home equity for retirees.

Whatever the financial case, the emotional investment involved can make it hard to sell, rent or float debt on a home after a lifetime of paying off mortgages — even if that strategy makes sense financially.

The comfort of living in a familiar home as one ages or the desire to leave the home’s full value to heirs compound many retirees reluctance to tap their home equity by either sale or leverage.

If you’ve planned well and acquired significant equity when reaching retirement age you’ve got multiple options for mobilizing it.

Decisions on precisely how to tap home equity require careful analysis and he financial and emotional trade-offs change as retirees age.

Non-financial personal preferences may quite reasonably trump sheer financial or cash flow benefits.

Peace of mind, convenience, familiarity are all real, if hard-to-quantify values.

Reverse mortgages do offer many advantages for retirees —

… notably, regular cash flows that do not count as taxable income. 

But this market needs to mature.

High initial costs of reverse mortgages scare off many retirees.

Many fear losing their homes to the lender, even though there is no such risk.

The reverse mortgage market will likely grow substantially once upfront costs drop, securitization takes hold, and customer awareness of potential advantages grows.

With your financial planner double-check all of the

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  • assumptions,
  • scenarios,
  • tradeoffs,
  • pros,
  • cons and
  • your spreadsheet calculations.

If the calculated risks are baked in, then go ahead with your eyes wide open.

Like all carpenters know, measure twice and cut one.

Pulling the trigger on any major decision like this one with consequences (intended or unintended) will significantly impact the rest of your life.

An excerpt from Book Four in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Rocky Mountain State.