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Archive for December, 2009

What’s next for real estate?

For most people, real estate remains a critical part of personal net worth. Despite the stock market’s recovery, the average net worth of an American family is down about 25% because of tumbles in real estate values and investment assets.

Overview of Market Trends – Focus on Boston

While still suffering because of continued turmoil in the anchor employment areas of Financial Services, Insurance, Real Estate (FIRE), there have been signs of stability in and near major metropolitan areas like Boston. Although the employment picture remains bleak, the Boston metropolitan statistical area (MSA) showed the strongest gains in property values during 2009 according to a recently released report by Zillow Real Estate Market Reports.

Even with the strong gains helped along by the federal government’s first time home buyer credit and continued low mortgage interest rates, there remain nearly 25% of homes that are “upside down” on their outstanding mortgages.

High unemployment persists as companies continue to announce layoffs or delay hiring. And given the expected wave of creative mortgage products like Alt-A loans, interest-only loans and “pick-a-payment” adjustable rate mortgages resetting to higher rates putting pressure on homeowners who are unable to refinance because of lack of jobs or lack of value, there will likely be an increase in the number of foreclosures.

According to research reported by HousingPredictor.com, the major metropolitan areas in the US will likely not see a boom in real estate until after 2020. With more than 7 million people unemployed and another 20 million listed as underemployed, it may be 2017 or 2020 when these workers are absorbed. And real estate sales depend on those who have jobs.

Real estate booms have typically run in seven to 10 year cycles with some outside trigger precipitating a crisis that popped the bubble. The current situation is unlikely to be different.

Implications for Investors

Apartment vacancy rates are expected to rise through 2010 to about 7% to 10%. The continued collapse in confidence about jobs hampers household formation as individuals may delay marriage or move back in with parents or relatives or double up with friends.

As foreclosures rise, there will likely be greater demand for replacement housing so vacancy rates may fall. And as workers try to keep their options open to accommodate moving for job opportunities, demand for rentals will likely increase as well. The caveat is that there will also likely be a range of supply options that will put pressure on rents. And as a result of continued poor economic conditions, landlords can expect that credit quality of tenants will erode.

Apartments will have to compete with an increasing supply of single-family homes. Currently, the single-family homes available for rent has ballooned to nearly 10% compared to the long-term average of 4.5%. And a change of policy by mortgage servicer Fannie Mae will allow renters living in homes or apartments where the landlords have been foreclosed on to no longer be evicted. This will likely mean that largest landlord of single-family rentals in the US will be a quasi-governmental entity.

The volume of sales in the multi-family market is way off and likely to continue. Potential buyers continue to wait for prices to stabilize. There will continue to be an upward shift in cap rates by 1% to 2% approaching the cap rates of 2002 (8.2%) which will directly contribute to downward pressure on prices in the range of another 10% to 20%.

And given the more stringent underwriting criteria like higher down payment requirements, the number of investors capable of acquiring a property will likely be limited. But there will be opportunities for those investors with the capital and credit to buy when prices stabilize.

About Steve Stanganelli, CFP ®

Steven Stanganelli, CRPC®, CFP® is a CERTIFIED FINANCIAL PLANNER ™ Professional and a CHARTERED RETIREMENT PLANNING COUNSELOR (sm) with Quest Financial, an independent fee-only financial planning and investment advisory firm with corporate offices in Lynnfield, Massachusetts and satellite locations in Woburn and Amesbury.

Steve is a five-star rated, board-certified financial planning professional offering specialized financial consulting advice on investments, college planning, divorce settlements and retirement income planning using alternatives like self-directed IRAs.

For more information on financial planning strategies, call Steve at 888-323-3456.

Article Source: http://EzineArticles.com/?expert=Steven_Stanganelli

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Is real estate still a good investment?

As a landlord dealing with sometimes rowdy tenants or unexpected repairs, you may wonder whether or not it’s still worth it.

Despite these headaches and the ongoing doom and gloom reported about real estate prices, owning investment real estate continues to provide a number of benefits.

Buying a property offers a number of favorable tax benefits, a way to generate income, diversify a personal investment allocation and in some cases have a tenant pay for your personal housing expenses.

As an investment property owner, you can deduct a host of expenses connected with operating the property including mortgage interest, property taxes, utilities and repairs. Aside from actual expenses incurred, property owners also benefit from a valuable non-cash expense: depreciation.

Losses generated from rental activities are typically considered to be “passive activity losses” with an exception for real estate professional. These losses can then be used to offset other passive income from another real estate investment or another type of passive investment such as in a private limited partnership. Disallowed passive activity losses and credits are deferred until there is passive income generated or the property is disposed in a taxable transaction.

Like all good rules there are exceptions. Although “passive activity” losses by rule must be used to offset other passive activity income, there are additional tax benefits available to those who are low- or middle income earning households.

For those who have adjusted gross income below $100,000 and “actively participate” in the management of the rental property, a real estate investor may use up to $25,000 in passive activity losses to offset non-passive income like income from wages or a business.

This remains one of the few tax shelters available to moderate income taxpayers. And like any other gift from the IRS, it comes with certain strings attached. In this case, the ability to use this passive activity loss exception phases out above certain income thresholds starting at $100,000 of AGI reduced $1 for every $2 of income above the threshold until eliminated at $150,000 AGI.

The key to “active participation” generally means involvement in management decisions about the property. Choosing the kind of paint or wallpaper? Reviewing bids for different contractors? Collecting the rent? All may be considered part of the active participation of the property owner.

About Steve Stanganelli, CFP ®

Steve is a five-star rated, board-certified financial planning professional offering specialized consulting advice on investments including self-directed IRAs and retirement income planning. Steve is affiliated with Quest Financial Services, a fee-only Registered Investment Advisor located in Lynnfield and can be reached at 888-323-3456.

Article Source: http://EzineArticles.com/?expert=Steven_Stanganelli

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Do you own investment real estate or a business? Have you been considering buying a rental property or starting a business? Have kids going to college in a few years?

If you already plan on your kids going to college, it’s never too late to start planning effective and efficient ways to increase savings, lower your taxes and improve your odds for receiving student financial aid.

Let’s say you already give your children an allowance. You’re already paying out of pocket and not getting any tax benefit. With a few changes you can turn that cash outflow into a tax deductible expense that can even help your kids save for college.

Consider hiring them to work in your business or on the rental property you own.

By paying them a reasonable wage for services like landscaping, cleaning, painting, shoveling snow or doing office administrative work like filing, stuffing envelopes or printing marketing flyers, you have an additional deductible expense which lowers the net income or increases the net loss of your business or property.

And for children earning income in the family business, there is no requirement for payroll taxes. And if you keep the amount of “earned” income below certain limits, you won’t be at risk of paying any “kiddie” tax either. (“Kiddie” tax limits adjust for inflation each year).

In effect, you have shifted income from a taxpayer with a higher tax rate to a low- or no-income tax paying child.

Now get your child to open a Roth IRA with the money you pay them and they have the added benefit of tax-free saving for college since Roth IRAs can be tapped for college tuition without paying a penalty as long as the Roth is open for at least five years (restrictions apply).

By reducing your income, you can also reduce your Expected Family Contribution (EFC) which is the critical number used to determine the amount and kind of student financial aid your child can get for college. The EFC is calculated using a number of things including the amount and type of parental assets as well as reported income. EFC is recalculated each time a financial aid form is submitted and is based on the assets and income from the year before.

So to improve your odds for financial aid, one strategy is to lower your reported income. By employing your child to lower your business or rental property income, you may be able to lower your EFC and improve the amount of aid your child receives.

About Steve Stanganelli, CFP ®

Steven Stanganelli, CRPC®, CFP® is a CERTIFIED FINANCIAL PLANNER ™ Professional and a CHARTERED RETIREMENT PLANNING COUNSELOR (sm) with Quest Financial, an independent fee-only financial planning and investment advisory firm with corporate offices in Lynnfield, Massachusetts and satellite locations in Woburn and Amesbury.

Steve is a five-star rated, board-certified financial planning professional offering specialized financial consulting advice on investments, college planning, divorce settlements and retirement income planning using alternatives like self-directed IRAs.

For more information on financial planning strategies, call Steve at 888-323-3456.

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