Fake News! -the RENT vs. BUY Debate

The TRUTH Behind the RENT vs. BUY Debate | MyKCM

I have not heard this term lately – have you?  The Russian are not hacking the mortgage industry – at least, I believe not yet.  The media has always had differing opinions of topics like this and we felt it was important to share the why.

In a blog post published last Friday, CNBC’s Diana Olnick reported on the latest results of the FAU Buy vs. Rent Index. The index examines the entire US housing market and then isolates 23 major markets for comparison. The researchers at FAU use a “‘horse race’ comparison between an individual that is buying a home and an individual that rents a similar-quality home and reinvests all monies otherwise invested in homeownership.” – can you see the flaw in the logic already?

Having read both the index and the blog post, we would like to clear up any confusion that may exist. There are three major points that we would like to counter:

1. The Title

The CNBC blog post was titled, “Don’t put your money in a house, says a new report.” The title of the press release about the report on FAU’s website was “FAU Buy vs. Rent Index Shows Rising Prices and Mortgage Rates Moving Housing Markets in the Direction of Renting.”

Now, we all know headlines can attract readers and the stronger the headline the more readership you can attract, but after dissecting the report, this headline may have gone too far. The FAU report notes that rising home prices and the threat of increasing mortgage rates could make the decision of whether to rent or to buy a harder one in three metros, but does not say not to buy a home.

2. Mortgage Interest Rates are Rising

According to Freddie Mac, mortgage interest rates reached their lowest mark of 2017 last week at 3.89%. Interest rates have hovered around 4% for the majority of 2017, giving many buyers relief from rising home prices and helping with affordability.

While experts predict that rates will increase by the end of 2017, the latest projections have softened, with Freddie Mac predicting that rates will rise to 4.3% in Q4.

3. “Renting may be a better option than buying, according to the report.”

Of the 23 metros that the study reports on, 11 of them are firmly in buy territory, including New York, Boston, Chicago, Cleveland, and more. This means that in nearly half of all the major cities in the US, it makes more financial sense to buy a home than to continue renting one.

In 9 of the remaining metros, the decision as to whether to rent or buy is closer to a toss-up right now. This means that all things being equal, the cost to rent or buy is nearly the same. That leaves the decision up to the individual or family as to whether they want to renew their lease or buy a home of their own.

The 3 remaining metros Dallas, Denver and Houston, have experienced high levels of price appreciation and have been reported to be in rent territory for well over a year now, so that’s not news…

Beer & Cookies

One of the three authors of the study, Dr. Ken Johnson has long reported on homeownership and the decision between renting and buying a home. The methodology behind the report goes on to explain that even in a market where a renter would be able to spend less on housing, they would have to be disciplined enough to reinvest their remaining income in stocks/bonds/other investments for renting a home to be a more attractive alternative to buying.  After 25 years in the mortgage industry I can share that we do not have an epidemic of renters that save money.  Yes there are some but this is not the majority.

Johnson himself has said:

“However, in perhaps a more realistic setting where renters can spend on consumption (beer, cookies, education, healthcare, etc.), ownership is the clear winner in wealth accumulation. Said another way, homeownership is a self-imposed savings plan on the part of those that choose to own.” 

Bottom Line

In the end, you and your family are the only ones who can decide if homeownership is the right path to go down. Real estate is local and every market is different. Let’s get together to discuss what’s really going on in your area and how we can help you make the best, most informed decision for you and your family.

2 REASONS WHY YOU SHOULD KEEP YOUR HOME IMPROVEMENT RECEIPTS

home-improvement-receipt.jpg

If you take out a mortgage for home improvement purposes, the IRS may ask you to prove the project was a “substantial improvement” that:

  1. Adds to the value of the home,
  2. Prolongs the home’s useful life, or
  3. Adapts the home to new uses.  For example, painting a room may not qualify, but an addition or new kitchen may qualify.

 

Keeping the receipts from your home improvement project would go a long way toward proving this. Also, keep in mind that the IRS gives you 24 months to reimburse yourself for improvements made in the past, or 12 months to complete future improvements. For more details, please reference IRS Publication 936, and see my article called, Three Things You Should Know About Pulling Cash Out for Home Improvement.

2: Ability to Reduce Your Capital Gains Tax:

Capital Gain is calculated by taking your sales price, minus your costs of selling the house, minus your “tax basis” (see illustration).  Tax basis is the total cost of buying, building or improving your house.  When you make a “substantial improvement”, the cost of the home improvement is added to your tax basis.  This reduces your capital gain when you sell the house, and it could save you quite a bit of money on capital gains taxes.  That’s another reason why it’s important to keep your home improvement receipts.

Please see a CPA for further details on the deductibility of mortgage interest or the capital gains tax in your specific scenario.  Contact me for further information on your mortgage options.

1: Ability to Deduct Your Mortgage Interest:

What States Give You the Most ‘Bang for Your Buck’?

What States Give You the Most ‘Bang for Your Buck’? [INFOGRAPHIC] | MyKCM

Some Highlights:

  • Thinking of moving across the country? How far will your money take you?
  • The majority of states in the Midwest and South offer a lower cost of living compared to Northeast and Western states.
  • The ‘Biggest Bang for your Buck’ comes in Mississippi where, compared to the national average, you can actually purchase $115.34 worth of goods for $100.

TWO THINGS YOU SHOULD KNOW ABOUT 529 COLLEGE SAVINGS PLANS

Finance and Savings for University Education Piggy Bank on Books

Section 529 of the Internal Revenue Code created a type of college savings plan that known as a “529 Plan”.  The 529 plan allows families to:

  • Invest funds after you’ve paid taxes on them (similar to a Roth IRA)
  • Grow the money tax-free over time (no taxes on dividends or asset appreciation)
  • Withdraw the money tax-free to pay for qualified college expenses

#1 – Each State Sponsors its Own 529 Plan(s), But You Can Invest in Any Plan that You Want
For example, if you live in Florida, you can invest in a New York plan and send your student to a college in California.  The plan is sponsored by the state, but the state hires a money manager to manage the plan and pick the investments.  There are several web sites that rank the various plans in each state, including Morningstar.com and SavingforCollege.com.  Click here to view a list of plans and how they rank as analyzed by SavingforCollege.com.  You can view the rankings over a 1-year, 3-year, 5-year or 10-year period of time.

Although you don’t get a federal income tax deduction for investing in a 529 plan, some states offer a full or partial tax deduction against your state income taxes (see a tax advisor for details).  Also, unlike other types of investment accounts, 529 plans don’t have restrictions based on income or age, and there are no annual contribution limits.  However, you can only contribute up to the amount necessary to provide for the qualified education expenses of the student.  Keep in mind that the plan can be funded by anyone, including parents, grandparents, friends and relatives.

#2 – The Investment Grows Tax-Free, and the Student Beneficiary Can Withdraw the Funds Tax-Free to Pay for Qualified Education Expenses
The funds in the account grow tax-free.  The student beneficiary can withdraw the funds tax-free to pay for tuition, fees, books, equipment, room and board at an eligible educational institution.  According to the IRS, “An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.” Click here to view a list of schools that are eligible institutions.

In conclusion, 529 College Savings Plans could be a great way for you to contribute to a child’s future.  Please see a financial advisor for more details.

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 970.

What Would You Sacrifice to Buy A Home??

Saving To Buy A Home? What Would You Sacrifice? [INFOGRAPHIC] | MyKCM

Some Highlights:

  • 95% of first-time homebuyers are willing to sacrifice to make homeownership a reality.
  • The top thing that buyers sacrifice are new clothes at 54%.
  • Even repeat or experienced buyers say they sacrificed taking a vacation or buying a new car to buy their last home.

10 Rules for Children and Cell Phones

kids-and-cellphones

Last night my son preferred to use his mobile phone(no service just wifi – another story) than go to the movies or watch the Stanley Cup game(granted not a Penguins fan – I give him that)

The entire world has moved to the cell phone. It’s no longer a convenient tool to speak to someone when you are mobile. Now it is the town square. It’s the place to socialize, it’s the library, the arcade, the TV, the shopping mall, the remote control, etc. Kids know it and feel left out of the world when they don’t have one. So they will tell you that they need one and that everyone has one except them. A kid getting a smart phone today is similar to our generation getting a drivers license. [Tweet This] It is releasing them into a whole new world.

Unlike many other parenting topics, you cannot think back to how your parent handled the situation when you were a kid because cell phones were not around yet. Regardless of how old your child is when you decide it is time to give them one, here are 10 rules for kids and cell phones.

1. The Plan

Discuss with your child what their cell phone plan entails. Let them know how many minutes and text messages they have a month. Determine consequences for running over. One idea is to charge them for the price difference.

2. Picture/Video Messages

Let your child know if picture and video messaging is part of your plan. Tell them what is and isn’t appropriate. Discuss and forbid behavior such as sexting and let them know how inappropriate pictures can spread and ruin reputations.

3. Downloads

Set rules on downloads. Require your kids to talk to you before downloading something. Use your discretion. There is no rating system for video games for cell phones.

4. Numbers to Avoid

Give your child a list of relatives to call or text sparingly. Also, warn them of incoming calls from unknown numbers who may be trying to get their information.

5. Driving and Cell Phones

Be familiar with the state laws to know if a headset is required for talking on the phone while driving and to know if texting while driving is illegal. Make your own rules for using the cell phone while driving.

6. Cell Phone Etiquette

Share with your child when it is not appropriate to use their cell phone. Examples include, in school, at the movies, on dates, during meals with people (especially family), during tests, at appointments, etc.

7. Cyber Bullying

Stop cyber bullying before it starts. Discuss with your child how painful it is for the victim and how there is no escape from cyber bullying once it starts.

8. Internet Usage

Tell your child if your phone plan covers internet usage or not. If it does, inform your child of any websites or applications you do not want them on.

9. Communicate Clearly

Explain to your child to write clearly over text messaging or if it is an important conversation to use the phone or even better, have it in person. Many conflicts are created using texting through miscommunication.

10. Attachment

Today, everyone has their cell phone attached to their ear or to their thumbs. Warn your child of becoming dependent on their cell phone and of becoming so attached they miss what is happening in front of them.

All Pro Dad