Tag Archive for 'why buy real estate now'

LOOKING AT THE REAL ESTATE MARKET IN A DIFFERENT WAY: INVESTING!

Published by Janeese Jackson on May 21, 2008 in Close-In Eastside 'hoods, Downtown, Lake Oswego & nearby 'burbs, Northwest Alphabet District and Pearl District. 0 Comments

Nearly all residential appraisals are based on comparable sales — comps. However, most commercial appraisals rely more on the “income capitalization” approach to valuation. This latter method, applied to residential real estate, casts a lot of light on the market run-up and can help you find the bottom of the bust in your market.The idea with the income-capitalization approach to home valuation is that rents (income), minus expenses and divided by investment (sales price) equals the return on investment (capital). This return on capital is commonly referred to in the industry as the “cap rate” and should be considered analogous to the percentage return you’d receive on other investments like stocks or treasuries. So, for example, a commercial building with a cap rate of 6 percent on a $1 million investment should be expected to generate a return of $60,000 per year.If you look at cap rates for residential real estate over the past few years it isn’t hard to see we’ve had a problem during this time. In my neighborhood, houses that were selling for $850,000 at the peak of the market rent for about $2,000 per month. After deducting property taxes and insurance (assuming zero maintenance and zero vacancy), the cap rate is about 1.5 percent, or a “one and a half cap.” Now let me ask you: How is this a good investment? You might want to answer “appreciation,” but keep in mind that unless rents increase, rising prices only continue to lower the cap rate. Thus appreciation is fundamentally limited by the growth of rents (or how bad of an investment one is willing to make).Looking forward, you can quickly and easily estimate where the bottom might be in your market by taking local rental rates, multiplying by 12, subtracting taxes and insurance, and dividing by a reasonable cap rate. A reasonable cap rate will vary, going as low as 2 percent for a trophy property in a fabulous location to 12 percent or more in high-crime areas.

Top Ten Tax Deductions for Landlords

by Attorney Stephen Fishman

Learn about the many tax deductions available to rental property owners.

Every year, millions of landlords pay more taxes on their rental income than they have to. Why? Because they fail to take advantage of all the tax deductions available for owners of rental property. Rental real estate provides more tax benefits than almost any other investment.

Often, these benefits make the difference between losing money and earning a profit on a rental property. Here are the top ten tax deductions for owners of small residential rental property.

1. Interest

Interest is often a landlord’s single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity.

2. Depreciation

The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years.

3. Repairs

The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

4. Local Travel

Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.

If you drive a car, SUV, van, pickup, or panel truck for your rental activity (as most landlords do), you have two options for deducting your vehicle expenses. You can:

  • deduct your actual expenses (gasoline, upkeep, repairs), or
  • use the standard mileage rate (50.5 cents per mile for 2008; 48.5 cents per mile for 2007). To qualify for the standard mileage rate, you must use the standard mileage method the first year you use a car for your business activity. Moreover, you can’t use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken a Section 179 deduction for the vehicle.

5. Long Distance Travel

If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan your trip carefully, you can even mix landlord business with pleasure and still take a deduction.

However, IRS auditors closely scrutinize deductions for overnight travel — and many taxpayers get caught claiming these deductions without proper records to back them up. To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long distance travel expenses.

6. Home Office

Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work, but also to a workshop or any other home workspace you use for your rental business. This is true whether you own your home or apartment or are a renter.

For the ins and outs on taking the home office deduction, see Home Business Tax Deductions, by attorney Stephen Fishman (Nolo), or Every Landlord’s Tax Deduction Guide, also by attorney Stephen Fishman (Nolo).

7. Employees and Independent Contractors

Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).

8. Casualty and Theft Losses

If your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called casualty losses. You usually won’t be able to deduct the entire cost of property damaged or destroyed by a casualty. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.

9. Insurance

You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers’ compensation insurance.

10. Legal and Professional ServicesFinally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.Did You Know?Did you know that:

  • Landlords can greatly increase the depreciation deductions they receive the first few years they own rental property by using segmented depreciation.
  • Careful planning can permit you to deduct, in a single year, the cost of improvements to rental property that you would otherwise have to deduct over 27.5 years.
  • You can rent out a vacation home tax-free, in some cases.
  • Most small landlords can deduct up to $25,000 in rental property losses each year.
  • A special tax rule permits some landlords to deduct 100% of their rental property losses every year, no matter how much.
  • People who rent property to their family or friends can lose virtually all of their tax deductions.

  

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Real Estate in 2008!

Published by Janeese Jackson on April 20, 2008 in Close-In Eastside 'hoods, Downtown, Lake Oswego & nearby 'burbs, Northwest Alphabet District and Pearl District. 0 Comments

2008—the Best Year to Buy a Home in 35 Years!??” In April of 1973, mortgage rates were about the same as they are today. Since that time, we have only had mortgage rates this low during 2001 and 2002, the height of the seller’s markets where there was little inventory. In the last two major buyer’s markets, one in the early 1980s and the other in the early 1990s, the rates were much higher. In 1978, interest rates were at 9.75 percent, en route to 18 to 21 percent in 1980. Thus, today’s buyer’s market, with exceptionally low mortgage rates plus a substantial supply of inventory, could be the best time in decades to purchase. There are several different ways that first time buyers lose money by waiting to purchase. The first is loss of tax deductions. In most cases, people who lack a mortgage pay more federal and state income taxes than those who qualify for a mortgage deduction. You can use a mortgage calculator to illustrate this point. For example, assume that a buyer is currently paying $1,500 per month on a rental. If the buyer purchases a $300,000 property with $30,000 down and a fixed-rate 30-year mortgage of $270,000 at 6.25 percent, the buyer actually nets $24,262 more, assuming that appreciation keeps pace with inflation, the buyer owns the property for eight years, and is in the 28 percent bracket. Another way renters lose money is through wealth accumulation, generally in the form of creating equity by paying down the loan and through appreciation. According to the Federal Reserve, the average homeowner between 1995 and 2004 had a net worth of $184,400, of which approximately $60,000 was due to home ownership appreciation. To account for the difference of $60,000 of wealth accumulation, a $200,000 house would have to decline by 30 percent. Thus, each year a buyer waits to purchase a median-priced home, they lose $6,000 in potential wealth accumulation. An additional way that renters lose money is through increased interest rates. For example, on a $200,000 mortgage, assume that interest rates increase from six to seven percent. By waiting, the buyer’s payments increase by $1,578 each year causing a total loss (in payments and wealth accumulation) of $7,578. If interest rates increase from six to eight percent on that same loan, they will pay an extra $3,221 per year resulting in a total loss of $9,221. Our local market is experiencing negotiation that I haven’t seen for years.  I don’t know if it’s truly the “best” year to buy, but it’s certainly a “good” year. 

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CHALLENGES & OPPORTUNITIES IN OUR PRESENT REAL ESTATE MARKET!

Published by Janeese Jackson on March 30, 2008 in Pearl District. 0 Comments

Not much more than a year or two ago, our marketplace was dealing with multiple offers and escalator clauses.  Many sellers’ biggest concern was making sure they were able to drain the last dollar of profit from the sale of their home!  The market was so hot that some buyers were gladly discarding the use of standard contingencies (such as financing and professionaly inspections…though, not if I could help it!!), just so they could get to the front of the line of other purchasers!  For the first three quarters of 2006, we watched as the market gradually shifted and interest rates ticked slightly upward.  Then we started seeing a more radical shift in the real estate market throughout 2007, but rates came back down.  I believe the “sub-prime” debaucle brought the “ball home” for Portland.  Clearly, it is more a buyer’s market today than at any time in the last few years.

If these changes were occurring in the stock market rather than the real estate market, one would be preaching the maxim “Buy on bad news, sell on good”.  But, today, in most real estate markets, buyers are holding onto their money, even while more sellers are listing their homes.  As a result, marketing time is getting longer and inventory is increasing.  However, interest rates are at the lowest point they have been at since January 2006.  Lower interest rates usually mean that more buyers can qualify for higher loans.  However, the irresponsibility of some loan officers and the corporate ideologies of some major lenders have certainly redefined that entitlement.  There are still good loan programs out there, but a little more creativity is necessary (and a good loan officer is paramount).  Good credit can get a buyer plenty of options and some creativity can still get a mildly credit challenged buyer a creative financing package!  With more inventory to choose from and interest rates falling or remaining the same and more time to make a rational purchasing decision, what more could a buyer ask for???

For most home buyers, livability is the major factor in their purchase:  Location, schools, safety, commutes, etc.  These motivations have never changed, regardless of the economics of the marketplace.  Here are concepts to remember:

  • PROFIT ON RESALE IS PRIMARILY DETERMINED BY WHAT YOU PAY FOR THE HOME, NOT BY SELLING PRICE.  In previous years, with the limited amount of inventory, owners were selling their homes at the top of the market.  But those that made the real money were the ones who had paid the least when they bought - i.e: they started with the lowest basis.  Why does this make a difference?  Because sellers usually become buyers, which means that selling at the top of the market only results in buying at the top of the market.  So those who really benefitted in these last hot markets were the ones who were able to pull out the greatest profit, because they had a lower basis in the home to begin with.
  • MARKET TIMING IS NOT REALLY FEASIBLE IN REAL ESTATE.  In the stock market, there are those who are “market timers”, making their purchasing and selling decisions based upon what the market is doing at that precise moment in time.  However, the real estate market does not work this way, since there is no such thing as the Dow Jones or Nasdaq, which reports changes on a minute-by-minute basis.  The best the uninformed real estate consumer can do is scour the internet, newspapers and magazines to get anecdotal reports that are usually months old.  Even the Zillow-type websites are not totally reliable, since they are based primarily upon public record information that depends upon tax assessors, deed recorders and other bureaucrats to document events that occurred months ago.  The information is inherently stale!
  • THE CONDITION OF THE NATIONAL MARKET DOES NOT REPRESENT THE LOCAL MARKET.  Oregon is a unique market, primarily due to its attractive quality of life.  Hoever, in addition, there are sub-markets such as the coast, the Willamette Valley, Southern Oregon and Central Oregon.  Anyone who relies upon news reports about the national housing market in making purchasing decisions about Oregon is making a big mistake.  That would be like looking at national weather patterns in deciding whether it would be a good day for a picnic at Washington Park.

For most sellers, frustration and disappointment stem largely from unrealistic expectations.  Here are some points to remember:

  • TODAY’S LOCAL MARKETPLACE IS NOT AN ABERRATION.  Look at the RMLS (Realtor’s Multiple Listing Service) “Market Action Report” (available on www.janeesejackson.com > go to left nav bar > go to “Market Stats”/updated monthly).  If you compare it to a few years ago, the available inventory and time on market are much closer to the days when the marketplace was in more equilibrium than in the recent market frenzy.   This is not necessarily bad.  When listing inventory is higher, there is enough time for buyers to make rational decisions amoung various alternatives.  When time from listing to sale is under 30 days, poor decisions and recriminations are bound to occur.
  • OLD ANECDOTES NO LONGER APPLY.  Sellers cannot live in the past, expecting the marketplace to treat them as it did their former neighbors or friends who sold their homes prior.
  • WHY IS THE SELLER SELLING?  There are many reasons that sellers sell.  Some are voluntary and some involuntary.  Regardless of the reason for the sale, a closer look at the statistics will show that while time on the market has definitely increased, there is often still good profit to be made in the market.  And, if the seller will soon be a buyer, their puchasing power will still be maintained.

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