Should you buy a rental property? In 2015 or 2016????

It seems so obvious. But this is a changing world.

Is it obvious?

It should be. The only reason many people can retire is the simple fact that they have purchased real estate, held onto it, and are reaping the benefits after the properties are paid off. A lifetime of rental income that you can leave your children.

It is the reason many people are millionaires.

Let’s look at the reasons you buy a rental home.

1) They have an investment return, currently in Colorado, of about 6 to 12%. That is far better than anyone can do in stocks and in savings accounts. This is why so many people have cashed in their IRA’s and are now using a self directed IRA to invest, using real estate as the investment vehicle. It is a good return with today’s rents and today’s poor interest return in banks.

2) The tenant makes your payment. Obvious and hard to beat. Even if rents go down in the future, the return is still good. And remember, people always need a place to live.

3) There are tax benefits. The depreciation from a rental is a great way to minimize your taxes. Talk to your accountant.  The serious problem with “depreciation recapture” when you sell is something all owners learn to live with, as long as they are informed on the subject.

It sounds great so far, but is it?

Here is the unwritten 4th benefit that is so obvious it is rarely mentioned: The property has to go up in value while you own it.

And that is the question.

In this crazy market, with low low interest rates and high selling prices, are the rentals you buy going to go up in value?

If you pay $300 a square foot for some junk house rental. and it stays at $300 a square foot for ten years, you do not have a great investment.

You have a good investment.

And remember the cost of capitol improvements and repairs. That money keeps adding up, and if you do not see a raise in value, you may end up actually losing money when everything is said and done.

The point is this.

Understand the reasons you are buying a rental. AND THINK ABOUT THEM ALL.   IN DEPTH.

You will get a great tax write off, with the depreciation. But you will pay depreciation recapture when you sell, unless you do a 1031 Exchange, or leave the house as part of your estate.

You will have the tenants pay for your loan, as long as it is rented.

The loan pays off, giving you a good return on your money after a few years.

But, you have expenses too.

And if the property does not go up in value quickly, all you get is a free and clear property after your loan is paid off.

It is possible that your money might be better spent waiting for a better stock market, or a better return in your investment account.

And remember, as my wife always says, people always need a place to live.

Think… Learn.

Randy

 

Share and Enjoy:
  • Digg
  • StumbleUpon
  • Facebook
  • Twitter
  • Google Bookmarks
  • LinkedIn
  • RSS
  • Reddit

Colorado Senior Property Tax

Hi.

This is a short blog for any of you that are about to receive the Senior Property Tax Relief.

It is a minor benefit to Seniors in Colorado.

And here is what you need to know:

This will save you a percentage of the property taxes that you pay on your home.

The rules are tough. You have to be 65 for the entire year before you receive this. In other words, if you turn 65 this year, you will not get it until next year.

You must have lived in your home 10 years before this can go into effect, and that is the big problem.

If you sell your home and move into your retirement ranch, your ten years starts the day you close on the new home. The 35 years you lived in your old home do not count.

So, you may have paid taxes on your home for 40 years, and then you sell the 2 story and buy the little retirement ranch. You do not get the Senior tax savings on the new one until you have lived in it for ten years.

Yes, it is unfair, and yes it will cost you money.

So plan ahead. Sell and move when you are 55. Then, when you turn 65 you will have lived in the retirement ranch for ten years, and you will be able to, eventually, get the Senior Tax break.

The rich people at the Capital don’t care, They have money, They don’t need a tax break on their property taxes. You don’t get it until you have lived in your new home for ten years.

Yes, it is unfair and ridiculous.

I wish I could help.

Of course, contact your accountant for exact details on this.

Share and Enjoy:
  • Digg
  • StumbleUpon
  • Facebook
  • Twitter
  • Google Bookmarks
  • LinkedIn
  • RSS
  • Reddit

Settling an Estate, or a Divorce!!! What your attorney isn’t telling you.

Life is so fascinating.  You inherit money, or you get a divorce, and you assume that the experts handle everything properly, and sometimes they do.

And, sometimes they don’t.

Here are a number of examples for you, so you can see if your attorney or the executor of your estate handled the Estate properly, or lacked the depth of knowledge to settle it without major errors.

The base of this example is easy. Four kids, one Estate. Settled equally between the four.

Value of the Estate is $1,200,000, which is, using simple math, a value of $300,0000 to each.

Since Estates, currently, that are valued below $5 Million are tax free, this should be an easy example.

But is it?  Certainly not. Read and learn.

Example A)

The Estate is all cash. Each heir receives $300,000. Simple and easy. In a trust, in a bank, it matters not. The cash is available and completely liquid.

Example B)

The Estate is cash and a house to sell. An old family house, with memories and 150 sweaters to be distributed, and more memories.

The house is sold, the net proceeds from the house are divided by 4 and the Estate is settled. The Estate is no longer valued as exactly $1,200,000 because the sale of the family home cost $22,000 to sell, and therefore every heir receives their share of the “new”  or Net value of the Estate. Or, in this case, the actual value of the Estate,. $1,200,000 minus the $22,000 to sell the family home, and minus another $11,000 in selling expenses, due to the condition of the home. The Net Value of the Estate is paid equally to all of the heirs, and no one complains. No one complains, because that is the amount of money left to the heirs. The Estate minus the cost of selling assets that are not liquid.

The Estate, in that simple case, has an actual value of $1,167,000, which is divided by 4 and distributed. Or, a value to each heir of $291,750. The $300,000 expected value is reduced by the cost of selling the family home, and no one complains because it is still an equal division of the Estate. Everyone knows that the value of Real Property is subject to the selling costs, and often at a negotiated price that is different than the appraised value.Pretty simple.

Example C)

The Estate consists of a house and a rental property, that one heir is receiving as part of the will. The rental is worth $280,000, and that heir receives the $280,000 value of the rental plus $20,000 in cash, and the other heirs receive $300,000. Simple and easy. A fair settlement.

Wait, not so fast. The rental is not a cash value item. It is a net value, which would be the value of the sale, minus the costs of selling real property. Those costs are approximately 8%. So you would subtract the 8% from the value, arrive at the actual net value of $257,600, and distribute based on that net value of the rental.

The family home would be sold, and the heirs would receive their share of the Estate, which would be reduced by the selling costs of the family home.

The rental would be “sold” theoretically, and the heir receiving the rental would receive the rental valued at $257,600, and then receive the balance of the Estate with his 1/4 share being the $1,167,000 divided by 4 MINUS the value of the rental based at $257,000.

$291,750 as that heir’s part of the Estate, subtracting out the net value of the rental, for a cash settlement to that heir of $34,150.

Every heir receives a value of $291,750.

One heir receives it as a check for $34,150 and a rental property, and the other heirs receive the $291,700 each.

A perfect and equal split of the Estate.

Let’s look at doing this the wrong way. The heir receiving the rental gets $280,000, plus his share of the estate, $291,750 minus the cost of the rental, which gives him $11,750. He then sells the rental, and ends up with the actual net proceeds from that sale, or $257,600. That heir has received an actual Net Value, of only $268,350.

The heir receiving the rental property received, in the settlement of the Estate, $268,350. The other heirs received $291,750 each. That is inequitable by the amount of $23,500.  Not so simple any more. It is no longer simple, and the math is quite difficult.

You can see how incredibly complicated this can be, and the concept is certainly more than most people can understand. It is also very complicated to calculate and to make a fair and equitable settlement. But, to not consider the costs of selling real property is to be patently unfair to one of the heirs in the last example.

Example D)

I will not even calculate this one, but I will explain the example.

Two parents leave behind 4 properties for four heirs. The properties are valued at $200,000, $300,000, $400,000 and $500,000.  All are rentals, but the total value is still far below the threshold for taxable items in an Estate. So, the attorney settles the Estate at the values, and divides the cash in the estate between the heirs. All simple and over.

Except, some of the heirs were ripped off, and here is why:

The cost of selling the $200,000 rental is approx. $16,000.

The cost of selling the $300,000 rental is approx. $24,000.

The cost of selling the $400,000 rental is approx. $32,000.

The cost of selling the $500,000 rental is approx. $40,000.

So, as an example, the seller of the $200,000 rental received $24,000 more for his share, due to the executor failing to recognize that the selling costs are much higher on a more expensive property.

Not smart.

There are parts of an Estate that are valued at a gross value. Like cash, stock, and other items that can be sold at a low enough cost that they are considered liquid.

Other items, like Real Property, have very expensive selling costs, and they should be valued at their Net Value. The value minus the selling costs. It is fair and simple and equitable, and your attorney or your executor has probably never even though about it.

One more example before I go.

It is a divorce. The wife gets the house, value at $500,000 in the divorce. The couple owes $350,000, so the net value of the home is $150,000, which the husband gladly accepts half of as his part of the house.

All simple and easy. The divorce settles and everyone is happy. Well, everyone except the wife. She decides to sell in two months, and she realizes that she split the $150,000 equity with her husband, and now that she is selling that Gross value is now a net value, and she will only receive $110,000 in actual proceeds from the sale of the house. $40,000. She got ripped off for $40,000 because no one though of considering that the value of the house for the purpose of a divorce should include the selling costs.

It is not a liquid asset. It is an asset with a built-in cost to sell. And that is true whenever she sells, whether it is now or in ten years.

Think before you let your attorney or an executor make a mistake that costs you $40,000.

And yes, this happens every single day.

Enough for now.

When you do it right, nothing is easy.

 

Randy

 

 

 

Share and Enjoy:
  • Digg
  • StumbleUpon
  • Facebook
  • Twitter
  • Google Bookmarks
  • LinkedIn
  • RSS
  • Reddit

A Serious Problem in the Colorado Contract.

This is a fairly complicated post, that every broker, buyer and seller should read.

It is complicated, and serious, so bear with me.

In the Mandatory State contract, there is a paragraph numbered 4.4.2.

It deals with a very important issue.

Here is some of it for you to read:

4.4.2.   Time of Payment; Available Funds. All funds, including the Purchase Price to be paid by Buyer, must be paid before or at Closing or as otherwise agreed in writing between the parties to allow disbursement by Closing Company at Closing OR SUCH NONPAYING PARTY WILL BE IN DEFAULT.

It seems reasonable, and actually rather innocuous. If your funds aren’t there, you are in default. But read it again.

If you go to closing, and your money is not at the closing, or the funds from your lender are not there, which may have been wired in to the closing, you are in default.

You are in default. The seller can stand up, leave the closing, leave the building, and collect your earnest money as a penalty. There is no remedy in the contract.

So now imagine this:  You have done everything that you were asked to do, and you are at closing, anxiously awaiting the closing and getting your keys. You are sitting there, and the closer tells you that the funds, wired to the Title Company by the lender, have not arrived.

They are not in the account of the title company.

The seller stands up and says thanks, and runs to his car.

You are out your earnest money. It does not matter, you are out $5,000 or $10,000 or $25,000. The seller keeps it, and sells the house to someone else.

You are probably a little unhappy. Possibly even angry. You have done nothing wrong at all. In fact, your lender may have done nothing wrong. The wire may have simply been delayed, or sent to a bank in Minnesota through a clerical error by the bank. It may have been authorized on time, and a clerk at the bank failed to send it on Friday before he or she left for the day.  You still lose.

Yes, that is the current contract. Call your attorney and ask. Call ten attorneys, and ask, please.

You will be surprised too.

And why is this the case? Do you think that any real estate broker in their right mind would want this clause in the contract. Of course not. It will make enemies forever if it happens, and, according to attorneys I have talked to, it is happening.

No. No real estate broker would ever want this.  They thrive on communicating and getting along, and being fair and honest with everyone. That is the way they do business.

This contact has this language because the rules committee for the State is full of Attorneys.  Attorneys love conflict. It is how they get paid. And this paragraph creates conflict. It is in fact, a setup for a complete adversarial relationship between buyer and seller, selling broker and listing broker, and eventually between attorney 1 and attorney 2.  It is conflict itself. It creates an adversarial relationship when none should even exist.

Tell me how a seller is damaged in any way if the funds for his closing arrive 2 hours late? What possible damages could the seller imagine? It could delay another closing. But is 2 hours going to actually damage anyone?

If the funds for closing are not there, a reasonable seller and buyer will find out when they can be there, and can reschedule. But that is not a contractual option.

It is an option, but not in the contract.

And, when is the closing? On the 12th of April. But at what precise time? Who schedules it is determined in the contract, but the time of the closing is not in the contract, only the date.  Closing times are determined by the contractual party, through phone calls or emails. A lawsuit waiting to happen.

The funds will arrive, once the problem is figured out. A reasonable contract would  require the parties to the contract to delay the closing by a few hours, or in the event the closing is on a Friday, until Monday. Yes, it will be inconvenient, and moving trucks will have to be rescheduled. Life is not perfect.

But the contract allows for a radical draconian result, which is completely unfair to the innocent buyer.

Read the paragraph: 4.4.2

Call your attorney. Now you need to decide what to do. Talk to your attorney and listen carefully. Your earnest money is at risk.

And, if you are the seller: Do you really want to keep the buyers earnest money because the buyers lender messed up a wire, or a fedX Package got lost? Is that fair?  Is that reasonable? Is that the way you want to be treated when you buy your next house?

And yes, Express Packages get lost. Wires are sent to the wrong bank and/ or delayed for clerical reasons. It happens.

Should it mandate a $10,000 penalty?

Randy

 

 

 

Share and Enjoy:
  • Digg
  • StumbleUpon
  • Facebook
  • Twitter
  • Google Bookmarks
  • LinkedIn
  • RSS
  • Reddit