Archive for February, 2009

If you are an investor in real estate, you’re probably aware of the benefits of using a 1031 exchange as appose to selling outright. An exchange defers your capital gains taxes, keeps your money working for you, and helps to build equity and maximize your returns. But 1031 exchanges are allowed not only for the good of the investor; by allowing investors to move their capital to the most advantageous investments, section 1031 stimulates the U.S. economy.

The fact that 1031 exchanges are intended to boost the U.S. economy raises the question of whether one can exchange a property for one located overseas. The short answer is no. The taxes you can save by using a 1031 exchange as appose to selling without one, is a deferment, which indicates that even though you are temporarily pardoned from having to pay federal capital gains taxes, the U.S. government will still want to collect the money if you sell your property at some point in the future. It is difficult and sometimes impossible for the IRS to collect taxes on the sale of foreign property.

If 1031 tax exchanges are limited to the U.S. so that the economy will benefit and the IRS will be able to collect capital gains taxes in the future, then you may be wondering what rules apply to U.S. areas like Guam, the U.S. Puerto Rico and Virgin Islands. In private letter rulings, the IRS has stated that a Virgin Islands property can only qualify as like-kind in an exchange with a U.S. property if it produces income, which is more restrictive than the typical requirements for a like-kind exchange, which state that the property has to be held for your trade or business or as an investment.

So if you are considering making an exchange outside of the fifty states (and Washington D.C.), make sure that the replacement property will be considered to be like-kind to the property that you are exchanging it for. To be completely sure about this, it might not be a bad idea to request a private letter ruling for your individual case.

U.S. investors can save a lot of money by utilizing 1031 tax exchanges to defer all of their capital gains tax on the sale of investment property. 1031 exchanges are like an interest free loan from Uncle Sam..

Many younger people just starting out buying a new home will take out a mortgage with a 30 year fixed mortgage rate. The interest rate as well as payment will stay the same for the term of the loan. The 30 year fixed mortgage rate is locked in at the time the papers are signed. Often borrowers want to get out from under their 30 year mortgages and opt to pay extra payments into the principal of their loan. The 30 year fixed mortgage rate will not change, but once the principal goes down, the amount of interest paid will go down.

On a $100,000 mortgage loan with a 30 year fixed mortgage rate at 6.For 25 percent interest need you to pay around $615 monthly payments fpr 30 years, while a 15 year loan with a 6 percent interest rate will need you to pay higher amount of monthly payments around $840 for 15 years. Although the payments’ interest rate of 15 years loan are higher, the amount of loan is cut about in half. The 30 year fixed mortgage rate is generally a fraction of a percent higher than the 15 year fixed mortgage rate.

If youu have a 30 year fixed mortgage rate loan, it’s usual that you may pay lower payments than your neighbors who are renting. If you are renting and you have a good credit rating you can afford to buy a home. There is a 30 year fixed mortgage rate loan that will fit into your budget.

If you are capable to pay for the down payment to buy a home with a mortgage loan, it isn’t necessary to cut off down payment then raise your monthly payments. There are many lenders offer the mortgage loan required little or no down payment; however, this kind of mortgage loan always need you to pay higher interest rate. Generally when borrowers ask for a loan they offer a 10 or 20 percent down payment, which is the percentage of the amount of the house you want to buy. By offering a large down payment your lender may be able to offer you the very lowest 30 year fixed mortgage rate.

If you are in the market to buy a home, but you are not quite ready to sign the papers, you can use the time to look around at homes and plug the numbers into a mortgage calculator. Once you enter the data that the calculator asks for you can see just how much your payment may be. The number displayed may not be the exact number your lender may say, but the number will be in the ball park. You will be able to narrow down your search for a home and for the amount of money you need to borrow. Using a mortgage calculator is especially helpful if you are already paying rent and want to buy a home instead.

Beware The Rent Versus Buy Calculator

You probably have seen a rent-versus-buy calculator here and there online, and you may have even used one. They are supposed to help you decide if buying a house makes financial sense for you, but do they really tell you what you need to know? Let’s take a look at how they work, and how they sometimes don’t.

To Rent Versus Buy

The idea of these calculators is to take into account all the costs of both renting and buying over a given time, to compare them and see which option is better. There are a number of criteria involved, though, and this means there will always be some guessing. How many years will you be in the home? How much will rent be up to in ten years? How high will your property taxes be? These fields will be filled in by default in most calculators, and you’ll change them as needed.

I just went to the U.S. Government’s site, ginniemae.gov to see their rent-versus-buy calculator. Their fields start (mid 2007) with an assumption of ten years in a house, a 7.5% interest rate, and 2% annual appreciation – all very conservative guesses. Here is what all of the criteria were preset at:

Your Current Monthly Rent: $750
The Price of Home: $150,000
The Down Payment: $15,000 (10%)
Term Of Loan (years): 30
Interest Rate On Loan: 7.5%
Estimated Years In The Home: 10
Annual Property Tax Rate: 1%
Annual Home Value Increase: 2%

You can change any of these. For example, property taxes are closer to 2% of property value in some areas. Over 10 years appreciation will probably be more than 2% annually (although it could well be a negative number this year and next). Hitting the “calculate” button, this is what was shown:

Home Value In Ten Years: $182,849
Loan Balance After 10 Years: $117,340
Your Equity: $65,509
Tax Savings (at 28%): $32,549
The Average Monthly Payment Over Time: Rent: $834 – Buy: $550
Total Payments Over Ten Years: Rent: $100,080 – Buy: $66,017
Your Total Savings On: Buying – $34,063

Confusing. My amortization table shows that the payment on a 30-year, 7.5% loan would be $944 per month, not $550 – and this doesn’t include mortgage insurance, property taxes or home owner’s insurance. They may take into account the tax savings, but that still doesn’t explain how they arrive at $550. There is this little note at the bottom:

“The above rent-versus-buy calculator uses the following in its calculations: homeowner’s insurance, loan costs, mortgage insurance, cost to sell the home, property tax, homeowner’s tax savings, and increases in rent. Results are estimates. “

Well, that certainly doesn’t clear things up, but it does point out some other issues, like the fact that there is no calculation at all for repair costs. Having owned several homes, I can tell you that there will be repairs and maintenance. We also don’t know if rising property taxes were taken into account. Also if you are in the 15% tax bracket (likely if you’re renting a $750 apartment), the tax savings would be about $15,000 less than calculated – a little bit of difference.

Now, even at a more reasonable 6.5% interest rate, the monthly cost of owning a $150,000 home (with taxes, insurance, and minor repairs) is a minimum $1,150 – and probably higher than that. Using the above example, this is $400 more per month than renting. My guess is they take into account the “opportunity cost” of not having that $400 per month to invest over 10 years. That might even surpass the equity gain from owning.

Buying is often a good idea, especially since you probably won’t invest that $400 monthly in extra cash flow you get from renting. But do some of your own thinking, understand what criteria are being used, and be skeptical of these rent-versus-buy calculators.

A VA foreclosed home and Veterans Affairs

In short, a VA foreclosed home is any house that you buy with the help of the American Department of Veterans Affairs or VA for short.

The paper work involved in buying a house can seem insurmountable to homebuyers lacking experience in such matters. For this reason we have the VA, a public institution dedicated to help US veterans buy their dream home.

What do you gain from the VA?

The mission of the VA is not purchasing the home for veterans as some people think. Rather, they give them advice and facilitate the purchase of the home. As usually, the lending company lends the money upfront to purchase the house. However, if a veteran is not able to negotiate with the lender for whatever reason, the VA steps in and talks to the lender.

When buying a house in a VA context, the Department of Veterans Affairs secures the veteran’s loan, so the lender is inclined towards accepting a lower interest rate, which is obviously a very favorable situation for veterans.

The VA house foreclosure process

It would seem that with such advantageous loan conditions veterans should never have any problem to repay their mortgages, but this is not always the case. Unfortunately, even with all the assistance available to them, veterans can suffer financial hardships as well. If they do not pay as agreed they face a VA foreclosed home process.

It is true, the Department of Veterans Affairs made it possible for them to obtain an advantageous loan, but if they fail to meet their obligations, the lending society will act exactly in the same way as with every other delinquent mortgage. The homeowner with such a loan will then face what is called a VA foreclosed home.

As soon as veterans let them know that they have trouble with their personal finances and thus are risking a VA foreclosed home, the Department of Veterans Affairs helps in any way they can in the hope that veterans will ultimately not lose their property to a VA house foreclosure.

In times of economic uncertainty, the general public lose more houses to foreclosures. Here it is the same. In the end, if the assistance and advice given to veterans cannot reverse the situation, the veteran’s property will become a VA foreclosed home.

Non-veterans and the VA

What many non-veterans do not know is that Veterans Affairs can help them purchase a VA foreclosure property.

To recap:

  • As we said, when veterans buy their homes, the VA offers its mortgage guarantee.
  • The lender usually offers a lower rate of interest.
  • If in spite of this the loan goes into default, the VA pays the whole amount of the loan and adds the property to their foreclosure listings for sale. Non-veterans also have the right to buy such foreclosed homes.

What is a VA Vendee loan?

They have a program called the VA Vendee Financing program, which can help non-veterans to purchase a VA foreclosure home. The non-veteran may also get the loan for a lower rate of interest than they would normally get. The VA Vendee Financing program, in essence, becomes the new lender of the home.

In a nutshell, the VA Vendee Financing plan helps veterans to get rid of their debts while granting non-veterans the option to buy a VA foreclosed home with a lower interest rate.

 

Can We Get Real About U.K. Real Estate?

It’s well known that in UK real estate, local real estate markets are falling because individuals and real estate agents may have inflated views of property values. With sales volumes that can be up to 50% lower than the average, the average price of homes for sale is definitely trending downward. Another factor that’s contributing to this growing downward tendency is that many sellers tend to have an inflated idea of what their properties are worth and for this reason, they reject larger numbers of offers. This is caused by a discrepancy that can range up to 30% between buyer and seller. A seller who’s offering £100,000 for a UK real estate property and receives offers in the range of £70,000 is better likely to reject them.

Sellers Are A Major Part of the Problem

Owners aren’t listening when real estate brokers tell them their property value has fallen. In fact, property values in the present market can decline as much as 20% annually. One expert in real estate services places the blame firmly on the sellers: “As a result they [sellers] are unwilling to accept agent advice on appropriate asking prices or offers. Consequently, many properties are withdrawn from the market or remain unsold for long periods, producing an unprecedented low number of transactions. Unless their [sellers] properties are absolutely outstanding it is essential that they [sellers] adopt a realistic attitude and listen to advice if they want to achieve a sale.”

Costly Real Estate is Suffering Too

Another shocking aspect of this trend of UK real estate is that even high-end properties designated as “super prime” are not immune. A super prime property is one worth more than ten million pounds. Every real estate agent knows that despite foreign investment in these properties, the prices are still dropping. Rental prices are also dropping as more and more super prime properties flood the rental market.

Lenders Are Partially to Blame

Add to this the fact that mortgage rates are rising, despite government efforts to support failing banks. Bank of England recently raised rates from .2% to .5% despite interest rates dropping – meaning there’s no benefit to consumers. The banks circle the wagons, each claiming that the rates rise because all the other banks raise their rates. The same group behavior doesn’t take place when some rates get lower. Whether or not this is true, it’s still bad news for real estate in the U.K. And it’s even hurting news for consumers who are seriously looking to buy UK real estate.

Powered by Yahoo! Answers