DON'T GET TRIPPED UP BY THESE COMMON MISTAKES!
1. HIGHER THAN EXPECTED "CARRY COSTS"
A "carry cost" is the cost to "carry" the property, such as the mortgage payment, property taxes, utilities, maintenance, and other expenses. For example, if you buy a house with the intention of selling it within a year, what are the total costs you will incur during that time to "carry" the property? It's important to accurately estimate those costs so that you don't get tripped up by them later on.
2. HIGHER THAN EXPECTED "COSTS OF SALE"
In most cases, you’d need to sell the house for at least 8% - 10% more than what you paid for it just to break even and cover the real estate commissions and transfer taxes. It's important to take that into account when you run your numbers so that you can accurately forecast your potential rate of return on investment.
3. VACANCY RISK AND EVICTION COSTS
What if the tenant defaults on the rent and you have to hire a lawyer or go through a costly eviction process? Or, what if you can’t find a tenant? That's why it's important to consider risk reduction techniques like non-refundable deposits, sale/leasebacks and/or rent-to-own strategies.
4. LACK OF LIQUIDITY
What if you need access to your capital and you can’t sell the house? That's why you should never be 100% invested in real estate. This means that if your budget for real estate investments is $500,000, you should keep part of that cash in the bank, sitting on the sidelines. This way you won’t get into trouble if the property sits vacant for a few months. Also, a cash cushion allows you to quickly take advantage of other investment opportunities when they arise.
YOUR COST OF BORROWING MAY BE LOWER THAN YOU THINK!
1. THE HIGHER THE INTEREST RATE, THE BIGGER THE TAX DEDUCTION.
Homeowners who itemize tax deductions can deduct the interest on up to $750,000 of mortgage balances used to buy, build or improve a qualified home. In the past few years, not as many home buyers benefited from this because their total annual interest expense was lower than their standard deduction.
However, interest rates and total annual interest expenses have doubled this year according to Freddie Mac's weekly survey of mortgage rates. For example, a $500,000 mortgage at a 6.5% interest rate has an annual interest expense of $32,500. This far exceeds the standard deduction. This also means that the homeowner in this example is more likely to itemize and benefit from the mortgage interest deduction.
2. HOW BIG IS THE TAX BENEFIT?
Calculate for yourself!
INFLATION IS AT DECADES-HIGH LEVELS: HERE'S HOW IT IMPACTS HOUSE PRICES
1. What is inflation?
Inflation is when a currency loses its buying power, causing prices in the economy to go up. Year-over-year consumer inflation in the economy has been running around 8.5% throughout the past year. That's the highest inflation rate we've seen since the 1980s. In fact, through much of the past 15 years, annual inflation has been running below 2%. That's why the recent price increases have been such a shock.
2. How does inflation impact house prices?
House prices tend to go up along with all the other asset prices in the economy during periods of high inflation. During the last period of high inflation, from 1970 - 1989, the average increase in house prices was 7.64% per year. During the past 20 years of low inflation, from 2000 - 2019, the average increase in house prices was 3.70% per year. House prices tend to go up at a faster pace during periods of high inflation. That's why real estate is often referred to as a "hedge against inflation."
3. How to benefit in a high-inflation environment?
The best way to benefit from the current inflation scenario is to buy real estate and use a large mortgage (if you can afford it). That's because the mortgage balance remains the same or goes down as you make your monthly payments, while the property increases in value. The good news is that mortgage rates are still relatively low... lower in fact than the annual inflation rate. This makes buying real estate in this environment even more attractive.
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