With the housing slump being as bad as it is, you would think our government would try to provide incentives for investors and buyers of second homes to help reduce the massive inventory of homes. Instead, new IRS rules are making it less tax friendly to profit from the sale of a second home or rental property. As of January 1, 2009, due to a provision of the Housing Assistance Act of 2008, owners of 2 or more properties will reap far less profit when selling their second home or investment property. As it was before, and as it stands now, owners may still sell their primary residences and not pay any capital gains on up to $250,000 of profit (if single) or $500,000 of profit (if married) if they have lived in their home for 2 of the last 5 years before the sale. This is known as the Primary Home Sale Exclusion. The old rules would allow you to sell your primary residence tax free up to the fore mentioned limits and move into your second home or investment property (for 2 years) making it your new primary residence which when sold, would allow the same tax benefits your previous primary residence offered. Technically, under the old rules, you could move into each investment property you own for a period of 2 years per property and sell them at a profit of up to the 250k & 500k profit limits without paying a dollar in capital gains. Sadly, those days are over.
As of January 1, 2009, second homes and investment properties that you later move into and convert to a primary residence will now be subject to capital gains tax on the percentage of time the house was owned by you but wasn't considered your primary residence. For example, if you owned a second home or rental property for 10 years and you converted it to a primary residence during the last 5 years of the 10 year ownership and you sell the home at a $100,000 profit, you will now have to pay capital gains on 50% of the profit since half the time you owned it, it wasn't your primary residence. Example 2: You owned the rental property for 10 years but only lived in it the last 2 years. You would have to pay capital gains on 80% of the the profit since it was your primary residence only 20% of the time you owned it before selling it.
Why is the government doing this you might ask. It's simple...MONEY! The old rules kept millions of dollars out of the hands of the U.S. Treasury every time an investment property or second home was converted into a primary residence for 2 years and then sold. This new rule is estimated to put Approx. 1 1/2 billion in the hands of the treasury over the next 10 years according to the Senate Finance Committee.
Do you think this new IRS rule will help or hurt the housing market? Post your comment by clicking on the link at the bottom of this blog post.
Thursday, January 22, 2009
Monday, December 8, 2008
Debt-To-Income Ratios Will be A Huge Factor In Determining How Much House You Can Afford
Banks have really screwed things up this time. Over the past 10 years, poor underwriting controls basically gave anyone with a pulse a loan. Banks have been known to throw caution to the wind when making money comes easy in a booming real estate market. In a seller's market, foreclosures are almost unheard of because home values grow so rapidly that a profit in selling is almost guaranteed. This is how the house of cards is built before reality comes in the form of a hurricane and unleashes it's furry on all that were irresponsible with their finances.
Improper lending standards have caused so much damage to the lending industry that lenders are now forced to change the way they do business. The great gatekeeper of prudent underwriting was the Debt-To-Income Ratio. This was used by lenders to keep the borrower from getting into financial turmoil. Unfortunately, this formula was altered to such an extent, that it no longer served it's original purpose.
Debt-to-income ratios are making a comeback and in a big way. There are 2 types of debt-to-income ratios. The first is the Standard or Front-End debt-to-income ratio which measures as a percentage, all of the costs associated with your monthly mortgage payment (principle, interest, property tax, homeowners insurance, PMI, etc...) against your monthly gross income. Your monthly mortgage payment should not exceed 28% of your monthly gross income.
The second type of ratio is the Total or Rear-End debt-to-income ratio. This is expressed as a percentage as well and includes all of your yearly debt (mortgage, car note, credit cards, alimony, student loans, etc...) against your yearly gross income. Your total yearly debt should not exceed 36% of your yearly gross income.
In figuring out how much house you can afford, use the ratios I've given above to give you a realistic idea of what today's lenders will approve. This is the method lenders should have chosen when making loans through the housing boom but they chose not to. Greed and a need to compete blindly with other lenders caused the deterioration of ratios and their usefulness in protecting not only the borrowers but the lenders and banks themselves. Debt-to-income ratios will be used as a main underwriting tool for current and future lending. This will translate into less house being purchased as a percentage of available income which will in effect keep more homeowners in their home and out of financial ruin. Isn't that the way it should be?
Improper lending standards have caused so much damage to the lending industry that lenders are now forced to change the way they do business. The great gatekeeper of prudent underwriting was the Debt-To-Income Ratio. This was used by lenders to keep the borrower from getting into financial turmoil. Unfortunately, this formula was altered to such an extent, that it no longer served it's original purpose.
Debt-to-income ratios are making a comeback and in a big way. There are 2 types of debt-to-income ratios. The first is the Standard or Front-End debt-to-income ratio which measures as a percentage, all of the costs associated with your monthly mortgage payment (principle, interest, property tax, homeowners insurance, PMI, etc...) against your monthly gross income. Your monthly mortgage payment should not exceed 28% of your monthly gross income.
The second type of ratio is the Total or Rear-End debt-to-income ratio. This is expressed as a percentage as well and includes all of your yearly debt (mortgage, car note, credit cards, alimony, student loans, etc...) against your yearly gross income. Your total yearly debt should not exceed 36% of your yearly gross income.
In figuring out how much house you can afford, use the ratios I've given above to give you a realistic idea of what today's lenders will approve. This is the method lenders should have chosen when making loans through the housing boom but they chose not to. Greed and a need to compete blindly with other lenders caused the deterioration of ratios and their usefulness in protecting not only the borrowers but the lenders and banks themselves. Debt-to-income ratios will be used as a main underwriting tool for current and future lending. This will translate into less house being purchased as a percentage of available income which will in effect keep more homeowners in their home and out of financial ruin. Isn't that the way it should be?
Wednesday, November 19, 2008
Definition Of Terms You'll Hear Daily During This Financial Crisis
Investing and financial terms are being thrown around in the media with very few people understanding what those terms mean. Many of you are left scratching your heads when you hear terms like "CDO's" and "Credit Default Swaps". I will explain these Financial Terms and others so you can clearly understand what is being reported by the financial and investment media.
The terms I will explain include: CPM-Commercial Paper Market, CDO-Collateralized Debt Obligations, Derivative, Securitization, LIBOR-London Interbank Offered Rate, Hedge Fund, CDS-Credit Default Swap, Equity, FDIC-Federal Deposit Insurance Corp., Basis Point, Debt, HELOC-Home Equity Line Of Credit, Leverage, MBS-Mortgage-backed Security, and Liquidity.
CPM- Commercial Paper Market: This is a low cost source of cash that companies take advantage of when they have short term financing needs. This funding source is preferred over bank lines of credit because it's a less expensive means of borrowing.
CDO- Collateralized Debt Obligations: This is a security backed by fixed-income assets and underlying bonds.
Derivative: A financial instrument whose value depends on its underlying assets, such as stocks, mortgages or any tradable commodities. Stock futures and Credit default swaps are types of derivatives.
CDS- Credit Default Swap: This is a contract that is a form of insurance that a debt security will be repaid in case of default.
Securitization: The practice of packaging hundreds or thousands of individual mortgages or other assets together and then selling ownership stakes to investors.
LIBOR- London Interbank Offered Rate: This is the rate that international banks charge for short term loans to each other.
Hedge Fund: These are privately held investment funds that gather investments from rich private investors, state retirement funds, pension funds and others and use techniques to try to produce high returns, usually with high levels of debt to increase leverage.
Equity: Current market value of one's home minus the amount the homeowner owes the bank on the mortgage. With stocks, it's the ownership in a company expressed in the shares of stock one owns.
FDIC-Federal Deposit Insurance Corp.: This is a government agency that insures deposits in banks and thrifts. The insured amount has temporarily been raised from $100,000 to $250,000 per qualified account.
Basis Point: A basis point equals One one-hundredth of 1 percentage point.
Debt: The money that a person or company owes a creditor through the use of bonds or loans.
HELOC-Home Equity Line Of Credit: A line of credit secured by a home. Borrowers can draw on the line of credit, With limits set by the lender, for a fixed period, usually 5 to 10 years.
Leverage: The use of borrowed money to invest or finance operations by individuals or companies. The more leveraged a company or individual is, the more risk they take on.
MBS-Mortgaged-backed Security: A bond or security backed by a pool of mortgages which provides a cash flow based on the principal and interest payments of the underlying mortgages.
Liquidity: The more quickly or easily an asset or an investment can be sold, the more liquid it is. Checking and savings accounts are examples of maximum liquidity shy of money under the mattress.
I hope I've helped you a little in understanding what these terms mean. It can be confusing, if you're not in the financial field, to get a grasp on what's going on in financial and investment markets. We are in a full fledged recession that may have dire consequences to the average household. Education is still the key to help you navigate through this critical time in our economy.
The terms I will explain include: CPM-Commercial Paper Market, CDO-Collateralized Debt Obligations, Derivative, Securitization, LIBOR-London Interbank Offered Rate, Hedge Fund, CDS-Credit Default Swap, Equity, FDIC-Federal Deposit Insurance Corp., Basis Point, Debt, HELOC-Home Equity Line Of Credit, Leverage, MBS-Mortgage-backed Security, and Liquidity.
CPM- Commercial Paper Market: This is a low cost source of cash that companies take advantage of when they have short term financing needs. This funding source is preferred over bank lines of credit because it's a less expensive means of borrowing.
CDO- Collateralized Debt Obligations: This is a security backed by fixed-income assets and underlying bonds.
Derivative: A financial instrument whose value depends on its underlying assets, such as stocks, mortgages or any tradable commodities. Stock futures and Credit default swaps are types of derivatives.
CDS- Credit Default Swap: This is a contract that is a form of insurance that a debt security will be repaid in case of default.
Securitization: The practice of packaging hundreds or thousands of individual mortgages or other assets together and then selling ownership stakes to investors.
LIBOR- London Interbank Offered Rate: This is the rate that international banks charge for short term loans to each other.
Hedge Fund: These are privately held investment funds that gather investments from rich private investors, state retirement funds, pension funds and others and use techniques to try to produce high returns, usually with high levels of debt to increase leverage.
Equity: Current market value of one's home minus the amount the homeowner owes the bank on the mortgage. With stocks, it's the ownership in a company expressed in the shares of stock one owns.
FDIC-Federal Deposit Insurance Corp.: This is a government agency that insures deposits in banks and thrifts. The insured amount has temporarily been raised from $100,000 to $250,000 per qualified account.
Basis Point: A basis point equals One one-hundredth of 1 percentage point.
Debt: The money that a person or company owes a creditor through the use of bonds or loans.
HELOC-Home Equity Line Of Credit: A line of credit secured by a home. Borrowers can draw on the line of credit, With limits set by the lender, for a fixed period, usually 5 to 10 years.
Leverage: The use of borrowed money to invest or finance operations by individuals or companies. The more leveraged a company or individual is, the more risk they take on.
MBS-Mortgaged-backed Security: A bond or security backed by a pool of mortgages which provides a cash flow based on the principal and interest payments of the underlying mortgages.
Liquidity: The more quickly or easily an asset or an investment can be sold, the more liquid it is. Checking and savings accounts are examples of maximum liquidity shy of money under the mattress.
I hope I've helped you a little in understanding what these terms mean. It can be confusing, if you're not in the financial field, to get a grasp on what's going on in financial and investment markets. We are in a full fledged recession that may have dire consequences to the average household. Education is still the key to help you navigate through this critical time in our economy.
Sunday, October 26, 2008
Hurt Finances? Here's An Affordable Way To Invest In Real Estate
Many real estate investors have taken a major hit in their finances due to bad timing. These are investors who got greedy at the top of the appreciation cycle and decided to buy while home prices were at record highs. Now that they are upside down in their investments, many are walking away having lost thousands of dollars in down payments and other related costs. With so much capital being lost, it can be very difficult to take advantage of today's bargain prices.
So, how do you take financial advantage of a crumbling real estate market when your pockets are relatively empty? The answer..home builder stocks and REITs! Home builder stocks and REITs are at decade lows due to the depressed real estate market. Some builders have gone bankrupt and others are being gobbled up by bigger builders. This presents a fantastic opportunity to invest in the builders that will survive this market downturn.
The following is a list of my top 3 REITs and top 3 home builders I feel will not only survive, but will be stronger due to the elimination of some of their competitors:
REITs
1) VNO - Vornado Realty Trust - Dividend Yield = 6.34%
2) BXP - Boston Properties - Dividend Yield = 4.4%
3) SPG - Simon Property Group, Inc. - Dividend Yield = 6.65%
Stocks
1) NVR - NVRLP
2) MDC - MDC Holdings, INC
3) RYL - The Ryland Group
The above companies are trading at multi-year lows as are all companies in their sector, but these companies will survive presenting substantial upside stock and unit appreciation once the real estate market starts to stabilize. Many of them also offer very attractive dividend yields of as much as 6.65%.
Stocks and REITs are a relatively inexpensive way to participate in real estate market swings. You can buy as much or as little as you can afford without having to qualify for a loan, or deal with the expenses required to maintain physical property.
So, how do you take financial advantage of a crumbling real estate market when your pockets are relatively empty? The answer..home builder stocks and REITs! Home builder stocks and REITs are at decade lows due to the depressed real estate market. Some builders have gone bankrupt and others are being gobbled up by bigger builders. This presents a fantastic opportunity to invest in the builders that will survive this market downturn.
The following is a list of my top 3 REITs and top 3 home builders I feel will not only survive, but will be stronger due to the elimination of some of their competitors:
REITs
1) VNO - Vornado Realty Trust - Dividend Yield = 6.34%
2) BXP - Boston Properties - Dividend Yield = 4.4%
3) SPG - Simon Property Group, Inc. - Dividend Yield = 6.65%
Stocks
1) NVR - NVRLP
2) MDC - MDC Holdings, INC
3) RYL - The Ryland Group
The above companies are trading at multi-year lows as are all companies in their sector, but these companies will survive presenting substantial upside stock and unit appreciation once the real estate market starts to stabilize. Many of them also offer very attractive dividend yields of as much as 6.65%.
Stocks and REITs are a relatively inexpensive way to participate in real estate market swings. You can buy as much or as little as you can afford without having to qualify for a loan, or deal with the expenses required to maintain physical property.
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