Three Questions to Ask Before You Invest in Real Estate

It’s important to ask these three questions when you invest in real estate:

  1. How can I increase my rate of return?  The cornerstone of any smart investment strategy is to calculate your rate of return.  With real estate this is done by running the numbers using an internal rate of return (IRR) formula that takes into account:
    • Present Value (PV) – what am I paying out of pocket to get into this investment?
    • Term (N) – what’s my timeline and how long am I going to hold this investment?
    • Periodic Cash Flow (PMT) – what’s my monthly cash flow?
    • Future Value (FV) – what are my net proceeds (after expenses) when I sell the investment?
  2. How does my rate of return with real estate compare with other investment opportunities?  When calculating your rate of return, make sure to account for:
    • Carrying costs (mortgage, taxes, insurance, maintenance, etc.)
    • Your time spent managing the property
    • Vacancy loss if you don’t find a tenant
  3. How can I reduce my risk?  You may want to consider these strategies to reduce your investment risk:
    • Increase your liability insurance in case something goes wrong
    • Consider a rent-to-own strategy where you find a tenant before you find a property
    • Consider mortgage strategies that result in more cash flow and/or better liquidity

Contact me so we can get started on helping you answer these questions!

Investment Property Math: 30-yr vs. 15-yr Mortgage

Here are three things to consider when choosing between a 30-year fixed rate mortgage and a 15-year fixed rate mortgage on an investment property:

1 – Cash-Flow Considerations
A 30-year mortgage carries a lower monthly payment and therefore is more likely to result in positive monthly cash flow.  The less money you pay out each month, the more likely you are to achieve and maintain positive monthly cash flow. Positive cash-flow reduces your risk of default in case the tenant stops making their rent payments or in case the property goes vacant for a while.  For this reason, a 30-yr mortgage is generally less risky for investors vs. a 15-yr mortgage.

2 – Rate of Return Considerations
A 15-yr mortgage saves you money because you pay less interest over time.  However, is your goal to save money or make money?  If your goal is to make money and improve your rate of return on investment, a 30-yr mortgage may be a better option for you. Although you’d need to run the numbers in each case to determine which option would produce a higher rate of return, you’ll typically find in favor of a 30-yr mortgage.  That’s due to the impact of positive leverage on your investment returns.

3 – Investment Objectives
Investing in real estate is not always purely a numbers game.  For example, some investors would be happy earning less of an investment return, and experiencing less financial liquidity with a 15-yr mortgage because they value the tangible nature of owning real estate property free and clear. A 15-yr mortgage pays off in half the time, and it would result in higher cash flow and less cash-flow risk in the future when the loan is paid off (assuming you still own the property at that time).

As you can see, there’s no “one-size-fits-all” strategy when it comes to investing in real estate.  Contact me for more info or to explore your options!

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.