House hunters can expect to find great Springtime deals in most U.S. markets this year - if they’re looking in the right places. But in certain metros, they could be paying as much as 30% over the last peak pricing in 2007. And that’s a little scary.
Hi, I'm Kathy Fettke and this is Real Estate News for Investors.
We're headed into the busy spring real estate season and according to the latest update from the FNC Residential Price Index, buyers in some markets can still get great deals. While other buyers could end up paying far too much.
Of the 30 major U.S. markets covered by the Index, just 9 were above pre-recession peak prices. That leaves 21 major markets that are still well within affordability range and housing in many secondary markets is still on sale.
FNC Housing Economist, Yanling Mayer, said that prices varied widely in various markets, depending on the extent of market fallout as well as the strength of the recovery in the last four years. He says, " 'average' nationwide property prices are up 28% since early 2012. That brings us up to a 13% below-peak level nationwide.”
The FNC says prices were up 4.7% in January of 2015 year over year and by December of 2015 they were up 6.2% year over year. So it appears that prices continued to rise last year and picked up speed toward the end of 2015.
So what's on tap for this year? FNC economists are predicting modest to strong growth in pricing due to several factors. Interest rates are at all time lows, making a mortgage payment more affordable than rent in most markets.
Potential buyers will be trying to get into the market, but once again, they'll be up against very tight inventory. Inventory was down 2.2% in January compared to a year ago. The National Association of Realtors says unsold inventory is at a 4 month supply right now. 6 months supply is considered normal.
Tight inventory in combination with eager buyers equates to bidding wars, and thus, higher prices. Yes, folks. we’ve been here before…
NAR's chief economist, Lawrence Yun says, "The spring buying season is right around the corner and current supply levels aren't even close to what's needed to accommodate the subsequent growth in housing demand."
NAR says despite the low inventory, rising prices and a typically slow January, the sales of existing homes rose .4% last month. That pushes the yearly sales rate to 11%. NAR says it's the largest year-over-year increase since July 2013, when it was 16.3%.
In fact, Yun says the continued recovery in U.S. real estate will likely help offset global pressures on the U.S. economy. He says it will help the nation avoid another recession.
That’s an interesting twist to the story. According to Yun’s theory, real estate investors are putting their money into properties, to secure their wealth against a potential recession. At the same time, their real estate investments could also help prevent a recession from happening. Do you agree?
National statistics are of no real help when gauging real estate values. We need to drill into local markets to get an idea of which cities are overheated and which are cooling off or just starting to warm up.
So which cities are experiencing the biggest price hikes and which are still offering bargains?
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Does it make more sense to buy or rent property today? Zillow’s recent report shows where it might be best to rent today versus own today, and where real estate investors can get the biggest bang for their buck.
One way to decide if you should buy or rent your home is known as the "breakeven horizon". The breakeven horizon calculates the amount of time it takes for the purchase of a home to become less expensive than renting that same home.
It's an especially important factor for people who change jobs frequently, such as today’s generation of millennials. Zillow says Millennials typically spend only three years at a job, before they move on.
Zillow recently looked at 35 of the largest U.S. markets and found that Washington D.C. is at the high end of the breakeven horizon. That means you'd have to own your home there for at least 4-and-a-half years to break even. At the low end, is Dallas where you would break even in just 1.3 years. On average, the breakeven horizon is 1.9 years nationwide.
For all those career-minded millennials or people under age 35 who are on the move, it may not make sense to buy in 30% of U.S. markets. While their mortgage may be lower than rent, there are other expenses to consider.
Zillow calculates the breakeven horizon based on several factors including initial payments for renting or buying, closing costs, monthly payments for rent or mortgage, insurance, property taxes, utilities and maintenance. Zillow also gauges any fluctuations in home values and rental rates to determine which is more cost effective.
The results show that 70% of the cities analyzed have a breakeven horizon of less than 2 years. Those lower breakeven levels can be attributed to low interest rates, rising home values and rising rents.
But many Millennials today are working on their first jobs, which are often located in areas with high breakeven horizons. Zillow cites Boston as one of the "youngest" cities. The breakeven horizon there is just over 3 years. In San Francisco, it's 2.9 years.
But home prices are high in those markets, so even if they could break even in just 3 years, it might be tough to come up with the down payment. That’s why America’s young adults are opting to rent in high priced markets.
Read the full transcript at newsforinvestors.com
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Mortgage rates are dropping to new lows - just 2 months after the Federal Reserve hiked rates in December for the first time in nearly a decade. What’s going on and how will this affect real estate?
I’m Kathy Fettke, and this is Real Estate News for Investors.
The 10 Year Treasury yield dropped again this week and some analysts think it could fall as low as 1% or even lower this year.
What does this have to do with mortgages? Everything.
When the 10 Year Treasury yield decreases, so do mortgage interest rates. The two are tied together because investors have a similar appetite for both.
It works like this: when investors worry about the global economy, they seek safety. And they find safety in government bonds, specifically U.S. Treasuries. When demand for bonds increases, prices for those bonds increase and the yield decreases.
It’s the same concept as when investors seek safety in cash flow real estate. Increased demand drives prices up, so the yield (net return or cash flow) goes down.
The average 30-year fixed rate mortgage is paid off or refinanced within 10 years. Those loans are bundled and sold as Mortgage Backed Securities (MBS) and offer a similar safety and return as the 10 Year Treasury Bond. Investors with an appetite for 10-year U.S. Treasuries also like Mortgage Backed Securities. That’s why you can guesstimate where mortgage rates are headed by looking at bond purchases.
Today, the U.S. Treasury note was at 1.75. Typically a 30-year fixed rate mortgage would be about 170 basis points above the current 10-year bond yield. So when you add 1.75 to 1.70, you get 3.45% - which is approximately today’s rate for a 30-year fixed rate mortgage.
Most people think mortgages are tied to the Federal Reserve and they are, but very indirectly.
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The number of vacant homes in the U.S. dropped by 9.3% toward the end of 2015. That’s according to RealtyTrac’s newly released report. If you own investment property, how does this news affect you?
Vacancies across the nation are low right now, with some markets coming in at less than one percent of all available homes. This number applies to single-family homes and 1-4 unit buildings.
Out of 85 million residential properties in the U.S., RealtyTrac says just 1.3 million homes were vacant at the beginning of this month. That's just 1.6% of all homes in the U.S.
Low vacancies occur when there is more demand for housing than available supply. When more people are chasing property, both home prices and rents increase.
Higher home prices may be good for sellers, but it’s not so good for buyers. Higher rents are good for landlords but not for renters.
Continued demand mixed with limited supply can overheat certain housing markets and create housing bubbles in those areas.
RealtyTrac analyzed 147 metro areas with at least 100,000 homes. They found that the two areas with the lowest vacancy rates were San Jose, California and Fort Collins, Colorado - at just 0.2% of all homes!
Other super hot areas with minimal vacancies are Manchester, New Hampshire; Provo, Utah; Lancaster, Pennsylvania and San Francisco, California - all with just 0.3% vacancies. Low vacancy rates are also found in Los Angeles, Boston, Denver, and Washington, D.C.
The city with the highest number of vacancies was Flint, Michigan. RealtyTrac says 7.5% of Flint homes were vacant at the beginning of February. That’s not surprising given their toxic water crisis.
Other cities with high vacancy rates are Detroit, Michigan; Youngstown, Ohio and Atlantic City, New Jersey.
But high vacancy is subjective. To put things in perspective, the long term average vacant rate is 7.38%. In September of 2009, vacancies hit a high of 11%. And even during the last real estate peak of 2006, vacancies were close to 10%.
RealtyTrac says 76.7% of the vacant properties are owned by investors. That's about three-quarters of all vacant properties - 1,044,599, homes.
Investment properties are more likely to be vacant because they are either purchased in disrepair and need renovation, or they need updating after a tenant leaves.
The vacancy rate for investment property is 4.3 percent nationwide, but in 1/3rd of U.S. markets where demand is stronger, that rate is down to 3 percent.
What does this mean for real estate investors?
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If you’d like a list of the best U.S. markets for investing in rental property, visit www.realwealthnetwork.com. If you join the network (it's free), you will also receive a list of agents, wholesalers and turnkey rental property providers recommended by Real Wealth members in the strongest U.S. markets.
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Corporate debt in America has doubled since 2008, according to analysts from Goldman Sachs. Have profits increased at the same pace? And if not, how could eventual corporate credit defaults affect you?
Before the mortgage meltdown in 2007, U.S. non-financial corporations held a total of $5.7 trillion in debts. That number has increased to over $8 trillion dollars today, just 8 years later. These corporations are carrying debts equal to 50% of their actual net worth, which is far above historic average and near record levels.
In the 1950’s companies owed 20% of their net worth on average. That increased to 25% in the 1980’s. Two decades later in 2007, when credit was easy for anyone to obtain, corporate debt compared to net worth was still below 40%. But today, it’s up to 50%!
Total corporate and non-corporate business debt outstanding has ballooned to $14 trillion, up from $11 trillion in late 2007.
An increase of corporate debt in itself is not worrisome, as long as those funds go to purchase product or assets that create more sales and more cash flow that can cover the interest payments. But unfortunately, that does not appear to be the case. A large percentage of recent debt accumulated by American firms has gone to fund mergers and acquisitions of over-valued companies.
More worrisome is that these U.S. corporations have also borrowed money to buy back their own shares to drive up their own stock prices! As much as $3 trillion has gone into financial engineering that includes stock buybacks during the last six years.
Why would a company borrow money to buy it’s own inflated stock? Simple. No one else will.
During Q4 2007, real net investment after capital consumption in the U.S. business sector was about $400 billion at an annual rate. By contrast, during Q4 2014 the comparable number was about $300 billion.
Real net investment in the U.S. business sector was 25% less last year than it was before the financial crisis; before massive amounts of money was printed to stimulate investment and before interest rates were at near-zero levels.
In comparison, during the 7 years after the 1990 peak and subsequent recession, real net business investment expanded by 50%. Today, it’s DOWN 25%.
READ MORE at www.NewsForInvestors.com
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Student loan debt is also a concern for the economy. Higher education has been an economic driver for decades. But much of that was fueled by easy student loans. Total outstanding student loan debt is $1.2 trillion today, up from just $260 billion in 2004.
Unfortunately, 50% of today’s graduates are unemployed or have jobs that don’t require a college education. Saddled with heavy debt out the gate and no or low paying jobs, 1 in 4 of those borrowers are either in default or are delinquent on their payments. Nearly 7 million Americans went at least a year without making payments on their student loans - which is about 17% of all borrowers.
The Obama administration has offered new repayment plans to more than 5.1 million borrowers. So far 611,000 have defaulted on the newly structured loans.
Again, doesn’t this sound familiar - like the loan modification programs home owners were offered?
The mortgage industry became highly regulated after the mortgage meltdown, but what about student loans? Who will be held responsible for giving student loans to young people who have no ability to repay them? Will the American people have to bail out poor decisions by college admissions offices?
Current law requires colleges and universities with over 30% default rates to establish a default-prevention task force and prepare a plan to identify the factors causing the high default rates. They also could lose eligibility to participate in federal student aid programs. This really sounds more like a slap on the wrist rather than real accountability.
But if more students default on their loans, you can expect tighter regulations to follow suit. And this could be devastating for private institutions of higher learning.
When any industry has relied on easy credit and suddenly that credit is pulled, chaos ensues. Few students can actually afford college, so if student loans become more difficult to obtain, fewer people will be able to enroll.
At the same time, those colleges used easy credit to expand and build more state-of-the-art facilities to attract more students and much of that expansion was funded by more debt.
This creates a serious financial problem: softer demand among students combined with higher administration costs. Add to that, the number of people going to college is also declining. The Millennials are now the largest generation in history and the largest group among them are ages 22-24. These young adults are now graduating. Who will replace them?
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Household debt increased by $51 billion dollars during the fourth quarter of 2015, according to the Federal Reserve Bank of New York. But the repayment rates actually improved.
Total household indebtedness is now up to $12.12 trillion, with only 5.4% in some stage of delinquency. This is the lowest delinquency rate since the second quarter of 2007.
The main reason for the increase in household debt last quarter was due to an increase in mortgages. More people were taking out home loans and those borrowers are making their payments as promised. And there appears to be a good reason for that - approximately 56% of all new mortgage balances went to borrowers with credit scores above 760.
Only 2.2% of mortgage balances were over 90 days late - which is a slight increase from the 3rd quarter’s 2.3%, but still at its lowest level since 2008.
Homeowners also don’t appear to be using their homes as ATM cash machines anymore either. Home equity lines of credit have been on the decline for 4 years - and fell $5 billion during the fourth quarter of 2015.
The Senior Vice President at the New York Fed said, “Mortgages are being paid down faster, helping to offset the generally rising volume of originations.”
Today’s homeowners want to pay down their mortgages, not increase them through cash-out refinances or equity lines like they did in the mid-2000’s. Home mortgage debt is actually down by $1.1 trillion or 9% from its late 2007 peak. Surprisingly, household credit card debt is also down significantly.
However, this responsible lending does not seem to be crossing over into the auto industry. Instead, auto loans have been given to people with all levels of credit scores, resulting in a steady increase in auto debt since mid-2011. And repayment is not as solid as mortgages have been.
The Wall Street Journal reported that 8.4% of borrowers with low credit scores who took out auto loans in early 2014 had missed payments by November, according to Moody’s analysis of Equinox credit-reporting data. That’s the highest level of early delinquencies for subprime borrowers since 2008...
Will the consequences result in another massive meltdown?....
READ MORE HERE
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Foreign investors have been gobbling up U.S. real estate ever since it went “on sale” in 2009. And the pace could increase substantially this year, now that a heavy tax on foreign investment has been lifted.
As Americans worry about stock market volatility and housing bubbles, international investors are pumping more money into the U.S.
According to research firm Real Capital Analytics, the purchase of U.S. real estate by foreign buyers skyrocketed to $87.3 billion dollars last year. Compare that to just $5 billion in 2009.
And demand is not slowing down. In a poll by the Association of Foreign Investors in Real Estate, also known as AFIRE, 64% of those polled say they plan to make modest or "major" increases to their U.S. portfolios this year. Another 31% plan to maintain the investments they already have. And, no one said they were planning a major decrease in their U.S. real estate holdings.
To put this survey into perspective, AFIRE says it has about 200 members from 21 countries, with about $2 trillion dollars in assets. So take into account, this survey comes from a small pool of members with a very large amount of capital to deploy.
AFIRE’s wealthy members consider the U.S. the best country for capital appreciation and for stability. They said they are mostly interested in apartment buildings and commercial properties. Single-family rentals were "not" on their radar.
In a recent press release, AFIRE’s CEO said - quote - "The investment opportunity is in the United States, itself. The real estate fundamentals are sound.”
He also said, "There are opportunities across all sectors of the real estate spectrum and in both gateway and secondary cities."
New York City was the #1 choice for foreign investments worldwide.
Los Angeles came in 2nd and San Francisco 3rd.
The secondary cities that top the list for foreign buyers looking to buy real estate include Washington, D.C., Seattle and Boston.
And even though foreign investment in the U.S. has soared from just $5 billion just 6 years ago to over $87 billion last year, the U.S. could become even more desirable for foreign investors.
A new law signed by President Obama will ease a 35-year-old tax on foreign investment in U.S. real estate, which is expected to open the floodgates for more purchases by overseas investors.
This new measure was part of the $1.1 trillion spending measure passed in December in order to prevent a government shutdown. Basically, the new legislation waives a tax imposed on foreign pension funds under the 1980 Foreign Investment in Real Property Tax Act, known as FIRPTA.
That tax is triggered upon the sale of a U.S. real property interest. It's similar to a capital gains tax but it applies to foreign pension funds. Under this new measure, foreign pension funds will now have the same tax treatment as their U.S. counterparts for real estate investments.
It's a substantial tax savings. The FIRPTA tax could be as high as 35% or more in some cases. At the time of sale, the seller was required to withhold 10 percent of the purchase price for tax purposes. The buyer would then be responsible for paying any tax due, upon the filing of income tax.
What this did is make the purchase of U.S. real estate unattractive for trillions of dollars worth of foreign pension investments. The tax-law modification could now be a game changer, resulting in billions, even trillions of new capital flowing into U.S. real estate.
Most likely, that capital will flow to commercial property, in this order, according to recent demand:
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Drug dealers trying to stash their cash into real estate are going to have a tougher time.
The Treasury Department announced it will begin tracking luxury real estate transactions purchased by anonymous buyers with all-cash.
The initiative is meant to prevent money laundering by shell companies that purchase high-end real estate without revealing the name(s) of the true buyers. The New York Times would like to take credit for the government’s crackdown. They say it was inspired by its own investigative reporting efforts last year that exposed the use of shell companies by foreign buyers who are creating safe havens for their money in the U.S.
Title companies will be responsible for participating in the truth-telling. They will be required to provide copies of driver's licenses and passports, and give the names of the individuals to the Treasury Department.
This is the first time the federal government is requiring this kind of disclosure. Initially, the focus will be on New York City and Miami, two cities known for attracting global investors.
Federal investigators will put the information into a database for law enforcement officials to access.
How long will it take before this law trickles down to regular buyers - like you and me?
Property Worth $1B+ in New York City
Speaking of big money transactions: Property values in New York City are skyrocketing. The Real Deal reports that 15 New York City properties are now worth more than $1 billion dollars each.
And, they say these values may pale in comparison to their true market values. They are set by the city and are thought to represent as little as half of the amount they would sell for. Plus the assessments are based on income and expense figures submitted in 2014, so the city's valuations may be lagging.
The total value of New York City property: more than one trillion dollars.
Let’s hope no tsunami’s hit that island.
And that's a warning.
Don’t put all your eggs in one island. If you own high priced property in San Francisco or New York City - consider how much of your net worth is tied to those properties. And if it’s a disproportionate amount, perhaps it’s time to take a closer look at possible options and protective measures for your real estate portfolio.
One tsunami or earthquake could wipe out your property in a matter of moments. Insurance for those kinds of natural disasters is expensive and often doesn’t cover the entire loss.
I met with an elderly couple once, who came to me for help. They owned a home in Berkeley, CA worth approximately $1M, and they owned it free and clear. But, they were completely cash poor. They could barely pay the taxes or insurance on the property, let alone maintenance. They rented out the basement which provided some income, but otherwise only had about $50,000 in retirement funds, which wouldn’t last long.
They came to me to see if I could get them an equity line or reverse mortgage.
I asked them if they had earthquake insurance and they did not. They could barely afford basic hazard insurance.
I asked them if they'd consider selling their home, investing the money and renting or moving to a more affordable place. They said they were too attached to their home and did not want to sell.
My advice to them was to put aside sentimentality and make wiser decisions that would offer safety and stability in their golden years.
I advised them to sell the property and diversify. $500,000 of the capital gain would be tax free because it was their primary residence. The other half had been rented and could be exchanged into rental property.
They could move just outside the San Francisco Bay Area where homes could be purchased for $200-$300,000. That would leave them with $700,000 to buy investment property with a 10% return - which would be about $70,000 annual net income.
Is the U.S. housing market headed for another subprime mortgage fiasco? Opponents of Obama’s new HomeReady mortgage program think so.
I’m Kathy Fettke and this is Real Estate News for Investors.
The Obama administration announced a new government-backed mortgage program called HomeReady, that assists low-income borrowers in purchasing a home.
HomeReady is a FannieMae loan - which means it’s insured by the US government - and basically replaces the subprime program that some say triggered the mortgage meltdown in 2008. But, this time, scratch the word “subprime”. HomeReady is being called an "alternative mortgage program".
The guidelines allow lenders to include the earnings of the primary borrower along with other wage earners in the household.
Having more than one borrower on a loan is not a new concept. However, what’s new with the HomeReady program is that even relatives who don't live in the same home can participate in the loan application.
Borrowers also don't need stellar credit scores. They can qualify with a 620 FICO score, which is considered "subprime". And the down payment can be as low as 3 percent.
Borrowers need to get enough wage earners in their borrowing pools to meet a 45% debt-to-earnings ratio. And this program is not just for first time homebuyers. Repeat buyers can also qualify with just 3% down.
Income from non-occupant borrowers, such as parents, is allowed and rental income from renting out a room or basement apartment can also be included to augment the borrower’s qualifying income.
Proponents say the benefits out weigh the risks and are praising the program as a way for minorities to get into home ownership. According to the Investor's Business Daily, the National Association of Hispanic Real Estate Professionals says it recognizes the living situations of many Hispanics and other minorities, who have several working individuals living in one household.
Borrowers will be required to complete an online education course to prepare themselves for home ownership.
What are my thoughts on this and how does it affect real estate investors?
Read more at www.NewsForInvestors.com
The Bank of Japan announced this month that it will cut rates to minus 0.1% and mentioned that it will push rates even lower if needed.
What in the world does this mean to Japan, the U.S. economy and you, the investor?
The Bank of Japan is the country's central bank, with similar powers as the Federal Reserve in the U.S. We are accustomed to hearing of central banks hiking rates in order to slow a booming economy, but lowering rates into negative territory? Now that is rare... but unfortunately, not so rare today.
Negative rates are set by central banks in order to encourage commercial banks to lend more because they would be charged to keep money within the bank.
Negative rates also encourage consumers to spend rather than save, because it costs them to have money in the bank as well. They do not earn interest for saving, they PAY it.
It’s basically the opposite of what we know as “normal" banking. Banks can end up paying customers who borrow from them! Negative rates can also weaken the country's currency, which helps increase exports and can boost the economy.
Central banks raise rates to slow down a booming economy, curb inflation and stop asset bubbles from growing out of control. So when they lower rates, they are trying to boost a slowing economy and create inflation.
Negative interest rates are simply another form of stimulus - but more of a last ditch effort for desperate economies trying to fight deflation. Most people understand inflation, but they don’t realize a government’s greatest fear is the opposite. Deflation.
Inflation is defined as when the prices of goods and services increase, or inflate. Deflation is when the prices of goods and services decrease - or deflate.
While ups and downs are normal in a free market, when inflation or deflation happens at a rapid pace, it can be devastating to an economy: i.e. the bursting of an asset bubble or hyper-inflation.
At first glance, deflation would appear to be good for consumers because they get to pay less for goods and services. Who’s at the pump complaining that gas is cheaper? And who was bummed out they bought property in 2009 at the bottom of the market?
In fact, deflation is a normal by-product of a healthy economy - contrary to what most people think. In a free market, competition is king. Companies competing for business will lower their prices, while improving quality. All others go out of business.
Inflation, on the other hand, is a by-product of fake stimulus - not free market economics. Inflation was never really an issue in the U.S. until Nixon took us off the gold standard back in 1971. The money supply no longer needed to be tied to gold, so central banks could print as much money as politicians needed to keep their unrealistic promises.
This kind of engineered monetary stimulus creates asset bubbles that eventually get so big they have no choice but to pop - creating massive waves of price increases (inflation) and then even larger price declines (deflation) as those bubbles pop.
We know the real estate bubble of the mid-2000’s was created from the manufactured stimulus of easy credit. The popping of that bubble created a worldwide financial meltdown.
How did the government fix it? More stimulus.
Instead of easy loans to consumers, the Fed made borrowing cheaper - by lowering interest rates to near zero levels for 10 years! Banks and corporations could borrow money for almost nothing. Corporations were able to borrow money to buy their own stock, driving values up way past earnings levels.
Sounds illegal doesn’t it? Apparently it’s not. Our own government did it - with another stimulus in the form of bond buying. The government was buying it’s own debt!
But that wasn’t enough, the government also issued 3 rounds of quantitative easing for an an unprecedented amount of $4 trillion.
Rents rose last year at their fastest pace since before the 2008 housing crisis. And even while some markets are starting to cool off, overall demand is growing, which will push rents in areas with the greatest demand.
One of the latest reports is from real-estate researcher Axiometrics, showing that rents rose 4.7 percent in 2015. That’s on average. Some metros, like Fort Meyer’s and Sarasota in Florida; Sacramento, San Francisco and LA in California saw double digit increases.
According to the Wall Street Journal, rents have risen steadily over the last six consecutive years while the homeownership rate is near a 30-year low right now, at just over 63%.
What’s going on? Home prices are low, interest rates are at all time lows and affordability is at it’s best in 97% of markets. Outside of a handful of expensive metro areas, it’s still much cheaper to own a home than rent in most of the country.
Why are more people choosing to rent than to own, even when owning might be cheaper?
First, even though interest rates are low, making a house payment very affordable, banks look at overall debt. A borrower should not have more than 43% consumer debt.
Let’s say someone earns $3000/month and pays $800 in rent. If they could purchase the home they live in, the mortgage might be $500/month. They could save $300 per month by being an owner, not a renter.
BUT, if they had a car payment for $200/month, credit card debt at $400 per month and a student loan payment of $400/month, their consumer debt would be $1000/month.
Add the $1000/month in consumer debt with the $500/month mortgage payment, that’s $1500. Since their income is $3000/month, their debt to income ratio would be 50% - too high to qualify for a loan.
Additionally, banks are terrified of buy-backs, so they are giving a preference to borrowers with high credit scores.
And of course, demographics play a part as well. The largest generation today, the Millennial population, ages 18-34, are saddled with student loan debt and are having a hard time finding employment. Plus, they like downtown living where renting tends to be more affordable than owning.
But it’s not just the Millennials who prefer to rent at this time. According to a recent Harvard study, researchers say the demand for rental housing has grown the fastest for renters with the highest incomes and for Baby Boomers, or those folks age 50 and over. In fact, demand among high income earners grew at a whopping rate of 61 percent from 2005 to 2015!
During that same time, the number of Boomers who became renters, grew 50 percent, from 10 million to 15 million. But the experts also say that demand has been broad-based, with renters coming from all income levels, age levels and ethnicities.
All this demand for rentals is driving leases up. And like anything, there’s a positive and a negative depending on which side of the fence you stand.
Renters face higher housing costs and therefore less cash flow, while landlords receive higher rents and therefore a higher monthly cashflow.
Landlords were also on the grassier side of the fence during the mortgage meltdown. When over 5 million homeowners lost their homes to foreclosure, they became renters. With so much demand for rentals, rents slowly increased during the recession, even while housing prices bottomed.
READ MORE HERE
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Using a checkbook LLC for your self-directed IRA is a strategy adopted by the savviest of real estate investors, but there’s one tiny problem with it. It may not be legal.
The ability to self-direct your retirement funds into alternative assets like real estate has been legal since 1974. Yet even today, the majority of IRA and 401K owners don’t know about self-direction. They believe they have to borrow from their IRA to buy real estate, or that they would be penalized for using those funds to invest in real estate.
Traditional financial planners consider self-direction as giving the investor the choice of stocks, bonds or mutual funds in which they wish to invest. That’s because traditional brokerages and banks only sell what’s authorized within their investment firms - which are stocks, bonds or mutual funds.
However, a truly self-directed IRA gives the investor complete control over their investment choices, including the ability to invest outside of the stock market and into alternative investments like real estate, gold, trust deeds and private placements.
But true self-direction is not for the hands-off investor. There are specific rules you must follow or you could end up committing a prohibited transaction. If you do that, your IRA could be seriously penalized and even potentially wiped out.
And there are plenty of prohibited transactions on Uncle Sam's list, so you should be well aware of what you can and can't do.
For example, if you direct your IRA to buy real estate, it must be for investment purposes only and not ever for personal use. If your IRA invested in a vacation home, neither you nor your family could use it personally.
You also can't pay yourself for managing it. In fact, you can’t manage it at all. The investment should be totally passive and managed by a professional.
And here's what could be the trickiest rule... you cannot even provide "unpaid" services to a property inside a self-directed IRA account. If you do, you could end up owing taxes and distribution fees, involving that real estate transaction.
Let's say you bought a single-family home with your self-directed IRA and the tenant calls about a problem with the heater. You don't live far away and it's an easy problem to fix, so you go over and do it yourself.
THAT violates the rule because you are providing direct services to your IRA investment. The result could be a big tax bill on what is now considered a distribution.
Instead, you have to ask the trustee of your self-directed IRA to hire a handyman to go fix that problem. And then you have to pay the handyman AND the trustee for those services.
The easiest way to avoid breaking the rules is to work with a very good custodian, trustee or administrator who can guide you and handle all the paperwork for you.
But… some investors want to avoid the fees they would have to pay a custodian or administrator. Plus, they want to be able to move quickly and not wait for a third party to approve their purchases or investments.
So they opt for a check book LLC that manages their self-directed IRA and acts as the trustee.
The problem with this scenario is that often the IRA owner is also the manager of the LLC.
As the manager of the LLC, you can write checks yourself and pay that handyman.
But hold on!
You are still the owner of the self-directed IRA and within that IRA, you are breaking at least two rules. You are managing the investment yourself, which is prohibited, and you are writing checks to pay for services to that account asset. Another no-no.
Prohibited transactions also include...
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It’s not too early to start your tax planning, or better yet, tax savings strategies, as Uncle Sam will come collecting soon.
Hi, I'm Kathy Fettke and this is REAL ESTATE NEWS for investors, the source for investor news that will help you make the right decisions, at the right times.
Uncle Sam will be imposing higher penalties on individuals who do not have health insurance. That penalty could take a two percent bite out of your income over the 10-thousand dollar threshold or about $700 per adult in one household.
There are also new paperwork rules for employers, related to the Affordable Care Act. Previous optional 1085 forms will now be mandatory.
On the plus side of tax reporting, individuals will have three extra days to file their taxes. This year's deadline is April 18th due to the Emancipation Day holiday observed in Washington, D.C. on Friday, April 15th. Tax filers in Maine and Massachusetts get one additional day due to the Patriot's Day holiday on April 18th.
There are also new filing and tax extensions deadlines for businesses. Partnerships and S Corporations must now file by the 15th day of the third month after the end of their tax year. That's March 15th for businesses using a calendar year. That's a month earlier than last year. For C Corporations, the due date is April 15th. A new six-month extension is also available in both those cases.
The BEST way to get tax deductions still exist. Here are 4 ways to dramatically reduce what you owe Uncle Sam through rental property:
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The post #005 – New and Old Tax Laws That Can Save You Money appeared first on Real Wealth Network.
Fears of bubbling real estate markets are rising, with 3 of the top at-risk markets in California. Is it time to buy? Or cash out?
I’m Kathy Fettke and welcome to Real Estate News for Investors.
In an end-of-the-year survey by Zillow, San Francisco tops the list for at-risk bubble conditions. A hundred experts participated in the survey, and a third of them said San Francisco is already in a bubble. Another 20 percent are predicting that market will peak sometime this year.
Los Angeles and San Diego are in 2nd and 3rd place as having the highest risk of officially being in a real estate bubble. Other frothy cities on the list include New York, Houston, Seattle, Miami and Dallas.
Zillow's Chief Economist says there's still a debate on whether these represent true bubbles. She says that one big difference between market conditions in 2007 and current conditions, are tighter lending requirements. That means buyers are less likely to default on their loans.
The survey covered a total of 20 markets and the overall consensus is that "most" of the markets are not bubbling yet, but if you own California real estate in one of the three hottest markets, it's something to consider.
Your property could be pricing at the top of the market right now. And if that's the case, you may want to consider selling while at the peak of the market, and exchanging that investment for property in non-bubble markets.
You’ve heard the term, buy low sell high. Times like this allow investors to sell high and buy low.
Do the bubble markets appear to be poised to pop, and if so, when?
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Is the 1031 exchange an unfair loophole or a stimulus that encourages more tax revenue?
That’s the question policy makers are debating as part of the Presidents 2016 Budget.
The 1031 Exchange has been part of the tax code for almost a hundred years. It allows an investor to exchange one property for another property of similar value without paying capital gains - as long as the replacement property is identified within 45 days of the sale, and then closed within 180 days.
The administration is proposing ...
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