Monday, April 1, 2013

Five Ways Investing in Real Estate Can Save You Money

Five Ways Investing in Real Estate Can Save You Money

Posted: 03/29/2013 12:11 pm

According to Brad Hettich, President and CEO of Commercial Lending X, there are several ways to save money fast, but chief among them is investing in real estate. "You should dip into your savings or take out a loan that you can repay, and always invest long-term," explains Hettich. "Real estate is a great example of that." Brad's logic is that with so many available properties that accommodate any budget, real estate is among the most effective ways to save money.
However, it is vital that if you cannot purchase property in cash, that you find a lender that specializes in your financial needs and price range. "With a stable income and a set amount of income put aside every month, you have the advantage of not only determining your own budget, but in deciding how much you want to pay for property," explained Hettich. Companies like Commercial Lending X work directly with local banks that were burned in the mortgage crisis, making it easier for them to provide both commercial and residential loans to consumers.
"Because we work with both consumers and banks, we stress five reasons why real estate investment will save you money in the long run," Hettich explained. "Lower taxes, positive cash flow, use leverage, equity growth, and the benefits of inflation."
1. Lower Taxes
There are several tax incentives for real estate investors, with deductions for property that can often be used to offset wage income. These tax breaks for real estate investment often allow property owners to turn a loss into a profit from all the money they save from deductions. These deductions can include any actual costs involved in financing, managing and operating the property, to include maintenance, repairs, property management fees, travel, advertising, and utilities. However, other great ways to save money on tax rates include government-instrumented deductions:
  • Depreciation: Property depreciates in value over time, enabling you to deduct some of the home's costs.
  • Interest: All mortgage payment interest is deductible.
  • Insurance: Premiums for any type of insurance are deductible.
2. Positive Cash Flow
When it comes to real estate investment, there are two ways to save money: pre-tax and after-tax positive cash flow. A pre-tax positive cash flow is when income received is greater than expenses, and an after-tax positive cash flow is when your expenses are more than your collected income, but the tax breaks bring you back in the black. Either way, real estate investment, if budgeted properly, can save you money and earn a nice profit along the way.
3. Use Leverage
According to Hettich, "Never spend a dime on your real estate investment unless you have to, because the only way to make money is to have money." Leverage is an important aspect of saving money through real estate investment because a real estate investor uses leverage to increase their assets without spending their own money. "Using your leverage to gain a large amount of equity is the difference between the actual worth of the property and the balanced owed on the mortgage."
Companies like Brad's help real estate investors secure loans where they can use the bank's money to purchase property and increase its equity without spending a dime of their own money. "Our goal is the same as any real estate investor: create value with as little expense as possible."
4. Equity Growth
The best way to save money, and earn money, is to build up equity for real estate investments. That way, with high equity you are able to save on your mortgage while earning a nice chunk of profit. As Hettich puts it, "Don't be afraid to sell and invest in something new once you've reached your equity goal. Just as long as you have the financial leeway to do it."
5. The Benefits of Inflation
When investing in real estate, a great way to identify potential savings is by researching the inflation rates for the area. "As commodities increase in value, so does the price of your home," Hettich explained, "which means that over time you reduce the amount you have to spend to maintain the property."
Generally speaking, inflation can help you save money on your real estate investment because as rent increases, your mortgage costs will remain static, which means you will save money on maintenance costs with the increased cash flow from the rent.
Ultimately though, despite the fact that these are five great ways to save money through real estate investment, they do come with their risks as well. According to Hettich, "Any time you convert cash into an asset, it becomes more difficult to get your money back. But that's the risk you take in investing because not only can you save for retirement with a regular cash flow, the reduced taxes will ensure its long-term viability to save you money."

Tuesday, March 26, 2013

Study: Nearness to Public Transportation Strengthens Home Values

A study released by American Public Transportation Association (APTA) and the National Association of Realtors(NAR) suggested homes in close proximity to public transportation were much more resilient when faced with price declines during the recession.
Data from the study found property values for homes near public transportation performed 41.6 percent better on average compared to homes not in “transit sheds.”
The study compared property values from 2006 to 2011 for homes located near public transit systems and homes that were in a non-transit areas in five regions—Boston, Chicago, Minneapolis-St.Paul, Phoenix, and San Francisco.
Overall, the study found homes near public transportation in those regions were more stable and experienced smaller price declines during the recession.
Boston residential properties located near public transit systems outperformed other properties in the area by 129 percent, according to the report.
In Minneapolis-St Paul, homes near public transit areas were 48 percent higher than other properties in the region. The remaining three metros also saw significantly higher values when located in transit sheds: San Francisco (+37 percent), Phoenix (+37 percent), and Chicago (+30 percent).
“When homes are located near public transportation, it is the equivalent of creating housing as desirable as beach front property,” said APTA President and CEO Michael Melaniphy. “This study shows that consumers are choosing neighborhoods with high-frequency public transportation because it provides access to up to five times as many jobs per square mile as compared to other areas in a given region. Other attractive amenities in these neighborhoods include lower transportation costs, walkable areas and robust transportation choices.”
Homeowners in Boston who live near public transit systems save an average of $351 each month, the most out of the five regions, the NAR reported. San Francisco was a close second in terms of monthly savings and averaged $346. The monthly savings in Phoenix was the smallest, at $175.
“Transportation plays an important role in real estate and housing decisions, and the data suggests that residential real-estate near public transit will remain attractive to buyers going forward. A sound transportation system not only benefits individual property owners, but also creates the foundation for a community’s long-term economic well being,” said Lawrence Yun, NAR’s chief economist.

Monday, March 19, 2012

Can I Sell My Parents’ House and Avoid the Capital Gain Tax?

Can I Sell My Parents’ House and Avoid the Capital Gain Tax?

I inherited my parents’ home, which is worth more than my current one. I’m thinking of claiming my parents’ home as my principal place of residence so that I can sell it in two years and not have to pay capital gains. I’m changing my homeowner’s exemption on my tax bill to my parents’ house. What other things do I need to do so that I won’t have to pay capital gains taxes on my parents’ house when I sell it?

Why go to the bother of trying to provide proof of your living in your parents’ home when you could probably sell the house now and pay no or little capital gain tax? When you inherited your parents’ house, you got a step up in its basis. In other words, the fair market value (FMV) of the property on the date of the death of your last parent is its new cost basis. And if it is more beneficial to you, the government says you can select another date to lock in the FMV as long as the date is between the date of death and the nine months afterwards. If the difference between the FMV and the price you sell the house for is not that great, the homeowner’s exemption and principal residence issues are moot. If you sell the house sometime during the nine months following your parent’s death, the price the house sells for essentially is its FMV. Thus, if you use the date of sale as the FMV date, the sale price and basis are the same, meaning there is no capital gain tax.

You could also sell your parents’ home, sell your own house and use the money realized on both to purchase another home and likely pay no capital gains. As long as you’ve lived in your current home for at least two years out of the past five years, it qualifies for the exemption on capital gain tax ($250,000 if you are single, $500,000 if you are married). If you really want to wait two years before selling the house, you will have to physically move into it in order to claim the homeowner’s exemption when you sell it. But I don’t think that would be in your best financial interest.

Rob Seltzer is principal of Robert Seltzer, CPA, PFS, in Beverly Hills. You can reach him at (310) 278-9944. Have a question for a CPA? Ask it here.

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