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5 First Time Home-buyer Myths!

by The Stone Wood Team


NAR’s Profile of Home Buyers and Sellers for 2016 was based upon a 132-question survey that generated 5,465 responses from buyers.

Zillow conducted a 160-question survey of 13,000 homebuyers who had closed transactions in 2016.

Myth 1: Millennial attitudes toward ownership differ from those held by boomers

The average buyer in the study was 36 years old with half the buyers being millennials. Zillow’s study is especially compelling because the dataset is more than twice as big as NAR’s dataset.

The primary reason respondents wanted to purchase a home was the desire to own a home of their own. Studies also found that the percentages of millennials versus boomers who wanted to become homeowners were virtually identical.

Myth 2: First-time buyers are being shut out of the market

NAR’s data and Zillow’s data differ on one very important point. NAR reports that first-time buyers only accounted for 32 percent of the market in 2015 and only 35 percent in 2016.

In stark contrast to NAR’s findings, Zillow COO Amy Bohuntinsky reported that its data showed that 53 percent of all sales in 2016 were to first-time buyers.

Given the size and the depth of the Zillow study, one could certainly argue that the NAR numbers may be seriously underestimating the percentage of first-time buyers.

Myth 3: Homes are less affordable for first-time buyers

Zillow’s findings showed that today’s borrowers are spending an average of 15 percent of their income on their mortgage versus the 30 percent that they spent in the 1980s.

Even though prices are higher, today’s first time home-buyers are spending a smaller proportion of their paycheck on their house payments.

Myth 4: It’s cheaper to rent than it is to buy

CNBC article proclaimed that it costs more to own versus to rent a home in every U.S. state.

Although the median rents may be less than the median house payments, that comparison is a poor one, and here’s why.

  1. The median payments for homeowners will always be substantially higher than they are for renters, primarily due to the large number of homes that are priced at $500,000 or more. Homes at this price point and above only constitute a tiny proportion of the overall rental market.
  2. Every month that homeowners make a payment, they build equity. Even if there is zero appreciation or inflation, at the halfway point on a 30-year mortgage, the typical homeowners will have approximately a 35 percent equity position in their home.
  3. Focusing on the monthly cost of renting versus owning fails to acknowledge the money saved by the homeowner over time. To illustrate this point, rents increase over time — fixed mortgages do not. For example, a rental payment in July 2002 of $1,500 would have increased to $2,038.75 by July 2017 due to inflation.

Myth 5: Prices are leveling off — waiting to purchase won’t make any difference

Assume that a buyer is going to purchase a property and obtain a loan of $200,000 at 5 percent fixed for 30 years. If the interest rates increase to six percent, the buyer may pay up to an extra $50,000 in interest over the life of the loan.

If the interest rates increase to 7 percent, the buyer will pay almost a $100,000 more in additional interest.

In other words, an interest increase of 1 percent results in about a 25 percent increase in interest over the life of a 30-year fixed rate loan. An increase of two points in interest results in a whopping 50 percent increase in the amount of interest paid. That’s why it’s smart to buy now when rates are at historic lows.

So, here’s the bottom line. The next time some other “expert” tells you that it is cheaper to rent than it is to buy, share the information in today’s blog with them.

 

Renting Vs Owning

by The Stone Wood Team


Some would-be buyers have emotional reasons to own a home like having a place of their own where they can raise a family, feel safe and secure and enjoy their friends’ company. Other buyers’ dominant reasons might be financial in nature such as building equity or lowering their cost of housing.


Regardless of what might be motivating people to want their own home, it is easy to justify that now is a good time to purchase. Let’s look at a $250,000 example using a FHA loan.

The total payment will be about $1,835 dollars a month. If the payment is lower than the rent a person is paying, that should encourage a person to continue investigating.

In this example, when you consider the monthly principal reduction, the monthly appreciation and the tax savings, even with money added for monthly maintenance, the net cost of housing is less than half the total house payment.

Considering all those advantages, the would-be buyer is spending over $1,100 per month more to rent than it would be to own. In a year’s time, they would lose close to $14,000 which is more than the down payment of $8,750 required on this price home.

Most would-be buyers understand that a home is a big investment but they may not understand the advantage of the leverage caused by the low down payment mortgage. The benefits extend beyond a return on the down payment but to the value of the home.

In this example, the $8,750 down payment grows to an equity of $73,546 in seven years based on 2% annual appreciation and normal amortization on a 30-year loan. If you calculated that as a rate of return, you’d be challenged to find anything that could compare with it.

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To see what your numbers might look like, check out this Rent vs. Own. If you need any help or have any questions, contact us. Part of our greatest satisfaction is helping would-be buyers understand why they should-be.

Buying Rental Properties

by The Stone Wood Team

Why should you buy a home to rent out ? Rental homes are the IDEAL investment because they offer a higher rate of return than other investments without the volatility of the stock market. With certificates of deposit and bonds at less than 2%, people need an alternative investment that they understand and with a reasonable amount of control. 

In this case, IDEAL is an acronym identifying the advantages of rental properties.

Income from the monthly rent contributes to paying the expenses and a return on the investment.

  • Depreciation is a non-cash deduction that shelters income for some investors.
  • Equity buildup occurs with amortized mortgages because each payment is composed of interest owed and principal reduction to retire the loan by the end of the term.
  • Appreciation is achieved as the value of the property goes up.
  • Leverage can increase the return on investment by using borrowed funds to control a larger asset.

These individual benefits working together make rental real estate a good investment for today’s economy. Increased rents, high rental demand, good values and low, non-owner occupied mortgage rates contribute to positive cash flows and very favorable rates of return. 

To find out more about how rentals might complement your current investment plans, contact your real estate professional.

Why Contacting a Lender is Important

by The Stone Wood Team

Lenders regularly publish mortgage rates but they may not be available for all buyers.Imagine that the mortgage payment based on an advertised rate influenced a buyer to make an offer on a home. After negotiating a binding contract, this buyer makes a loan application and finds out that for any number of possible reasons, that rate isn’t available.

Even if the person does financially qualify for a loan at a higher interest rate, it will not be the payment that the buyer expected when the contract was negotiated.

Lenders evaluate several factors such as the borrower’s credit score, debt-to-income and loan-to-value ratios. These variables are used to assess the risk associated with the repayment of the loan.

While mortgage money is a commodity, it isn’t priced the same way items are that involve cash for goods. The lender puts up the money today based on a promise from the borrower to repay over a long term, possibly up to thirty years.

The simple solution to avoid surprises such as the one described here is to get pre-approved at the beginning of the home search process. Since pre-qualification does not mean the same thing to all lenders, call if you’d like a recommendation of a trusted mortgage professional.

Inheritance versus Gift - Is there a difference?

by The Stone Wood Team




A person called into a radio talk program with a situation that was troubling to the caller and disturbing based on the potential tax liability that may have been avoided.

The caller’s elderly father had deeded his home to his daughter a few years earlier because in his mind, his daughter was going to get the home eventually and this would be one less thing to be taken care of after his death. The daughter didn’t really care because the father was going to continue to live in the home and take care of it so that it would be no expense to her.

Obviously, unknown to either the father or the daughter, transferring the title of a home from one person to another could have significant tax implications. In this case, when the father “gave” the home to his daughter, he also gave her the basis in the home which is basically what he paid for it. If she sells the home in the future, the gain will be the difference in the net sales price and her father’s basis which could be considerably higher than had she inherited it.

If the home was purchased for $75,000 and worth $250,000 at the time of transfer, there is a possible gain of $175,000. However, when a person inherits property, the basis is "stepped-up" to fair market value at the time of the decedent's death.  If the adult child had inherited the property, at the time of the parent's death, their new basis would be $250,000 or the fair market value at the time of death and the possible gain would be zero.

In most cases, there are less tax consequences with inheritance than with a gift. There are other factors that may come into play but being aware that there is a difference between a gift and inheritance is certainly an important warning flag that would indicate that expert tax advice should be sought before any steps are taken.

Loan Principles

by The Stone Wood Team

 

It's the Principal of the Thing

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Most people think they’ll have a house payment and a car payment for the rest of their lives but it doesn’t have to be with a plan and a little discipline. The plan is to make additional principal contributions to a fixed rate mortgage to shorten the term and save tens of thousands in interest.

If a person were to make an additional $100 payment each month applied to principal on a $175,000 mortgage, it would shorten the loan by five years six months. If the person were to make $200 a month additional payments, it would shorten the loan by 9 years. $459 additional payment would shorten it to 15 years.

If a person does make a decision to regularly pre-pay their mortgage, it will be their responsibility to verify that the lender is applying the money to the principal each time as opposed to being placed in the reserve account for taxes and insurance.

In today’s market, a savings account pays around 0.5% or less. Even with the low mortgage rates available, there is still a considerable savings. People who might need the funds in the near future should carefully consider this option due to the difficulty to access equity easily from one’s home.

Make your own projections using the Equity Accelerator

Choose a Lower Tax Rate

by Stone Realty Services®

During campaign season, it is not unusual to hear a candidate criticized because they make a lot of money but pay little in income tax. While it might not seem fair, taxpayers are allowed to arrange their affairs so that they minimize the amount of tax paid.

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Salary, wages and commissions, along with interest and dividends are taxed at ordinary income rates which can range from 10% to 39.6%. However, capital gains rates, for property held more than 12 months, are much lower ranging from 0% to 20%. Taxpayers in the 25-35% brackets pay LTCG rates of 15%.

The profit on rental property enjoys the lower long-term capital gains rates as compared to the profit on “flipped” property which is taxed at ordinary income rates.

Investments in rental homes generate income, provide depreciation for tax shelter, have equity build-up due to the amortizing loan, leveraged growth due to the borrowed funds and appreciation. The profits could be considerably higher than alternative investments and the profits taxed at lower rates.

The advantage is available to people who understand the tax laws and choose to arrange their activities so they pay a minimal amount of tax. The advantage is available to all taxpayers, not just the rich. In fact, implementing these types of strategies could lead to an increase in wealth.

 

If you're going to play, GET IN THE GAME

by Stone Realty Services®

If competition is a buyer’s biggest concern, for goodness’ sake, get in the game. In a new survey of close to a thousand home buyers conducted by Redfin, affordability is still the number one concern but due to low inventories, competition from other buyers is moving its way up the poll.

26% identified affordability while 19% mentioned competition and 15% mentioned low inventory as their respective top concerns.

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To win, athletes study the competition to come up with a plan and buying a home is not different.

  1. Ask what terms are important to the seller before you write the offer.

  2. Once you decide to make an offer, do it as fast as you can, hopefully, to be the only one the seller is considering.

  3. Make a good (or possibly, your best) offer in the beginning; you may never get a chance at improving it. In highly competitive situations, offer above the list price.

  4. Attach your pre-approval letter from a respected lender. This means you’ll need to get pre-approved before you even think about writing an offer.

  5. Have your lender call the listing agent to reassure them of your ability to qualify.

  6. Include a higher than normal amount of earnest money to show you are serious.

  7. Eliminate unnecessary contingencies.

  8. Write a personal, hand-written letter telling the seller what you like about their home and why you want it. Consider including pictures of your family.

  9. Minimize seller expenses paid for the benefit of the buyer.

  10. Shorten inspection times.

  11. Don’t ask for personal property.

  12. Be flexible on closing dates to accommodate the seller’s move.

Once you find your dream home, don’t take a chance on losing it. Write a winning offer that will be good for both the sellers and the buyers.

 

Rental Investments

by Stone Realty Services®

Rental homes can be a natural alternative investment choice for homeowners because they are already familiar with houses. Maintenance on a rental is not that much different than on your personal home. The same plumbers, painters and other workmen can be used to make repairs.

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Single family homes offer an investor high loan-to-value mortgages at fixed interest rates for long terms on appreciating assets with defined tax advantages and more control than other investments.

  1. High loan-to-value mortgages – most investments require that you pay cash but rental properties can be purchased with 20% down payment.
  2. Fixed interest rates – most commercial loans are based on a floating rate such as prime interest plus one or two percent compared to real estate loans as fixed rates for the term.
  3. Long terms – commercial loans are generally short-term such as six months or a year with the possibility of being renewed for another six months or a year unlike real estate where a 30-year mortgage is commonplace.
  4. Appreciating assets – real estate has a long-term history of going up in value.
  5. Defined tax advantages – many investments are taxed as ordinary income but rental real estate enjoys a non-cash deduction called cost recovery, the profits from sale are taxed at lower long-term capital gains rates or may be eligible for a tax-deferred exchange.
  6. Control – rental homes don’t require partners and afford the investor more options than investing in mutual funds and other traditional investments.

The demand for good rentals is strong and the rents continue to go up in most markets.  There are people who choose not to buy or cannot buy a home who would prefer to live in a single family home rather than an apartment.

 

How Home Improvements Affects Property Taxes

by Stone Realty Services®

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You've saved the money and are ready to pay cash to build a new pool for your home.  However, that's just the beginning of your soon to be increased expenses which will include maintenance, higher utilities and higher taxes.

Homeowners obviously benefit by a larger equity when their home increases in value due to appreciation.   A not-so-obvious effect that will also more than likely take place is that their property taxes will increase.  In most cases, a property's assessed value is generally tied to market value to calculate the property taxes based on the tax rate for that year.

Similarly, a homeowner can affect the value of their home by making capital improvements.  Some small items may never be recognized by the taxing authority but items that require a permit, certainly are brought to their attention.  Items such as a fence, roof, remodeling, windows, new rooms or swimming pools can easily increase the assessed value of a property.

Most states have an established time frame in which to challenge the current tax assessment for that year.  The process is relatively simple and doesn't require professional representation.  It generally involves showing that there is an error which has overstated the value or that current comparable sales indicate a lower value.

If you'd like more information or need the comparable sales data, please let us know.  We would be happy to help you investigate the possibility of lowering your property taxes.

Displaying blog entries 1-10 of 13

Contact Information

Photo of Stone Wood Team Real Estate
Stone Wood Team
EXP Realty
2165 Jamieson Avenue
Alexandria VA 22314
Office: (703) 739-4663
Office: (703) 739-HOME
Fax: 703-683-9692