"24 - 36 - 60" Some Huge Numbers

Recently I was having lunch with a client to review their real estate holdings. We started discussing the merits of owning residential rental real estate and the long-term benefits of owning more than one property. Here's their story.

In November of 2003, my client decided to purchase a new residence closer to their business. I showed them how they could buy a new home with creative financing, and keep their original home for a rental.

However, we do not want to lose the tax-free benefits that the Internal Revenue Code 121 provides.

Look out if you make a mistake on this.

If you want to qualify for up to $500,000 tax-free on the profits of your principal residential sale ($250,000, if you are a single homeowner) then be sure you have owned and occupied the property as your principal residence for 24 of 60 months prior to the sale.

Here’s the kicker! You can rent the house for up to 36 months after you move, but if you don’t sell within the 36 month time frame… YOU LOSE your $500,000 tax-free sale exemption.

If you have any questions about making the right moves… consult your tax advisor.

“How Much is Too Much?”

Recently a client was referred to me who was thinking about buying a property, but she was unsure because property values have appreciated a lot in the past seven years. Her concern was that with values where they are, should she wait for prices to come down before she bought? Seems like a legitimate concern.

So how much appreciation is too much? At what point should rising property prices scare us of a coming “Bubble Burst”? Here’s a real life situation. A mother and father of my best friend purchased a home in 1981. They paid $350,000 for their home. I just sold it for his mom, because she didn’t need such a large property any longer. They held their property for 24 years and in that time they experienced average annual appreciation of 6.25%. That’s just 6.25% annually, barely over the national average. Hardly sounds like a bubble to me.

The nice thing about 6.25% appreciation is that the value of an asset almost doubles every 10 years. Imagine what that kind of compounding will do for your wealth creation. A property worth $500,000 today will be worth $1,000,000 ten years from now. That’s an extra $500,000 in the wealth column. His mom’s retirement is much more comfortable, because she and her husband bought real estate and held it for a long time.

My advice to my client was to buy and wait rather than wait to buy. Timing the market never works…Not in stocks and bonds and not in real estate. Had we all known what real estate values were going to do over the past seven years, we would have loaded up on more real estate. Now’s a great time to invest in real estate, whether its here in California, or in other states.

If you would like to see about investing in more real estate, either here or in other states, call me. I can answer your questions.

"Is Your ARM Broken?"

The Fed has raised interest rates 14 times since June 2004, each time by a quarter-point, bringing the cost of overnight loans banks charge each other to 4.50 percent.

However, for the first time in memory, 30 year fixed rate loans are lower than adjustable rate mortgages.

Rates on ARMs continue to rise while fixed rates remain stable. The Federal Reserve has raised the Fed Funds rate 14 times in the past 19 months more than quadrupling short-term adjustable interest rates. In spite of this, long-term fixed interest rates have failed to rise much at all. Because most indices are lagging, even if the Fed leaves rate alone, your ARM will continue to rise.

Inverted yield curve
As the Federal Reserve has raised short-term rates, it’s become more expensive to keep adjustable-rate mortgages. Usually when short-term adjustable mortgage rates go up, long-term fixed rates go up as well. But, confounding many experts, that has not occurred. The average 30 year fixed loan from Jan 2005 until Jan 2006 has increased from an annual rate of 5.24% to 5.79%.

The upshot is that ARMs are getting more costly than fixed rate loans. It appears that the advantage of an ARM over a fixed-rate mortgage is gone.

If you want more information regarding your current loans and would like an analysis, please email me or give me a call so that you can fix your ARM if it is broken.

Santa Rosa, Northern California Real Estate

"Is Now The Time To Take Some Money Off The Table"

Recently I was talking to a client of mine about what the future holds and what she should be doing with her real estate. Like many of us property owners in Sonoma County, she has a lot of equity. The question was what the next direction the market will take is. That presupposes that I know what the market is going to do. This I do know, real estate goes up in value over time. Real estate more or less doubles in value every ten years. But in the short term, it’s anyone’s guess as to what is going to happen.

In a prior life I worked as a Registered Investment Advisor, that’s another name for a financial planner. One of the things that I always talked to my clients about was diversification. It is important to diversify assets to protect your wealth against risk. Whether its stocks or real estate… diversification is a good idea.

So I told my client about how I diversified my real estate risk. I recently decided to take some money off the table here in Sonoma County. I owned a rental home in Santa Rosa on Vale St. So I sold Vale Street and bought a vacation home in Lake Conroe Texas. Lake Conroe is a gated lake community with three golf courses, yacht facilities, lighted tennis courts, fitness center and a country club. I can guarantee you that unless you’ve been to Lake Conroe, your impression of this part of Texas is wrong. Currently I am keeping this as a vacation home but if I chose to rent it, it would have significant positive cash flow with only 20% down.

Why Texas you ask. A recent National Association of Realtors survey recently identified 130 metro markets as least likely to have a real estate bubble. I do not believe that Sonoma County is on a bubble, but as a way to continue owning property and diversify my risk I chose to buy in one of those other markets. I still have my Fountaingrove home here but I’ve now got another little piece in another market. "By the way Texas property goes up in value too”. Last year property values went up eight percent.

If you want to investigate a little diversification in your wealth portfolio call me. I have a lot of information on how to continue maximizing your wealth while reducing your risk.