Why the "Buy & Hold" Strategy is Best

The Buy and Hold methodology, as it is applicable to property, is and always has been the cause for making more millionaires than any other method. The main reason is really because it lets you develop equity through appreciation over a period of time. There are numerous short term techniques like lease-options, wholesaling, and flipping that will create some cash in your pocket, but in no way will it improve your net worth in the long run.
I have found in my 20+ years of investing that the process of purchasing real estate is the most significant part of the ownership cycle. Selling is straightforward in the right market, and the only time in the property transaction you become accountable for commissions and capital gains tax. It can kill the whole deal if done improperly and at the wrong time.

Your goal in property investing must be to develop as much equity as you can in the property while still having enough passive income to get you there. So long as you own the property, you’ll have the extra advantage of tax sheltering that you cannot obtain from any short term methods. THIS is the basic reason that explains why the Buy and Hold methodology is king.

Most people fall within the 20%-36% income tax bracket, and for all you Californians out there, California has one of the highest state tax rates. What’s even scarier is that most individuals work the first 4 months of each year simply to pay their taxes!

The reality is, you will never get ahead financially until you learn to shelter your revenue from taxes. The rich population in this country understand how to shelter their income from taxes, which is why many of them practice the Buy and Hold technique and own rental properties of their own.

As time goes by and you pay off your loan, you get the advantage of additional cash flow which is very useful in retirement. One option you have is to do what is referred to as a 1031 Exchange into a bigger, more valuable property that produces heavier cash flow. The beauty of a 1031 Exchange is it defers the capital gains tax (which just increased on January 1, 2013) into the future and allows you to transfer more of your equity to your new purchase. This is another benefit to building wealth in real estate only the Buy and Hold strategy offers.

Traditionally, properties have doubled in value every 7 to 10 years going back 50 years in time. Imagine your equity position if you hold a property for 20 or 30 years!

If you sell, you not only lose out on future appreciation, but you must pay commission and capital gains tax. I look back to some of the first properties I owned and wish I’d never sold them. While I sold them for a decent profit at the time, their value today is 2 or 3 times as much. It made no sense to sell and let the subsequent owner make all that appreciation. I managed not to sell one property I bought many years back and finally paid it off. The cash flow on that one property today is over $1200.00 per month after expenses. That’s more than the average social security check, and rents have gone up thanks to inflation. (I never pictured myself liking inflation till I started owning real estate!)

At a recent event, I was seated at a table next to a man who’d been buying rental property since since 1999. He never sold any of the homes he purchased. Many of these properties have doubled in price and he is now thinking about using 1031 Exchanges to move into bigger properties. The cash-flow and tax shelter he received over time have been an important asset to him, and now for estate planning purposes he is consolidating his holdings into bigger properties to one day will to his heirs. His plan was to leave a legacy to his kids and grand-kids. The Buy & Hold strategy permitted him to realize his dreams.

If you are tempted to make use of your properties as an ATM machine, it will not permit you to develop equity and true wealth over time. Real estate is meant to be a “retire rich” program, not a “get rich quick” program. In my opinion, the single reason to take money out of a property is to put a down-payment on another. Even then, you have got to be careful that the rental income on the property you are refinancing has increased enough to cover the new higher payment. You do not need to build a house of cards by weakening the structure of your portfolio.

True wealth in real estate is realized through equity growth and appreciation. Cash flow, although a must, is the glue that holds the deal together to permit you to wait until the value grows. Let your tenants cover your payments and make you rich!

5 Home Renovations That Could Hurt Resale

Unlike the homeowner of 25 years ago, today’s typical buyers plan to live in their homes for just five to seven years. So it’s more important than ever to consider resale when making home improvements.

Even if you’re a buyer, it’s important to think like a seller, too, from the time you sign the purchase contract through any home improvement or renovation projects. The goal: Think about how your improvements might affect the sale of your home down the road.

Below are five home renovation/improvement projects that could actually hurt your home’s resale.

1. Going overboard on landscaping or gardens

A homeowner/seller may have a green thumb and be really proud of the time spent on the garden, the hedges or landscaping. But the next buyer might see it as too much maintenance, especially if you went overboard with your green thumb. Potential buyers may not be willing to pay for it (as part of the home’s overall price), hire a gardener or do the work themselves. This is especially true with Millennials and Gen X-ers. Of course, your property needs curb appeal, and nice landscaping does sell. But it could be just as easy to do a quick, inexpensive yard once-over before going on the market.

2. Converting a garage into a family room

Converting a garage into a family room may make sense if you don’t have a nice car or you simply want a bigger family room. Some people think a driveway is enough. But this is a huge “no-no” in real estate. A garage is expected, especially in the suburbs. If you take it out, you lose a huge chunk of buyers who simply won’t consider a home without a garage.

3. Taking out a bedroom

It’s common today for people to transform a bedroom into a huge master closet or into a home office with a built-in desk and cabinet. If you do, make sure the room can be easily turned back when you put the home on the market. Buyers with kids may need that bedroom. They’ll see the room you converted into a home office or closet as more money they’ll need to spend to turn it back into a bedroom.

A home office is the easiest to undo, as long as you haven’t built in intricate desks, shelves and cabinets. A large closet generally goes within a master bedroom, which includes taking out a door or putting up a wall, all of which is harder to undo.

4. Adding a swimming pool

Similar to landscaping, a pool requires maintenance and is an even bigger liability. This is very particular for certain parts of the country. If you’re in the South, in a warm environment, you can get away with it much more easily. A pool would be a common “must-have” on many buyers’ wish list.

If you’re in an area where it’s only warm a few months a year and pools aren’t common, adding one could be a big mistake. Then again, it’s your home, and if you plan to be there a long time, add the pool. Just know that it may be a turn-off to future buyers. When in doubt, consult your agent.

5. Adding highly personalized colors, finishes or fixtures

Often, homeowners put in tile, sinks, vanities, countertops and floor coverings that are hard to replace, and yet are specific to their tastes.


For example, you may be obsessed with the Moroccan tile from your Marrakesh vacation last year and want it in your kitchen. But the next buyer may not be so enthusiastic.

Similarly, installing ceramic or marble tile all over the floors may be a costly mistake that others won’t want to pay for. Some homeowners assume that because they spent $50,000 in such upgrades, their homes will be worth so much more. But what may be a highly personal touch could make your home look like a “fixer-upper” to others. The end result: You’ll turn off a lot of buyers who don’t like your taste and don’t want to do the work to undo it.

Ask an Expert: Will Carrying a Balance Improve My Credit Score?

Ask an Expert: Will Carrying a Balance Improve My Credit Score?: Whether it's better to maintain a balance or pay your credit card off in full each month is one of the most common questions about credit scores.

What to Consider Before Buying an Investment Property

The housing market is rebounding and interest rates are still low, meaning an investment property might make a lot of sense for you. Before you move forward with purchasing an investment property, take note of these considerations.

Rental Property
If your property doesn’t generate rental income, you are counting on it increasing in value at a rate higher than inflation. Look at the market that you’re considering and if historically that holds true for homes in the area.

Time Shares
Time shares aren’t generally thought of as an investment, since re-sale can be difficult and — at times — at a lower price.

Real Estate Development
Development deals come with a high price tag and a lot of risk. While the return can also be high, for the average investor, the risk doesn’t outweigh the potential reward.

Foreign Real Estate
Before buying property in another country, make sure you are aware of the differences in their real estate laws and protections. Also take into consideration the country’s economic and political stability.

Associated Costs
If you purchase an investment property, the mortgage will not be your only expense. Consider necessary insurance, differences in tax treatment of investment property vs. primary residence, upkeep and, if you plan to visit your property — travel costs.

Once you’ve thought through the considerations above, an investment property may still be a good financial move for you. Interest rates are low, and while home prices are rising, they are still relatively low in many markets.

Sales Edge Up as More Homes Come Onto the Market

Sales of previously owned homes edged up 0.6% in April from the month prior and there was a noticeable increase in homes coming on the market, according to the National Association of Realtors.

NAR reported Wednesday morning that sales of existing single-family homes rose to a 4.97 million seasonally adjusted annual rate in April from a 4.94 million rate in March. The March figure was revised upward from 4.92 million.

NAR chief economist Lawrence Yun noted that the limited inventory of homes for sale and tight credit has constrained sales.

However, the inventory of existing homes for sale rose 12% from March to 2.2 million homes in April, the highest level since September 2012.

In April, “we started to see improvement in the number of homes for sale,” said Re/Max chief executive Margaret Kelly said. “It may take a few more months, but as prices rise and more homeowners gain positive equity, we should see an increase in the inventory of homes for sale, resulting in a much better selection for potential homebuyers.”
Wednesday’s report shows the median sales price was $192,800 in April, up 11% from a year ago.

However, the number of listed homes for sale is 13.6% below the listings in April 2012.
The NAR report also shows that 32% of sales were all-cash transactions and only 18% of sales involved foreclosures and REO.

Cash transactions were up from 29% in April 2012 and distressed sales were down from 28% a year ago.

Finding an Inspector

An inspector, if they do their job well, will make you aware of issues with your prospective home, such as needed repairs or structural damage. If the inspector finds problems with the home, you may decide you can overlook them, you may try to negotiate the price of the home in anticipation of costs associated with the problems, or you may decide the house is not for you and keep looking. The point is that you are aware of the problems before they become yours to solve.

Now that you know why you need a home inspection, how do you find a good home inspector?

Hire Your Own:
A seller may offer up an inspection report. While they may have the best intentions, it is always better to hire an individual you’ve vetted who is working for you.

Certification:
Ask your inspector if they hold any certifications or memberships that qualify them as a home inspector. An inspector can be accredited through the American Society of Home Inspectors. In addition, they may be a member of the National Association of Certified Home Inspectors.

Experience:
Ask how long they have been inspecting homes and request they provide references. In addition, ask if home inspection is their primary occupation.

Comprehensiveness:
What does the inspector cover in their inspection report? They should be able to provide you with a list. In addition, ask how long the inspector thinks the inspection should take. A normal inspection should take as long as 2 to 3 hours.

Errors and Omissions Insurance:
Even the best inspectors make mistakes, so ask if your inspector carries errors and omissions coverage.

The Inspection
Once you are ready for the inspection, make sure you are present when it occurs. Ask questions and pay attention to comments the inspector makes as you walk through the home. While a good inspector should have a camera, you may also want to bring your own to keep record and help you remember where the inspector found problems.
Finally, make sure you thoroughly read the inspection report. It may elaborate on problems the inspector pointed out during the inspection, or even include issues the inspector failed to mention during the walk through.

Investing in Real Estate

If you are just getting started with real estate investing, there are some important things you should consider before taking the big leap.

Buying a property can be a daunting idea when you realize all of the things that need to be done. Looking, researching, negotiating, losing out to someone else, getting finance organized, getting legal advice, getting inspections done (building, pest, strata etc.) and finally, draining your bank account to finalize the purchase!

Here we will discuss a few things to think about to help lessen the burden.

Clarify Your Goals

It’s a good idea to do some reading and research about property investing, if you haven’t already.
After getting some expert advice, either from advisors or books, you should have a good idea about what strategy you want to follow to achieve your wealth creation goals.

Common strategies in property investing include:

• Long Term Investing for Positive Cash flow
• Long Term Investing for Capital Growth
• Short Term Holding, Renovating and then “Flipping”
• Short Term Holding, Speculating on the Property Cycle

The type of property that you want to buy is also an important decision. Apartments, townhouses and units will have different returns compared to houses or even commercial property. The area that you invest in will play a critical role in how your investment performs as well.

Prepare to be Patient

With longer term investing, it can take years to start seeing gains from your investment.
Property investment is definitely not a get rich quick scheme and once you purchase that first property, you will need to let go for a while and just focus on keeping up with the costs.

Short term holding of property is a riskier exercise for the novice and it is recommended you take a long term position if you are new to
the area.

Get Your Finances in Order

You normally need a decent deposit and pattern of savings before purchasing an investment property. The exception to this is if you already have substantial equity in another investment (such as the family home or stocks).

Always aim to reduce personal debt such as credit cards and personal loans as this reduces your cash flow and is looked on negatively by
the banks. If you end up buying a property which is negative cash flow, you will need to demonstrate to the lenders that you can sustain these payments.

Dive In

Once you’ve decided on your strategy and gotten your finances in order, start researching areas that will be in high rental demand. This is one of the most important factors, because if you purchase your property but then struggle to rent it out, you will be left paying off the mortgage out of your own pocket.

After doing your proper research and due diligence, make an offer on a property where the numbers stack up as a good investment. Remember that investing in property is a decision based on calculations and statistics; it should not be an emotional decision such as buying your own home.

You should avoid procrastination too much because time in the market is normally better than “timing the market”.

Good luck with your investment endeavors!

 

10 Mortgage Misconceptions

Mortgages are tricky and often hard to understand. Because most people only purchase a home every five to seven years, prospective home buyers understandably don’t spend a lot of time in the interim educating themselves about mortgages and the mortgage process.
With the real estate market picking up and mortgage rates prime for refinancing, Zillow has compiled a list of common mortgage misconceptions based off the results of the just released 2013 Mortgage IQ Survey.

Misconception No. 1:

Your interest rate reflects the true cost of your mortgage
Your annual percentage rate (APR) is actually the figure that represents the true cost of your mortgage. It is inclusive of your interest rate, points, mortgage insurance (when applicable) and other fees, including origination and underwriting fees. It does not include the cost of your homeowners insurance policy. The APR is typically higher than your interest rate because it incorporates the rate and the fees. In fact, when shopping for a mortgage, it is best to compare loans based on APR instead of the interest rate because it gives a better sense of the total cost over the life of the loan.

Misconception No. 2:

Mortgage rates are only released once per day
Mortgage rates for all types of mortgages can change frequently, sometimes dramatically, throughout the day. Because of the rapid changes in mortgage rates and a lender’s ability to control what is offered, it is important to shop around for the best rates. Getting multiple loan quotes is highly recommended.

Misconception No. 3:

All lenders are required by law to charge the same fees for appraisals and credit reports
There are no laws that require lenders to charge the same fees for services such as appraisals or credit reports. In fact, in order to make their loan quotes more competitive, some lenders may waive charges for such services. Conversely, some lenders may charge higher fees for these services, so it’s important to shop around.

Misconception No. 4:

I must get my mortgage through the same lender I was pre-approved with
A pre-approval is a conditional agreement that estimates the size of the home loan a lender would fund for you. It typically involves income verification and a credit check. However, you are under no obligation to proceed with the lender that gave you the pre-approval. Make sure you get at least three loan quotes before proceeding with a mortgage.

Misconception No. 5:

You will almost always get the best mortgage interest rates at the bank where you have a checking account
While some banks do give their customers discounts, it’s unlikely your bank will offer the best interest rate available simply because you bank there. To get a competitive mortgage rate and terms, get quotes from multiple lenders either in person or online — including your bank — and pick the one that works best for you.

Misconception No. 6:

When taking out a mortgage with your spouse, lenders will look at each of your credit reports equally when determining the interest rate you qualify for
When applying jointly for a mortgage, lenders will pull your credit scores from each of the three major credit reporting agencies: Experian, Equifax and TransUnion. They’ll then take the middle score of each set and use the lower of the two to help determine your mortgage interest rate. This means that the least creditworthy borrower will have the greatest effect on your monthly payment. It does not matter who the primary or secondary borrowers are.

Misconception No. 7:

You cannot get a home loan with less than a 5 percent down payment
It is a common misconception that you need to put down 10 percent, 15 percent or even 20 percent on a home, especially in light of the recent housing crash. But with as little as 3.5 percent down, you can often obtain a mortgage through the Federal Housing Administration (FHA). FHA loans have become a popular loan option for those who may not have a large down payment or have blemishes in their credit history. FHA loans are available to everyone, not just first-time home buyers. (Find out more about the advantages and disadvantages of an FHA loan here.)
There are also alternative loan programs through other agencies, including the Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA). These loans also require little-to-no money down.

Misconception No. 8:

If you go through a short sale or foreclosure, you must wait 7 years before getting another home loan
In most cases, to buy a home after a short sale, you’ll typically only need to wait 2-4 years depending on your down payment and the loan type you select. The waiting period after a foreclosure is longer: Typically you’ll need to wait 3-7 years before getting another home loan. Even if you can afford to get a mortgage right now, you’ll need to have a good credit score, which can be difficult to rebuild in just a few years. Unique circumstances can lead to different outcomes, so make sure to check with a lender or two.

Misconception No. 9:

If you are underwater on your home loan, you are unable to refinance
It is estimated that millions of homeowners who are underwater and current on their mortgage can refinance using one of two special government programs. The first, the Home Affordable Refinance Program (HARP), is available to homeowners who have a loan backed by Fannie Mae or Freddie Mac. The second program, FHA Streamline Refinance, has recently been modified to help homeowners with loans insured by the Federal Housing Administration (FHA). Both programs help homeowners refinance into lower interest rate loans and may help dramatically lower payments without very much cost to the borrower. Zillow Mortgage Marketplace is the only online mortgage marketplace where you can get loan quotes for HARP and FHA Streamline. As an added bonus, it is the largest mortgage marketplace where you can anonymously get loan quotes, meaning you don’t enter any personally identifiable information and therefore cannot get spammed and hounded by lenders who were sold you contact information. See if you may qualify.

Misconception No. 10:

You can only refinance your home loan once every 12 months
With conforming loans backed by Fannie Mae or Freddie Mac (the vast majority of loans today), you can refinance as frequently as you’d like so long as you do not take cash out when you refinance and are just refinancing to lower the interest rate and/or term of your mortgage. The rule of thumb is to wait until the difference between your current interest rate and the available interest rate would save you enough money each month to cover the costs of refinancing in 2 years. The amount of time that you plan on being in the home should be considered, as well. In general, refinancing will be more financially beneficial the longer you are in the home. Use the refinance calculator to determine how long it will take to break even on the costs of refinancing.

6 Worst Types of Real Estate Investments

As any experienced real estate investor will tell you, not all investment properties are created equal. Homes that might be perfect for a primary residence, for example, might not yield positive cash flows — and without positive cash flows, you’re losing money, not making it.

Here are a few things to think about and properties to avoid when you are ready to invest your hard-earned cash equity capital.

1. Anything that doesn’t generate rental income

These include second homes and land investments. Too many people invest in properties hoping that they will go up in value. But there is an opportunity cost to having money sit in real estate that doesn’t pay any income. Even if the property goes up in value, you’ve got to reconcile and account for all the money you would have earned if your money had instead been in the bank or in stocks and/or bonds.

2. Anything with negative cash flows

If you buy a “prize property” — such as a fancy downtown fancy condo, beach property or vacation rental — it’s probably going to be 20+ years before you get your first dime of positive cash flow. And that’s just no way to invest your hard-earned money. Pencil out any potential deal ahead of time, and buy properties that pay cash flow from day one — the moderately priced properties in non-prize areas.

3. Tenant-in-common (TIC) investments

These were popular from 2005 to 2007 as a way to diversify a portfolio without having to deal with the hassle of owning and managing real estate. But few people ever earned a dime because of all the costs and fees associated with the agreements.

4. Development deals

Development of land is extremely high risk. There are entitlement, construction and market pricing risks, plus countless others. These investments are best left to the extremely wealthy and experienced investors who can take the chance that they’ll never see their money again.

5. Condo-hotels, intervals & time-shares

These aren’t even investments. There’s no ability to predict cash flows, rental income or future value/sales prices. And they are very hard to resell and typically only at a fraction of the original cost.

6. Foreign real estate

You might be OK buying real estate in Canada or Britain – however don’t forget about the foreign currency risk — but foreign countries generally have different real estate laws, protections and fluctuating currencies, making these properties extremely high risk.

Investing in Houses

A standalone house on its own title is often considered a reliable investment, hence the phrase “as safe as houses”. But buying a house as an investment property does not guarantee you will make a good return.

When looking at buying an investment property, the old adage “Location, location, location” is probably a better indicator to use than the type of property that you end up buying…

However, there are distinct advantages for investing in a house:

1. You own the property outright and there are no shared facilities to be maintained (such as laundries, gardens or car spaces)
2. You do not pay body corporate or strata fees
3. You can fix it up the way you want, depending on local council restrictions. If it needs work and you would like to enlarge the kitchen, you can include that in your plans, as well as any other changes you would like to make
4. If the block of land is big enough, there is future potential to subdivide and make a bigger profit
5. Houses are usually have high rental demand in family orientated areas
6. If you qualify for depreciation, there may be larger tax advantages

Let’s look at the last piece, as it is important today. In many cases, buyers are snapping up older fix-up properties as property investment and then either reselling them or renting them out as money-making properties.

If you are investing in houses, it is probably a better idea to buy, fix-up and sell, if you can get your price. If you cannot get your price because it is an older home, it will leave you on the hook as a landlord.

Rental Return?

You may believe that you will cover your expenses as a landlord, but that is not necessarily the case. Commonly, houses yield between 4% and 8% depending on where you buy.

A 4% yield means that for a house worth $500,000 you should earn $20,000 in gross rent each year. And likewise, an 8% yield would earn double that or, $40,000 per year.

You should always strive to invest in a house that has a good yield, but this will depend on many factors, such as:

• How big your deposit is
• The interest rate on your mortgage
• The potential future capital growth of the house

As an example, if you buy a house which has a yield of 4% and your mortgage rate is 6% then that means you have a negative cash flow of 2% (which would be $10,000 per year on your $500,000 property) and that is not including the other expenses such as council rates, water fees, insurances etc.

You would only go for this situation if you had a substantial deposit (which would reduce the size of your debt) and the potential future capital gains outweigh the immediate short term cash shortfall.

New Vs Old and Maintenance

Let’s not forget that as a landlord, you are responsible for ensuring that any damage that a renter may have caused is repaired so your property continues to be safe and a viable rental property.

If you use a property manager, they should be staying on top of all repairs and forwarding the expenses onto you.

You will also find that older houses do require more investment not only to make them habitable but also to keep them in good shape.

As houses age, joists sag, frames shift and the ground moves which means your home may wear in unexpected ways. You will have to deal with this to keep your investment property value up.

Investing in newer houses may be prohibitive because of cost, but they should be much cheaper to maintain in the first few years.

Investing for Positive Cash Flow

Investing for positive cash flow (also known as positive gearing) means buying an investment property that has a high enough rental return in order to cover all holding expenses and still have some cash left over.

This is easier said than done.

In most capital cities, rental yields average around 5%. Therefore if you are paying 7% on your mortgage and 1% for other expenses (such as insurances, council fees, body corporation fees etc.) you are making a 5% minus 8% equals -3% cash loss. That is negative cash flow and you have to put in your own money every month to hold onto that property.

Given enough time, most investment properties become positive cash flow after a number of years which creates a passive income stream for the rest of your life. This should always be the long term goal unless you use a strategy such as flipping to make your money.

Why Favor Positive Cash flow Over Negative Gearing?

If you buy a positive cash flow property, you are receiving money in the hand from the very first month. Yes, you probably will have to pay tax on that income, but it is still cash in your hand to save or invest further!

Negative gearing involves making a cash loss (and therefore draining your bank account on an ongoing basis) in the hope that the capital gain in the future will outweigh the money being spent in the present. This can be a good strategy if the capital gains eventuate, but if they don’t, you may end up with a bad investment.

A lot of people have the misconception that by losing money on a property and utilizing negative gearing, they are reducing their tax bill. This is true (in countries where negative gearing is an option) but there is no point in reducing your tax bill if at the end of the day you are still spending money! Don’t focus on reducing tax, focusing on making money with a good investment.

Opportunities to Buy Positive Cash flow Property

There may not always be good opportunities to buy cash flow positive, but here are some things to consider.

Property Cycle Timing

In a growing property market, or a market that has surged in prices recently, positive cash flow property will be harder to find. The reason for this is the price of the property has increased yet the rental return may have stayed roughly the same or increased only a little.

In a declining market, however, property prices may be stagnant or dropping a little (hopefully not too much!) and more people are favoring renting than buying due to uncertainty in the economy. This puts pressure on rental prices as there is more competition for the available rental stock.

Therefore rents are increasing whilst prices are decreasing which increases rental yields. This is probably the best time to find positive cash flow properties.

Regional Areas or Boom Towns

Areas where the populations are smaller and have plenty of land for future expansion generally have lower property prices than the capital cities. The rents may also be lower, except if there is an abnormal demand for rental properties versus owner occupied properties. This can create a situation where rental yields are significantly higher than capital cities.

Be wary of investing in “one industry towns” where the town relies on one or two major industries to support its population as this is riskier. But if you can find a regional town that has a good variety of industry, lower property prices and higher rental returns, this can be as good if not better than buying a property in a capital city.

Tax Advantages Impact Cash Flow

Depending on circumstances and local regulations, depreciation of your investment property can be claimed as a tax deduction. This can often turn a negative cash flow property into a positive cash flow property as it is a non-cash deduction (meaning you are not spending any money on an ongoing basis to receive the deduction).

Depreciation is where the cost of the building and its fittings are depreciated over time much like a business claims depreciation on equipment, computers and physical assets which do decline in value.

Balancing Capital Gain and Cash flow

Overall, if you can find a property that has positive cash flow, even if it is minute, and has potential for reasonable capital gain in the future then this is a good property to invest in. It may be harder to find these types of properties, but they provide immediate returns as well as future gains.

Property Investment Tips - Short Term Versus Long Term

Short Term Property Investment

You can make money from buying property and holding it for the short term, but this will normally involve at least one of the following conditions:

• Buying the property at less than market value (eg. a distressed sale, foreclosure or deceased estate)
• Buying a property, renovating and then re-selling (commonly known as ‘flipping’)
• Buying in a rapidly rising market and selling at the peak of the market (usually involves some luck or extraordinary market insights)

Short term property investment is a strategy that can make lots of money in a short period of time, but usually requires a higher appetite for risk and a solid implementation plan. Even then, “short term” in the property market is usually a period of at least 6 to 12 months.

Long Term Property Investment

Holding property for the long term is a less risky way of growing your wealth, but it is also no guarantee that you will do well.

It is not unheard of for someone to buy an investment property and after 5 or more years it is still worth the same, or worse, dropped in value. To someone who has taken a blind stab at buying this property, they will most likely be very nervous and want to cut their losses and sell.

But for someone who has done their research and can read the indicators that show the market is due for an upturn, then they will be confident of holding longer in anticipation of that fantastic gain that will make it all worth while.

Long term property investing usually involves some of the following conditions:

• Choosing an area where demand is expected to exceed supply (eg. more jobs are being created in the area and therefore more people want to live closeby)
• Holding and maintaining the property for at least 5 to 10 years
• Keeping the property rented with reliable tenants to help cover expenses
• Sometimes taking a net cash loss now, in return for potential capital gains in the future

So the strategy that you use for your property investing should be chosen based on your own investing personality.

If you see yourself as a “passive” investor, that is someone who is willing to sit back and watch their wealth grow without too much effort, then long term investing is better for you.

However, if you are more an “active” investor and have the extra time to renovate, develop or analyse the market closely, then the short term strategy may be more suited to you.

Having said that, some people will use both strategies and some will use one or the other. The important thing is to decide which strategy you want to use upfront and try and follow it through for best results.

Due on Sale, What Do I Do?

WE’RE HEARING about due on sale clauses. Not in the traditional sense where a mortgage must be paid off when a property is sold but rather in other circumstances. These other circumstances include death and when someone has a rental property that they want to transfer into a corporate entity. In all of these situations a mortgage on the property is essentially the 900-pound elephant in the room that needs to be addressed.

Recently I was contacted by an attorney who wanted to know if his client who owned a rental house could transfer the property to the client’s LLC without the mortgage lender being able to foreclose. Stated another way he wanted to know if this transfer was one of the exceptions under federal law to a due on sale clause contained in every mortgage. The simple answer is no but that overlooks what is going on.

I had the same situation a few months ago. Basically you have a consumer who wants to have their cake and eat it, too. They want the benefit of limited liability on the rental in case someone gets injured and sues them. They also do not want to incur the costs of a commercial loan. They want a residential mortgage. Or they do not want to do a refi of the residential loan into a commercial loan.
As an attorney you have to warn the client that the transfer can lead to a foreclosure. An alternative is to ask the lender for consent. My experience is the lender will not consent and I find no fault with that. If you want to invest in real estate you should realize it is not a hobby and it costs money to do so.

Death is another scenario where the due on sale clause shows up. However, a transfer to a relative is an exception to triggering a due on sale clause. This means that if the surviving relative pays the mortgage monthly they get to stay. The transfer of the real estate to them by inheritance will not in and of itself lead to the loan being called in. Of course this does not mean there will not be other issues.

I just had a client whose wife died and the home they lived in was just in her name. The home had a mortgage on it and the lender would not speak with the husband. I fixed that by doing a probate. Then there was a problem with the insurance where the lender tried to force place the insurance on the home. The lender was provided with proof of insurance and a copy of the new deed to the property where the husband became the owner from his wife’s estate.

The lender was apparently confused by this and sent another letter giving the husband a short period of time to provide proof of insurance otherwise the lender would force place it. So I wrote a letter which I generally find is a waste of time but this time it worked. Perhaps the threat of complaining to the OCC got someone’s attention. But wait there is more.

Because the husband was not on the loan the lender claimed they did not have to speak with him and some other nonsense about not providing him with income tax information. Since the husband is paying the mortgage he would like to be able to deduct the mortgage interest he is paying. I then referred the husband to a tax pro who said he could fix the problem.

Based in Chelsea, Mich., John McDermott is a real estate and elder care attorney who represents both consumers and businesses.

New Housing Index: Home Prices in Dallas Area Up 7.1 Percent | Texas Real Estate Blog - Dallas, Texas

New Housing Index: Home Prices in Dallas Area Up 7.1 Percent | Texas Real Estate Blog - Dallas, Texas

Rates Continue to Drop, 30-Year Nears Its Record Low

Average fixed mortgage rates moved lower for the fifth consecutive week in Freddie Mac’s survey, with the 30-year fixed-rate mortgage dropping five basis points from the previous week to 3.35%, just above its all-time record low of 3.31% set the week of Nov. 21, 2012

Also the 15-year fixed-rate mortgage set a new all-time record low the week ending May 2 at 2.56%, eclipsing the record set last week.

The average five-year Treasury-indexed hybrid rate dropped two basis points to 2.56%, and the average rate for a one-year Treasury adjustable-rate mortgage fell three basis points to 2.62%.

"Mortgage rates eased somewhat following the release of the advance estimate of real [gross domestic product] growth for the first quarter of the year, which rose 2.5% but fell short of the market consensus forecast,” said Frank Nothaft, vice president and chief economist, Freddie Mac, in a press release.

Average points in the latest week were as follows: 0.7 of a point for 30-year FRMs and 15-year FRMs, 0.5 of a point for five-year Treasury hybrids and 0.3 of a point for one-year Treasury ARMs.

A year ago, weekly rate averages were 3.84% for a 30-year FRM, 3.07% for a 15-year FRM, 2.85% for a five-year Treasury hybrid and 2.7% for a one-year Treasury ARM.