Real Estate Information Archive

Insurance is a way to hedge the risk of a possible loss on an asset that a person or entity cannot afford.  The cost of the coverage is determined by risk and exposure to the insurer and reflected in the premium.

Another way to say it is: don’t buy insurance when you can afford the loss.  If you have a mortgage on your home, you must have insurance.  It is probably prudent for most people to have property insurance but certain coverage might be avoided because you can afford the loss if you were to have an occurrence.

1. Call your current agent and review your insurance coverage.  Ask if there are any available discounts whether your property qualifies for now or after certain improvements are made.  Monitored alarm systems, dead bolts, smoke detectors, updated electrical, certain types and ages of roofs among other things may be eligible for individual discounts. 
2. Compare the newly revised coverage and premium with other reputable agencies and insurers.  Shopping can be time consuming but experts agree that the exercise can be valuable and should be considered every few years. 
3. Deductibles are an easy way to affect the premium based on the initial amount of loss that the insured wants to assume.  The higher the deductible, the lower the premium.  Determine the amount of risk you want to assume and select an appropriate deductible.
4. Consider bundling your home and auto policies for possible discounts and leverage for better service.
5. Don’t become a co-insurer.  Most policies stipulate that a building must be insured for at least a certain percentage, usually 80% of its insured value to be able to collect the full amount of a partial loss.  Insured value is not always the same as market value.  The land is not considered in the value but replacement cost of the dwelling is.

It isn’t possible to purchase insurance after a loss; it must be purchased before a loss is incurred.  Premiums are based on careful analysis of insurer’s loss and overhead expense plus a profit.  As a homeowner and an insured, it would be equally wise to analyze coverage, claim service, your risk tolerance and the premium you’ll pay for that coverage.

Even if you’re having a professional help you with your income tax return, you need to provide them with information on the money you spent that might be deductible.  Look at the following list to see if any of these things need a little more investigation to determine if they apply to your situation.

• If you refinanced your home for the second or subsequent time in 2014, there may be points that can be taken as an interest charge.
• Compare mortgage interest, property taxes and other eligible itemized deductions to your standard deduction to see which will give you a larger deduction.
• If you’re paying mortgage insurance premiums with your payment, you may be eligible to deduct them.
• If you purchased a home in 2014, there may be some deductions found on the HUD-1 form you received at closing.
• If you purchased a home in 2014 and the seller paid points on your behalf in order to get a mortgage, you may be able to deduct them.
• If you purchased and installed in 2014 qualified residential energy efficiency property or improvements, you may be eligible for tax credits.
• If you have dedicated, exclusive space in your home for a home office, you may be eligible for a deduction that may include a pro-rata share of insurance, utilities and other things.

For more information, see IRS Publication 936, Home Mortgage Interest Deduction; 2014 Instructions for Schedule A.

If you need another copy of your closing statement for the home you purchased or sold in 2014, contact your real estate professional.

Over 50% of homebuyers don’t shop to find the best interest rate for their mortgage.  While a buyer wouldn’t rarely purchase the first home they look at, they will accept the rate and terms offered by only one lender.

While the borrower and the property affect the rate and terms that a lender may offer, it is not to be said that all lenders will offer the same terms and rates to the same buyer.  Credit score, home location, home price and loan amount, down payment, loan term, interest rate type and loan type all affect the interest rate but different lenders can interpret this information differently.

Shopping around to compare rate and terms for a mortgage is a reasonable exercise considering that a half percent lesser interest rate could not only lower the payment but the cumulative interest that is paid while that loan is outstanding.

Some borrowers don’t shop the mortgage because they are concerned that having their credit checked multiple times could adversely affect their credit score.  The credit bureaus take this into consideration when several requests are made by the same category of lender in a short period of time.

Check to see the difference 0.5% could make in the mortgage you’re considering by using the calculator provided by Consumer Financial Protection Bureau.  Contact your real estate professional for a list of trusted mortgage professionals to consider.

A simple decision to rent your current home instead of selling it when moving to a new home could have far reaching consequences.

If you have a considerable gain, in a principal residence and you rent it for more than three years, it can lose the principal residence status and the profit must be recognized.

Section 121 provides the exclusion of capital gain on a principal residence if you own and use it as such for two out of the last five years.  This would allow a temporary rental for up to three years before the exclusion is lost.

Let’s assume there is a $100,000 gain in your principal residence.  If it qualifies for the exclusion, no tax would be owed. If the property had been converted to a rental so that it didn’t qualify any longer, the gain would be taxed at the current 20% long-term capital gains rate and it may incur a 3.8% surcharge for higher tax brackets.  At least $20,000 in taxes could be avoided by selling it with the principal residence exclusion.

Depreciation, a tax benefit of income property, is determined by the improvement value at the time of purchase or at the conversion to a rental whichever is less.  If the seller sold the home and took the exclusion and then, bought an identical home for the same price, he would be able to have 60% more cost recovery and avoid long term capital gains tax.

It is always recommended that homeowners considering such a conversion get advice from their tax professional as to how this will specifically affect their individual situation.

A well-planned garage or yard sale can make room in your home, get rid of unused items and make some money but it needs some planning to be successful.

• Start early to research and plan
• Promotion is key
• Display items attractively
• Price items right
• Organize checkout

Saturdays are generally the best day but there may be some exceptions.  Experienced garage-salers believe that a well-planned one-day event will do as well as a multi-day event.  Serious purchasers will look for the “new” sale and most people don’t come back multiple days.

Advertise in local newspapers and free online classified sites like craigslist.  If several families are going together for the sale, mention that in the ad; it will be a big draw.  Mention your bigger-ticket items like furniture, equipment and baby items.

Garage sale signs can be purchased or made at Staples, Fedex Office or Kwik Signs.  Signs need large lettering so they’re easy to read while people are driving. Most important info: Garage or Yard Sale, address, date and time.  Directional signs are also important.  Balloons and streamers to attract attention to the signs are very helpful.

Consider using the service Square so that you can take credit cards.  The cost is 2.75% per swipe and can be done on your smartphone or iPad.  You’ll need to sign up at least two weeks in advance to receive your reader.

Unless you’re having an estate sale, keep your home locked.  You don’t want people wandering through your home while you’re outside.  If you start to accumulate a lot of money, take some of it inside.  Don’t discuss how much money you’ve made during the sale or how successful it has been.

People will want to bargain; it’s the nature of the game.  Consider this strategy: less negotiations early in the sale and possibly, more toward the end of the sale.

Don't Consider Appreciation or Tax Savings

Appreciation and tax savings are legitimate contributors to an overall rate of return on rental real estate but what if you didn’t consider them at all.  If you only looked at one or two, very conservative measurements, you might decide to invest especially knowing that there are more benefits that will accrue to your investment.

If we bought a property for cash, collected the rent and paid the expenses, the amount left would be called Net Operating Income.  In the example below, if would generate $7,200 a year which would be a 7.02% cash on cash rate of return which is considerably higher than the current 10 year treasury rate of around 2.3%.

If we place a mortgage on that property, the rate of return actually increases due to leverage.  After the principal and interest are paid, the net operating income obviously decreases but the cash on cash rate of return increases to 9.10% because the borrowed funds means less cash invested.

Another contribution to the investment’s rate of return occurs with the mortgage due to amortization: the principal reduces with each payment made which increase the investor’s equity.  In this example, the equity build-up divided by the initial investment yields a 5.25% rate of return in the first year.

Single family home for rental purposes offer the investor high loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with tax benefits, reasonable control and an opportunity to earn higher than normal rates of return.  Call if you'd like to talk about what kind of rental opportunities are available.

Being a Good Neighbor

A good neighbor might be characterized as someone who’ll look after your home when you’re out of town by picking up your mail and watering your plants.  You’d most likely reciprocate for anyone who’d be so generous toward you.

In some cases, you might only be able to name one or two of your neighbors who would step up to that level of service.   Wouldn’t it be nice if more people on your street would be happy to make that offer?

The solution may just start with being a better neighbor first.  The following suggestions go a long way to improving your neighborhood and making new friends at the same time.

• Meet your neighbors and exchange phone numbers and email addresses.  Agree with each other that you’ll let them know if you see something strange going on at their home. 
• Slow down when driving through the neighborhood; it will make it safer and everyone will appreciate it. 
• Control your dog: keep it on a leash; pick up after it; don’t let it bark too much.
• Don’t park in front of your neighbor’s home.
• Notify your immediate neighbors when you’re having remodeling done and ask them to let you know if any of the contractors cause damage to their property.
• Let your neighbors know when you’re having a party and that there will be more cars on the street than usual.
• Maintain your home and yard so that it adds to the beauty of the neighborhood.
• Put your garbage out for collection on the correct day and bring the containers back in promptly.

In reality, it is fairly obvious; you just have to think of the things that you’d want from your neighbors.  Be friendly; don’t be noisy; offer a helping hand when available and respect each other’s boundaries.  Having a sense of community and that you all share the neighborhood can be underlying principles that will guide your behavior.

A good neighbor would be aware of suspicious activity and would call their neighbors and the police if warranted.  This might be something you can discuss with your neighbors.  Click here for a template to record your immediate neighbor’s contact information and keep readily available if needed. 

Verify with Your Lender

If you have a mortgage with an escrow account to pay your property taxes and insurance, you expect the company servicing your loan to pay this year’s taxes this year so that you can deduct them on your 2014 income tax return.  After all, your monthly payment includes 1/12 the annual amount so there will be money available for them to be paid on time.

IRS requires that expenses must actually be paid in the year that a deduction is to be taken.

The predicament occurs when you’ve made your payments but the mortgage company didn’t pay the taxing authority in the tax year they were due.  If they paid your 2014 taxes in January of 2015, they wouldn’t be deductible for you until you file your 2015 income tax return. 

Verify with your lender after you make the December payment that they did indeed pay your property taxes.  The question for your lender’s customer service is: "Have you or will you pay the 2014 property taxes this year so I’m eligible to deduct them on my 2014 income tax return?”

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With fixed rate mortgages as low as they are, most purchasers or owners wanting to refinance might not even consider an adjustable rate loan.  The determining factor should be how long the person plans to be in the home and which mortgage will provide the cheapest cost of housing.

For instance, if you compare a $300,000, 30 year term mortgage with a 4.125% rate on the fixed and a 3.25% on the 5/1 adjustable, the breakeven point would be almost seven years assuming the rates adjusted the maximum that they could in each year.

Therefore, if a person is going to stay in the house less than 7 years, the ARM would provide the cheapest cost of housing.  This example shows that at the end of five years, the ARM would generate almost $13,000 savings over the fixed-rate. 

On the other hand, this could be a good time for homeowners with an existing adjustable rate mortgage to consider refinancing into a fixed-rate mortgage.  The longer that they intend to stay in their home, the more advantageous it might be for them to convert their mortgage to lock-in their payment and fix their housing costs.

A trusted mortgage professional can analyze the alternatives to provide you with the information necessary to make a good decision.  You can try the Adjustable Rate Comparison with your own numbers to see the effect.