BUYING RENTAL PROPERTY: WHY IT MAKES SENSE! July 27, 2011
Posted by Matt Siggerud in Real Estate: Commercial, Real Estate: Foreclosures And Short Sales, Real Estate: Investing In Real Estate, Real Estate: Residential, Real Estate: Taxation, Real Estate: Traditional Sales.add a comment
Why is buying rental property such a great investment?
There are four primary reasons that make real estate, namely, buying rental property, a great investment.
1.The first of these is cash flow. What is cash flow exactly? Well, to put it in simplest terms, cash flow is what money you have left over after the mortgages, the taxes, and the insurance have been paid. Again, the tenant pays you rent, and that money pays off these items. Whatever is left over goes into your pocket……that is cash flow.
2. Though many people buy rental property for “cash flow,” the real benefits that will build your net worth lie elsewhere. The second main “benefit” from buying rental property is the tax shelter that it creates for you. What does this mean exactly? Well, each time you buy a rental property, the IRS allows you to “depreciate” that property over 27.5 years. In other words, you can take this depreciation expense against your active income from your job. Let’s use a quick example:
Say you buy a $200,000 rental property. Again, the IRS lets you depreciate the building, not the land. Normally, 85% of the purchase price is used to determine the building, the physical house’s value. In this example, the IRS lets you depreciate $170,000 (the house) over 27.5 years. This is equal to $6,181 per year you can take a depreciation expense against your active income. In other words, say you make $80,000 in income from your job. Now, take $80,000 minus $6,181, which gives you $73,819. Now this is the income that you pay tax on, $73,819, not $80,000 (which you actually made.) Not too shabby huh!?!
You can see how by buying this “one little rental property,” you have reduced your taxable income significantly. As you guess, if you buy two houses, this number doubles, three, triples, etc.
I know some real estate investors that own enough rental property that they do not pay in federal or state income taxes because they have such a significant depreciation expense from all of their rentals.
3. The third main benefit from owning rental property is appreciation. As we know, not all debt is bad debt. In fact, any type of real estate debt you have is the best type of debt to have, for it is appreciating debt. Again, your home may not appreciate at 10%, or even 5% every year, but at the very least, it will go up over time. This is the area that most real estate investors build their long-term wealth. Buy the properties, and then hold them.
Time for another quick example: say you buy two rental homes totaling $400,000. Now let’s say those two homes appreciate 5% over 10 years. You now have homes that are worth $651,557.85. You have made $251,557 in equity by simply buying the houses and holding onto them. Not too bad, huh? Most say that sure beats what they make at their day job!.
Minnesota real estate, from 1940 to 2000, has appreciated 6.15% on average per year. (See this link below)
www.census.gov/hhes/www/housing/census/historic/values.html
We encourage you to go out and read the book Equity Happens. Go to www.EquityHappens.com to find out more about this awesome book. The basic premise of this book is yes, over time equity does happen. People have been talking about the “bubble bursting” with real estate since the 1950s. Yet in spite of this, real estate investors have continued to see slow and steady appreciation. Appreciation is real. Equity does happen 
4. The last benefit from owning rental property is achieved through the paying down of the principal balance on your mortgages. Again, the rent you receive from your tenants will go towards paying those mortgages. Most of that money goes towards interest the bank charges you, however, some will go towards paying down the debt you owe. Over time you will build equity through paying down the loans as well.
However, you can see with the previous example at #3, if you merely pay “interest only,” on your loans, you will still gain considerable equity. In fact, the majority of your equity you build will be through appreciation, not through “paying down the loan.” For this reason, I am a firm believer in doing “interest only” types of loans. It allows you to cash flow more, to put more money in your pocket right now. What’s more, the home appreciates at the same rate no matter if you are paying $1,000 a month, interest only, or $1,800 a month, principal and interest. Cash flow is a wonderful thing that will allow you to continue buying properties. Cash flow allows you to leverage yourself, and control more appreciating assets, more real estate.
For more information visit www.investmentpropertyguys.com
#2 National RE/MAX Team Ranking – First Quarter 2010 May 25, 2010
Posted by Matt Siggerud in Real Estate: Commercial, Real Estate: Current Listings, Real Estate: Foreclosures And Short Sales, Real Estate: Legal, Real Estate: News, Real Estate: Residential, Real Estate: Taxation, Real Estate: Traditional Sales.add a comment
The MN Real Estate Team of RE/MAX Advantage Plus continues to perform well. In the first quarter, through March 2010, we were ranked #2 with strong April and May numbers coming in each day.
Year-to-date we have pended or closed 424 properties on behalf of our clients!
Contact me for more information about why we are successful in the current market environment.
Questions And Answers About The Simplified Short Sale Process April 1, 2010
Posted by Matt Siggerud in Finance & Mortgage: News, Real Estate: Commercial, Real Estate: Foreclosures And Short Sales, Real Estate: Legal, Real Estate: News, Real Estate: Residential, Real Estate: Taxation, Real Estate: Traditional Sales.add a comment
While meeting with buyer and seller clients in the past month many questions about the foreclosure and short sale market forecasts have come up in discussion. This Q&A format is very informative with regard to how those two markets will possibly be impacted this year under the new Treasury Department’s Home Affordable Foreclosure Alternative (HAFA) Program.
What is a Short Sale?
In a Short Sale, a lender agrees to let a homeowner facing financial hardship sell a home for less than the mortgage owed. A Short Sale is an attractive alternative to foreclosure, typically not pursued until after other efforts to keep the owner in the home have been exhausted. There are potential tax consequences that should be discussed with a tax professional.
Why is a Short Sale better than foreclosure?
Typically, a Short Sale is less damaging to the borrower’s credit. The former owner can qualify for a mortgage backed by Fannie Mae or Freddie Mac to buy another home in as few as two years – far sooner than if there had been a foreclosure. Short Sales also help protect other property values in the community by keeping the home out of potential disrepair.
Why has the U.S. Treasury issued new Short Sale guidelines?
Because of the challenges many homeowners have faced in their attempts at Short Sales, RE/MAX International has worked closely with major lenders, the U.S. Treasury and other federal agencies to streamline and standardize the process. The new guidelines are in response to this advocacy by RE/MAX and others in the industry. Short Sales are seen as a critical component in stemming the increasing number of foreclosures and stabilizing the housing market. More than 75 percent of the mortgages in the United States are covered by the recently streamlined Short Sale guidelines issued by the U.S. Treasury Department.
What’s been improved in the Short Sale process?
Under the Treasury’s Home Affordable Foreclosure Alternatives Program, mortgage servicers have 10 business days to respond to a Short Sale offer. In the past, a lack of timely response has been one of the main reasons for delayed or derailed Short Sales. Also, paperwork and documentation are now standardized. Previously, such procedures varied widely between lenders. Various deadlines in the Short Sale process also have been standardized.
What’s improved for the homeowner?
Under the Treasury program, a successful Short Sale will release the borrower fully from the primary mortgage obligation. This lender will not pursue a deficiency judgment. Additionally, homeowners who complete Short Sales are eligible to receive $1,500 to offset the expense of moving from the home.
What’s the incentive for a primary lender to approve a Short Sale?
Using program guidelines, lenders will determine a minimum acceptable offer for the property. Typically a lender’s loss on a Short Sale is less than the loss it faces should the property go into foreclosure. Through the Treasury program, mortgage servicers receive $1,000 for every Short Sale closed.
How does the program work?
If the owner of a principal residence does not qualify for refinancing and has exhausted Making Home Affordable loan-modification options – or if they make a direct Short Sale request to a lender in the program – the lender determines if a Short Sale is possible. If it is, the borrower is given at least 120 days (up to a year, depending on local market conditions) to sell the home using a real estate agent experienced in the local market. Meanwhile, the foreclosure process can move forward, but it cannot be finalized until after the marketing period has expired. During the marketing period, lenders must respond to a fully completed “request for approval of a Short Sale offer” within 10 business days.
Does the borrower continue to make primary loan payments during the Short Sale marketing period?
Yes, in some cases. The amount is determined by the loan servicer in accordance with terms of the Treasury guidelines. If there is a payment, it cannot exceed 31 percent of the borrower’s gross monthly income.
What if there’s a second mortgage, home equity line of credit or other junior lien?
The borrower is responsible for either paying off such debt or negotiating release from the debt and any potential for deficiency judgment. Contact me to help you with this process. I will send out a valuable packet of information outlining steps needed to be taken and program contact information. The Treasury program provides some financial incentive for junior lenders and investors who hold such loans to participate in the Short Sale and release the liens.
Are there restrictions on who can make a Short Sale offer?
Yes. Among the program’s many restrictions are requirements that the property not be sold to a relative and not be occupied or repurchased by the former owner. The buyer may not receive any funds from the transaction and cannot sell the property for at least 90 days after closing.
Is a Short Sale the only alternative to imminent foreclosure?
If a Short Sale is not successful, the lender can opt to take a “deed in lieu of foreclosure.” In this process, the homeowner gives clear title to the property to the lender. Under terms of the Treasury program, the borrower is released from the remaining mortgage obligation and can still receive the $1,500 for relocation expenses. The borrower then has 30 days to vacate the property. In some cases, it’s possible to pursue a “deed in lieu of foreclosure” without first pursuing a Short Sale.
When does the program begin?
The official effective date is April 5, 2010, but participating mortgage servicers can begin operating under the terms of the plan as soon as they are ready to meet reporting requirements.
Is there an expiration date for the Treasury program?
Borrowers have until Dec. 31, 2012, to enter into a Short Sale or deed-in-lieu agreement with their lender under terms of the Treasury program.
Are Short Sales still possible for borrowers and lenders not covered by the Making Home Affordable Program?
Yes. Short Sales remain possible for borrowers with mortgages not covered by the Treasury program’s incentives and guidelines. Contact me for more information on how to pursue a Short Sale with their mortgage servicer or investigate other possible options.
Source: RE/MAX International
