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

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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].

Tax Deferred 1031 Exchanges – Is the End in Sight?

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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

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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].

The 5 Million Dollar Gift Tax Exclusion

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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].

Good Things to Know About Unpermitted Square Footage

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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

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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.

 

Credit Reports are EXCLUDING Negative Information and Raising FICO Scores

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Updates to the types of information that the major credit reporting firms use in creating a credit score could soon improve the scores for millions of Americans. The three firms, Equifax, TransUnion, and Experian recently decided that they would no longer use certain negative reports in their credit scores. Specifically, Tax liens and Civil Judgments will be excluded from reports if certain information is unavailable to the firms. Here are 3 things you need to know about the new rules allowing credit reports to exclude negative information and boosting FICO scores, and how they might affect you.

 

  1. This will only apply if the information that the firm has about the tax lien or civil judgment is missing some information. If the report includes full name, address, date of birth, and SSN, then the information will stay. However, frequently reports are made without this information. It is projected that over 10 million people will see moderate improvements to their credit score, and over half a million could see substantial gains of 40 points or more.
  2. The boost could make a definite difference in loan approvals. A 40 point gain could easily mean the difference between approval and denial for a loan. And while this is great news for consumers with shaky credit, lenders might be wary. Those with tax liens and civil judgments against them have been estimated to be twice as likely as those without to default on loans.
  3. The new rule will go in effect July 1, so if you know that you have these on your record, check your credit after this time. If you see a substantial improvement, don’t sleep on it. Use your improved credit to increase your financial stability. That said, If you are a lender, you might need to remember the adjustments, and keep them in mind when assessing credit worthiness. You now have less information to work with.

The impact of this change will obviously not be seen until the rule is put into effect and credit scores begin to change, but there are some things that we should keep in mind. First, public information can still be used to determine if, for example, someone has a civil judgement against them. The change in rules will boost their credit score, but lenders could still look this information up. Second, this will hopefully decrease the number of people with incorrect information on their credit reports. Removing items this way shows that the CRAs are paying attention to a current problem:the number of complaints that they receive about incorrect credit report info.

Top 10 Truths: Conventional Loans vs. FHA Loans

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Top 10 Truths Conventional Loans vs fha Loans

Top 10 Truths: Conventional Loans vs. FHA Loans

Top 4 Things to Know About First-Time Home-Buyer Programs

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Top 4 Things to Know About First-Time Home-Buyer Programs

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Top 10 Insider Tips About Your FICO Score

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Top 10 Insider Tips About Your FICO Score

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