Two Reasons to Buy vs Rent

1: Cost of renting:

Rents have increased dramatically in recent years.  Vacancy rates are low, and the growth in renter households is high.  This means that landlords have greater pricing power when setting rents.

2: Cost of not owning:

The average rate of house price appreciation over the past 20 years has been over 3% per year.  In the Click here to view house price trends in your local market past five years, house price appreciation in many markets for starter homes has been even greater.

At 3% annual house price appreciation, a $10,000 down payment on a $200,000 house could grow to $40,000 over a five-year time period.

That growth could be money that you would have lost by not owning a home.

Contact me if you’d like me to run a buy vs. rent analysis for your specific scenario! 

Timing is Everything… Especially During Retirement

A lot of discussion about “sequencing of distributions” has been taking place recently in financial planning circles.  “Sequencing of Distributions” looks at the order in which you take distributions from your retirement account.  This matters because the order in which you take distributions has a very significant impact on how long your retirement assets will last.

Consider the two examples illustrated in the chart.  Column 1 has the same amount of distributions scheduled for the next five years, regardless of how the market performs.  Column 2 changes the distributions in years 2, 3 and 4, based on the performance of the market.

A reverse mortgage line of credit can be used to supplement your income in the years where you take a reduced distribution from your retirement account.  This could preserve your assets for a longer period of time, and give you more flexibility as the market fluctuates.

Please see a financial advisor for more details on how to evaluate a better distribution sequencing strategy for your situation.  Please contact me for more details on how a reverse mortgage could help.
Source: CMPS Institute

If You Can Afford To Rent

How do the changes to to the Mortgage Interest Deductions impact me?

The only type of home mortgage interest that is tax deductible in 2018 is interest on up to $750,000 of

loan proceeds used to buy, build or improve a qualified home.  The $750,000 is aggregate total for both qualified homes(one primary home + one vacation home). For more details, see my article called, “When is Mortgage Interest Tax Deductible.” Here are five ways this change may impact your home loan strategy:

• Debt Consolidation Loans – the interest on the “cash-out” proceeds or home equity loans used to pay off other debt that was not used for home improvement is no longer tax deductible
• Vacation Home Loans - it may not be a smart idea to use a “cash-out” mortgage or home equity line of credit on your primary home to buy a vacation home. Instead, you may want to consider placing a mortgage on the new vacation home when you buy it so that it can be treated as “acquisition indebtedness” for tax purposes.
• Home Improvement Loans - the interest on a “cash-out” mortgage or home equity lines of credit is generally still deductible if you are using the funds for home improvements. There are certain rules and timelines that need to be followed to make this work.
• Refinancing an “Acquisition” Mortgage Closed on or Before December 15, 2017 – there may be no need to worry about losing your tax deduction if you refinance an old loan that was used to buy, build or improve your home. That’s because the interest on your new home loan is generally still tax deductible on balances up to $1mm if the new loan balance is the same as your current loan balance.
• Refinancing an “Acquisition” Mortgage Closed After December 15, 2017 – the interest on your new home loan could be deductible on balances up to $750,000 if the loan balance is the same as the old loan balance. If you are increasing your mortgage balance, you may want to use the funds for home improvement to keep your tax deduction on that portion of the loan.

Be sure to check with a CPA for more details about how these changes may impact your specific situation.

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.

Low Bond Yields Are Causing Problems for Retirees

Most retirement plans created over the past 30 years have assumed that government bond yields during retirement would be a lot higher than they are right now.  As illustrated in the chart, the yield on the 10-yr US Treasury fluctuated between 4% and 8% during most of the 1990s, and between 2% and 4% over the past 10 years.  However, the yield has stayed below 3% for most of the past two years.  Even so, interest rates in the US are not nearly as low as they are in the rest of the world.

In fact, over 30% of global government bonds had a negative yield throughout 2017; and approx. 70% of global government bonds had yields lower than one percent.  Even after bond yields started increasing this year, US bond yields remain below their long-term averages, and it's not out of the question that they may remain so for an extended period of time.  This low-rate environment has many causes, including a “flight to quality” in the financial markets and large bond purchases by central banks across the world.  Low bond yields may be the new normal, and many retirees would do well by revisiting the financial assumptions in their retirement plans. 

For example, a $400,000 retirement account with $30,000 in annual distributions would deplete 20% faster with 2% bonds yields vs. 4% bond yields.  You may be able to use a reverse mortgage to reduce your expenses or supplement your income during retirement.  This could allow you to take fewer distributions from your retirement account.  This would preserve your assets for a longer period of time, and help you to account for today's lower bond yields.

Please see a financial advisor for more details on how low bond yields may be impacting your retirement plan.  Please contact me for more details on how a reverse mortgage could help.
Source: CMPS Institute

While it seems simple enough, it is important to very carefully ask and answer these three questions when you invest in real estate:

1. How can I increase my rate of return?  The cornerstone of any smart
   
   investment strategy is to calculate your rate of return.  With real estate this is done by running the numbers using an internal rate of return (IRR) formula that takes into account:
   • Present Value (PV) - what am I paying out of pocket to get into this investment?
   • Term (N) - what's my timeline and how long am I going to hold this investment?
   • Periodic Cash Flow (PMT) - what's my monthly cash flow?
   • Future Value (FV) - what are my net proceeds (after expenses) when I sell the investment?
2. How does my rate of return with real estate compare with other investment opportunities?  When calculating your rate of return, make sure to account for:
   • Carrying costs (mortgage, taxes, insurance, maintenance, etc.)
   • Your time spent managing the property
   • Vacancy loss if you don't find a tenant
3. How can I reduce my risk?  You may want to consider these strategies to reduce your investment risk:
   • Increase your liability insurance in case something goes wrong
   • Consider a rent-to-own strategy where you find a tenant before you find a property
   • Consider mortgage strategies that result in more cash flow and/or better liquidity 

Contact me so we can get started on helping you answer these questions!

Three Questions to Ask Yourself for a Happier Retirement

#1: What does retirement mean to me?

Many people think of retirement as a time in your life where you can work if you want to, but not because you have to. In other words, how would you feel if you could work for fun and/or pursue your passions without worrying about money? This requires financial independence, or having enough money to:

• Cover your needs and basic wants
• After taxes
• After inflation
• For some period of time (usually you and your beloved's lifetime)

The amount of money necessary for financial independence is called "Critical Capital". This is a pile of money that can sustain all your retirement expenses with inflation and after taxes for the requisite time period. This may be in an assortment of piles of money such as funds in your 401(k), Roth IRAs, and taxable money. Retirement could mean reaching a point where you have enough Critical Capital to spend your money making a life versus being forced to spend your life making money. Now that's exciting!

#2: What is the role of mortgage planning?

Your mortgage is most likely your single largest debt, and your house is most likely your single largest asset. Your mortgage and home equity situation impact your:

• Cash flow
• Tax deductions (or lack thereof)
• Net worth and wealth position
• Liquidity (access to your money)
• Estate and legacy planning

It's important to ask yourself whether your mortgage or real estate equity strategy is helping or hurting your chances of acquiring the right amount of Critical Capital. Does it make more sense to use a smaller mortgage and invest more cash flow into your Critical Capital fund? Does it make more sense to use a bigger mortgage and invest more upfront cash into your Critical Capital fund? What about using or planning to use reverse mortgage now or at some point in the future? Mortgage planning asks and answers all these questions to help you avoid missing your mark and not having enough Critical Capital. Your mortgage, housing, and cash flow strategy play a large role in helping you achieve financial independence.

#3: How Will I Get Enough Critical Capital?

Remember, the amount of money necessary for financial independence is called "Critical Capital". There are three specific steps that I use to help you acquire enough Critical Capital for financial independence:

• Calculate Critical Capital — how much do you need?
• Determine the future value of how much you have already saved — what will your current investments be worth in the future?
• Determine how much you still need to save — how can you change your cash flow or real estate equity situation in order to make up for the shortfall?

As a mortgage professional, I work as a team with your CPA, CFP® and other financial advisors to help you determine how much cash flow you need during retirement and the best way to generate that income. I can also refer you to a financial planner if you don't already have one. Either way, give me a call or send me an email to schedule a time to discuss your options in further detail.
PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX AND INVESTMENT ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION.
Source: CMPS Institute