How to buy a $475k condo with $25k down and pay $1,950 per month!

Building wealth takes discipline and sacrifice, but sometimes a little creativity goes a long way. As a mortgage broker, I am frequently asked if I have any tricks up my sleeve to help bring down the cost of a mortgage.

Here is one way to buy a condo (or house) for up to a $475,000 purchase price with $25,000 down and pay $1,950 per month!  That payment includes utilities, Internet and cable TV, applicable tax deductions and taking a roommate

Here are the basic requirements:

  1. A minimum $85,000 income.

If you do not make $85,000 per year, you will need more income to qualify. One solution is a co-signer. A family member, for example, with good income and low debt can help you qualify for the loan.

  1. You must be debt free.

If you have credit card debt, reduce your spending and start paying off those cards asap.

If you have a car payment, sell the car or return a leased car back to the dealer asap.

Take whatever money you have available and buy a car for cash. My financial advisor has reminded me over the years: If you need to finance a car, you can’t afford that car. I’m not saying we can always avoid going into debt but it’s a good point. Drive a clunker for a few years while save you tons of money.

Here’s my personal story on this topic: Many years ago, I too needed to get my finances in order. I was overspending and it needed to stop. For a 2-month period I (painfully) wrote down every single penny I spent. The results were rather shocking to me. I had spent $22 on parking in 3 days, for example. To this day after (finally) becoming successful, I would rather park on the street for free 3 blocks away and walk 4 minutes to my destination than to pay a valet to park my car.

Cooking at home replaced the constant eating out. I never realized food is actually fairly inexpensive. Costco sells Japanese Wagyu Boneless Ribeye Roast at $99.00 per pound and chicken, turkey and ground beef under $3.00 per pound. Take your pick.

From there, saving money turned into a fun game – how to find ways to have a great time with spending little to no money.

I sold my car and purchased a used 20-year old Honda Accord for $3,500 cash. Honestly, driving that car made me feel semi-embarrassed at first. But soon those feelings were replaced with happiness and the joy of not having a car payment.

Driving that Accord saved me tons of money, never broke down, and I sold the car for $3,500 2 years later! True story. Next, I bought a used Ford F150 for $10k cash. Gas prices went up that year so after filling up for $100 on a Monday (and again on a Wednesday!), I sold the truck bought a used Toyota Camry for $11,500. Five years later someone hit my car and totaled the Camry. The insurance company cut me a check for… take a guess… yes, $11,000! I had driven that car for 5 years for $500. Yes, I got very lucky. But it all started with my decision to live within my means and pay cash for whatever car I could afford.

  1. Find a 2-bedroom condo for sale.

As of my writing this article there are 2-bedroom condos for sale for $475k or less in Studio City, Santa Clarita, Burbank, Glendale, Koreatown, Sherman Oaks, Long Beach, Reseda, Stevenson Ranch, Torrance…etc.

  1. Find a roommate who will pay you $1,250 per month rent.
  1. Educate yourself about the tax benefits that come with owning a property.
  2. You can deduct the property taxes and mortgage interest, which literally puts money back in your pocket. So let’s count those savings when calculating the monthly payment.

    Let’s take a look at the numbers:

    Purchase price: $475,000

    Down payment: $23,750 aka 5% down

    Closing cost: Negotiate seller to pay in full.

    Principal & interest: $2,400

    Property taxes: $495

    Homeowner association fee: $300

    HO6 insurance: $25

    Mortgage insurance: $0

    Utilities, Internet and TV: $300

    Roommate: $1,250

    Estimated Tax break: $4,800 per year

    Payment calculation: $3,200 mortgage payment + $300 utilities, Internet and TV –  $1,250 roommate – $400 tax break = $1,950 per month.

    Disclaimer: I am not a CPA. Please consult your CPA for current tax laws and your specific tax savings. Principal & interest payment are based on current rates for qualified buyers only. HOA payments will vary. Utilities, Internet and TV costs will vary. HOA insurance cost will vary. Property taxes may vary. Roommate figures may change. All numbers mentioned are subject to change. All loan programs are for qualified buyers only.

    Here’s one thing I know. Many financially successful spend way below their means. What feels cool to them is saving money, not spending money and always owning and never renting. When I bought my $3,500 Honda Accord, my successful friends praised and validated me while my financially challenged friends pitied and felt sorry for me – which is hilarious. And those same financially challenged friends are still financially challenged 10 years later – which is less hilarious.

    Real estate has been a great investment over the past 50 years. Let’s figure out a plan how to get YOU into a property whenever the time is right for you.  Feel free to contact me anytime with questions at [email protected].

LIBOR is going away in 2021!

A series of fraudulent transactions connected to the LIBOR first reported

Here are 5 things to know about LIBOR:

  1. LIBOR stands for Intercontinental Exchange London Interbank Offered Rate, the world’s most widely used benchmark for short-term interest rates.
  2. LIBOR rates are published Monday-Friday at 11:30am London time.
  3. Banks commonly use LIBOR as the benchmark rate to charge each other for short-term loans.
  4. LIBOR is used for debt instruments including student loans, credit cards and Adjustable Rate Mortgages.
  5. Adjustable Rate Mortgages adds the LIBOR rate + ARM Margin rate to calculate the variable interest rate portion.

Adjustable Rate Mortgages are 30-year mortgages with an interest rate fixed for 5, 7 or 10 years. For example, a 7-year adjustable rate mortgage is a 30-year mortgage with a fixed interest rate for first 7 years with a variable interest rate for the remaining 23 years.

The ARM margin rate is determined by the bank and is fixed for the life of the loan. A common margin rate is 2.25%. Today, the 1-year LIBOR rate is 1.73%. Based on these rate, ones adjustable rate mortgage would be 3.98% today.

“This date is far enough away to reduce the risk and costs of a more sudden change”, says Andrew Bailey, chief executive of the Financial Conduct Authority in Britain. “By having a date by which transition will need to be complete, however, we give market participants a schedule to plan to, and make it easier for them to engage as many counter parties and Libor users as is practicably possible in that planning.”

How will the outstanding $1.33 trillion of mortgages affected once LIBOR goes away? Nobody knows yet.



Tax Deferred 1031 Exchanges – Is the End in Sight?

Tax reform is a hot topic in 2017. Donald Trump has identified tax reform as one of his top priorities and it is expected that house republicans will begin to push legislation looking to create visible changes to the tax code. Is the end in sigh for tax deferred 1031 exchanges?

Lawmakers are eyeing bills to change the current tax code including abolishing the much loved 1031 exchange, a section of the tax code which allows for the deferment of taxes when selling a property if a similar property is purchased.

Here are a few things you should know about section 1031 of the internal revenue code:

  1. A 1031 exchange allows taxes to be deferred in something called a property swap. A seller can defer any taxes owed on a property sale by purchasing another property “of like kind”. Gains accrued from the sale of the property are not recognizes immediately. Instead the gains are deferred until the (new) replacement property is sold, at which point the cash will be taxable.
  2. Property swaps are popular among smaller entities. Individuals with rental properties, or small real estate companies commonly use a 1031 exchange to use pre-tax profits to help purchase new properties.
  3. People disagree on the impact of the policy change. Those who want to remove the 1031 exchange section from the tax code see it as a simple tax loophole benefiting the rich. Removing the section would create immediate financial gain for the government, potentially allowing for other taxes to be decreased.
  4. Proponents of the deferment point to the fact that decreasing tax liability for those involved in trading real estate means that they then have more capital to spend on improving the properties. Not only will the removal of this provision mean that fewer sales occur overall, but that once the sales have been completed, there will be less spending on other areas, which increase the value of the property and support local business.

The 1031 exchange tax law always made sense to me. Sell a property and use the gross profits towards purchasing a new property and pay taxes when you cash out and in the meantime add liquidity to the market. No law is perfect but most people seemed to favor this one.

Thinking About Buying a Property? Things to Know About Supplemental Taxes

Supplemental taxes are not an additional tax – good news. Supplemental taxes make up the difference between the property taxes that you should have been charged vs. the property taxes you were actually charged. In real estate, this commonly occurs when a property is first purchased. The tax assessor can take a little time to update the tax records with the new often-times-higher value assessment of the property. This means that you might receive your first bill for taxes lower than your actual taxes owned, pay your (lower) taxes, and then later be on the hook for the additional taxes. In some situations when the previous owner had a very low property tax payment, you could get an unexpected bill for many thousands of dollars.

So how do you prepare for these taxes? Thankfully, with a bit of preparation, supplemental taxes will be expected and can be prepared for fairly easily. Here are a few steps to make sure that you understand what you will need to do to be ready come Tax Day.

  1. When a property is sold or a construction is completed, the value of the property must be reassessed. Property taxes will then be owed based on the new value of the home.
  2. When you initially purchase a property, taxes might be billed based on the previous valuation of the property. However, once the property is reassessed, taxes will be owed based on the current value. This includes taxes paid during the interim period between purchase and reassessment. If the current valuation is higher than the previous, you will receive a bill from the tax assessor for the difference paid vs. owned. If the current valuation is lower than the previous, you will receive a refund.
  3. Preparing for taxes should be super simple since everyone knows the correct property tax figure. Put aside enough money to pay taxes based on the current value of the property. Then, when you are given the bill – may it be monthly or bi-yearly depending on whether you impounds your taxes or not, you will have the necessary funds available.
  4. Reassessments and supplemental tax bills can be necessary even if a sale has not taken place. If the value of a property changes (for example, due to a construction or the destruction of a building) be aware that you may receive a tax bill. In this instance, it can be more difficult to know what to expect.

Supplemental taxes are really not a big deal as long as you know to save money you might owe for taxes not charged initially. Taking the time to understand how it all works will save you from the potential financial disaster of an unexpected hefty tax bill. I had a client a few years ago that received a bill for $10,000 from the tax assessor a little over a year after purchasing a property! Of course, he was charged $10,000 less during that year AND knew the bill was coming AND instead of saving the money for the upcoming tax bill, spent the money. He described his actions as rather foolish BUT confirmed had a great time spending the $10k! Always consult a tax adviser for further information regarding any tax related issues.

Contact me anytime at [email protected]

Millenials Struggle to Buy Homes Might be Worse in California

While the housing market has largely recovered from the economic downturn in 2008, one area that still looks weak is the percentage of people who own homes. And while the overall percentage of homeowners is at a historic low, the numbers look even worse when you look at Millennials. Adult Americans under 35 have a home ownership rate of just 34.3 percent, according to the US Census Bureau’s April 27, 2017 report. Here is what you need to know about this trend and why Millenials Struggle to Buy Homes Might be Worse in California.

  1. Millennials aren’t foregoing home ownership by choice. While only 34 percent of these young people own their own house, surveys find that over 90 percent of those renting plan on one day owning a home. This is higher than average for renters.
  2. One commonly cited reason for this lack of home ownership is that they are poor. Millennials on average make less money while having much higher debt than past generations. This high proportion of student debt combined with lower (adjusted) income means that fewer Millennials are having the cash necessary to invest in something like a house.
  3. Changing social norms also are responsible for the trend. The current generation is also foregoing marriage and parenthood at much higher rates than previous generations. This means that they are much less likely to feel pressure to move out on their own. Many young people are opting instead to live with roommates or even moving back in with their parents.
  4. Home Builders have also contributed to the trend. More and more new developments are aimed at older wealthier audiences, and this means that the smaller entry-level houses that would be needed by poorer younger buyers are simply not being constructed at the rates they would need to be. This is especially evident in markets like California, where the average monthly housing cost is a whopping 35% of the household budget. Nationally, this average is 19.4%.

This combination of changing attitudes, lack of money, and a lack of entry level properties are all major contributing factors in why Millennials are avoiding home ownership. Many of these national factors are worse in California, which also has a higher than average unemployment rate ranking 35 out of 51 according to the March 2017 Bureau of Labor Statistics. However, if Millennials are looking to buy a home, all hope is never lost. Today, there are more loans programs available. If you have a good work history and some savings, you could even purchase a home with as little as 3.5% down.

Contact me anytime with questions at [email protected]

12 Niche Loan Programs to Help US Homebuyers Qualify in 2017

Two decades ago, the major lenders employed mortgage underwriting requirements for collateral, capacity and credit history – the three Cs. Collateral meant that the home buyer made a down payment, preferably of 20 percent or more of the value of the house, never less than 10 percent. Capacity referred to the maximum share of a borrower’s income that could be devoted to mortgage payments and other debt service. Credit history meant that the borrower demonstrated an ability to manage credit responsibly, an ability that has come to be summarized in a credit score.

Nontraditional mortgages are those in which the lender deliberately waives one or more of the three Cs. Over a very short span of time, beginning in the late 1990s and culminating in 2007, the U.S. housing market came to be dominated by such mortgages.

Here are my favorite Niche Loan Programs to help US Homebuyers Qualify for a Mortgage in 2017:

1. Jumbo Loans with 5% Down – 20% down is not always required on Jumbo loans.

2. One-Day out of Foreclosure, Short Sale and Bankruptcy – No minimum waiting periods on major credit issues.

3. Exclude Current Mortgage Debt – All mortgage debt including primary residences, second homes and investment properties currently owned.

4. 12-Month Bank Statement Program – Income based on deposits from business account into personal bank account. Tax returns not required.

5. Non-Warrantable Condos – Financing available for condo projects that do not qualify for conventional financing.

6. Assets-for-Income Program – Qualify using money in the bank and not income filed with the IRS. Tax returns not required.

7. 1-Year Tax Return Program – Qualify on most recent tax year’s income. A 2-year income average not required.

8. Foreign National Loans – 20% down payment if a borrower works and lives in the US.

9. 1-Year Self Employed – The standard 2-year self-employment history is not always required.

10. Doctor Loan Program – Student debt excluded when deferred for 12 months.

11. Hard Money Loans – A last resort high interest, high cost loan, allowing no income and bad credit.

All programs are for qualified buyers only.

The mortgage industry is constantly evolving. Loan programs come and go. Lending guidelines change daily monthly, weekly and sometimes daily. Loan programs are never good or bad. Loan programs are more like tools. Make sure you do your homework and always pick the right tool for the job!

Contact me anytime with questions at [email protected]

The 5 Million Dollar Gift Tax Exclusion

Did you know there is an annual federal gift tax exclusion AND a lifetime gift exemption, which was raised to $5.49 million in 2017? Gift taxes are often a confusing topic. Fortunately, it is not that difficult to explain. Here are a few common questions and answers about the gift tax.

  1. What is the gift tax? The gift tax is a potential financial obligation on the part of the giver of any gift.
  2. Who pays the gift tax? The giver pays the tax. The receiver does not.
  3. When does the gift tax apply? Gift taxes may apply when any asset is transferred to another without the full value of the item being paid in return. There are many situations where the gift tax may not apply. For example, medical or student expenses paid as a gift are exempt from the tax. Additionally, there are yearly and lifetime exclusions, and if the gifts are under these amounts, no tax will be owed. Finally, gifts to your spouse or a political organization are exempt.
  4. In 2011, the estate tax and gift tax exclusions were combined. Now, there is a lifetime limit of 5.49 million dollars, which can be gifted before the gift tax kicks in. This means that most people won’t have to worry about the gift tax, as this is quite a sizeable sum for much of the population.
  5. There is also an annual exemption. Any gifts you make that are under $14,000 annually will not count against your lifetime limit of $5.49 million. You can spread gifts out to multiple individuals without going over your limit as well. Giving $12,000 each to 3 different people will not count against your lifetime limit since you’re under the allowable $14,000 per person, per year. However, a gift of $36,000 to one person would end up with a gift tax liability for $22,000.
  6. The $5.49 million estate tax exemption means that on your death, your estate will not be liable for federal or gift taxes as long as the combined worth of your estate + any gifts made over the $14000 annual limit is less than $5.49 million dollars.

So, if you are looking to give gifts, take full advantage of the $14,000 yearly exclusion. Spreading your gifts out so that each recipient receives less than $14,000 per calendar year means that your estate will have as little tax burden as possible when it is left to your heirs. Always consult a tax advisor for further information about tax related issues.

Contact me anytime with questions at [email protected]

Will the Mortgage Interest Deduction Change in 2017?

The mortgage interest deduction is a current tax benefit to homeowners. It allows homeowners to deduct the interest paid on their home loans from their income taxes. This is one of the ways that the tax code currently incentivizes home ownership. While this is not the only tax break afforded to homeowners, it is definitely a part of what makes home ownership appealing and affordable. Will the mortgage interest deduction change in 2017? Here is a brief outline of the current law, and what we know about the future. Please consult a tax adviser for further information regarding the deductibility of interest and charges and to confirm any updates to the current tax code.

  1. If your mortgage is less than a million dollars, then you will be able to deduct all of your interest. ($500,000 limit if filing separately while married). Since the average home price is around $200,000, this means that the overwhelming majority of homeowners will not be anywhere near the deductible limit.
  2. This debt is called “Home Acquisition Debt”, and it can refer to any of the debt accrued in purchasing your house. It can also be applied to money spent fixing your house, or to a refinance. However, when refinancing or accruing debt in renovating a house, you may need to be careful to ensure that the interest deduction will apply immediately.
  3. The mortgage interest deduction has been around for a long time. This policy has been a key part of our tax code for a long time, and most citizens are in favor of retaining it. While changing it or removing it is sometimes discussed by politicians, it is overwhelmingly popular among citizens, and so has remained. 
  4. Donald Trump has made statements suggesting that he is examining the mortgage interest deduction, and that it may not exist in its current form if he can implement his plans for the tax code.
  5. One of the proposals floated during his campaign was to cap itemized deductions at $100,000 and $200,000 respectively for single and joint filers. 

So, despite some worry that Trump’s proposed tax code will hit one of the most popular deductions, there is no evidence yet to suggest it would effect the majority of home owners. It will be interesting to see what happens in 2017.

Good Things to Know About Unpermitted Square Footage

Homeowners love to renovate and add on to their homes. However, occasionally homeowners will add square footage to their house without securing the proper permitting and paperwork. As a home buyer, you need to be aware of how to check for unpermitted square footage, and what it could mean about the property. Here are a few things to look for.

  1. Does the square footage on the (online) listing match the footage listed on tax records? Local governments should have square footage information on file. While a small footage discrepancy is quite common, if the difference is hundreds of square feet, it is very likely that the house has had unpermitted additions – like garages and decks. Checking local records will help you to get the correct information about a property.
  2. Unpermitted square footage can bring a number of headaches. The most obvious one is that the work performed may have been inferior. Experienced contractors will always ensure that work is done according to proper building codes. If the work was not permitted, there is a real chance that it was done by an amateur or under qualified contractor. Additionally, once the city becomes aware that there is unpermitted work on any give property, inspectors may be required to come by and examine the work. Often these inspectors will be required to remove drywall and partially demolish an area to perform the inspection. This can be big hassle and an expensive one!
  3. Finally, insurance claims could be denied if the insurance company becomes aware of unpermitted work. The insurance company can (gladly) argue that the inferior work is what caused the problem. For example, a fire caused by an electrical failure could be the result of substandard work that does not meet code. Making sure that your house is completely permitted is the best way to ensure that your insurance will fully cover what you are paying for.

So, as a home buyer, be on the alert for unpermitted square footage. If there are discrepancies between the square footage on record and the square footage quoted by the seller, start digging into the details. As always, do your homework and never buy a home with unpermitted square footage unprepared.

The Benefits of a Reverse Mortgage

Reverse Mortgages are financial arrangements that allow you to live off of their equity in your house. While these are not recommended for people who have enough to live comfortably or who have little or no equity in their house, it can be hugely helpful to others. In a perfect world, everyone would be able to retire and live comfortably during their golden years. However, we see more and more seniors who end up having to work longer, or drastically reduce their standard of living. A retirement should be able to provide for you to live under the same standard of living you enjoyed during your working years. If you have a moderate amount of equity in your house, you can take advantage of it and live out your years in comfort with a reverse mortgage.

So what should you know about a reverse mortgage? Most reverse mortgages are obtained with refinancing ones home but one can obtain a reverse mortgage as a purchase-loan as well. A reverse mortgage has no monthly payments and can allow one to access cash out of the property. However, you will have to pay normal taxes, utilities, and other home maintenance bills. No monthly payments sound great but make no mistake, you’re still paying for it. A reverse mortgage can mean you are essentially handing over the property to the bank in exchange for not making a monthly mortgage payment.

A friend of mine’s mom used a reverse mortgage 15 years ago to access her equity to pull out $200k in cash with NO no monthly mortgage payment requirements for the rest of her life. Her property was paid off at that time. Today, that $200k mortgage and increased to $420k – due to negative amortization. The property is worth $695k. The loan balance will continue to increase and could eventually exceed the value of the property, depending on how long she lives. For her, a reverse mortgage was the right decision but again, this loan product is not for everyone. 

A common misconception is that the reserve mortgage lien holder owns the property and keeps any equity remaining. This is untrue.

No loan is good or bad. A loan is just a finance-tool. Make sure this tool is right for you. Always spend more time researching the negative aspects to any loan since the positives are most obvious. Please consult a tax advisor for further information and talk to friends and family. Make sure to do your homework before agreeing to any mortgage and especially a reverse mortgage.