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If you have two years before your student enters college …

 Test Prep

Every tenth of a point added to a student’s GPA may save thousands of dollars in loans that won’t have to be paid back later because colleges will give preferential aid to good students.  So now’s the time to consider test prep courses for the SAT.

 

Business Interest

Financial aid is based on the parents’ tax return from the base year (the year before the student enters college).

So any strategies (including tax strategies) that can lower the reported family income may help improve odds for financial aid. If you have any interest in running a business on the side or working as an independent contractor (i.e. real estate agent or MLM distributor, for example), now  would be the time to start.  That’s because most businesses will show losses during the first couple (or more) years which can help lower the Adjusted Gross Income and improve odds for financial aid.

 

Real Estate Strategies

Use home equity if you have any.  The possible “triple play advantage” for this option is clear:  1.) in most cases there is a tax deduction for the interest, 2.) you temporarily reduce the equity in your property and lower your asset value which lowers your potential family contribution and 3.) as a secured loan, the interest rate is low compared to other options.

Another late-stage planning technique is to use the proceeds to buy an immediate annuity.  This can shelter the capital and the payout can be used toward the mortgage payment. For details on this strategy, call for a College Cash Flow Planner Model.

 

FOR MORE PERSONAL TIPS, CALL STEVE @ 978-388-0020 or 617-398-7494

Exclusive College Planning Service Helps Parents with Costs

Need Help Financing College? Don't Just Get a Loan. Get a Plan

 

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Saturday was a beautiful spring day in New England. Temperatures were moderate.  No humidity.  It was bright and sunny with languid puffy clouds hanging in the noon time breeze.  A beautiful day to be outside especially after the gloomy weather that Mother Nature has thrown at us during the winter and spring so far. A beautiful day for gathering with family and friends and celebrating the milestones of life whether a birth, a marriage, a graduation or connecting with others.

It so happened that I was attending the funeral celebration for a friend and client. Celebration is the right word.  While sadness always is part of these things, it truly was more fitting and proper to highlight and remember the qualities that we all should aspire to.

In this case we were gathered to celebrate a sister, aunt, daughter and friend who lived fully during her short 50 odd years.  A global traveler, talented cook and baker, gifted woodworker and gardener and charitable sort who always thought of others less fortunate.

Regardless of one’s religious persuasion, the celebrant of this service, a Roman Catholic priest, expressed it best when he said that many of us think a long life is synonymous of a good life.  But in reality, he emphasized, the teachings of many religions focus on the quality of life as opposed to its length. And this person, my friend and the sister of my very best friend, truly made her short time in the temporal world full and rich.

Like a light switch, one moment someone’s vivacious smile is there and in the next instant it is gone leaving us only with the warm glow of memory.  Whether it is better to have a sudden death or have time to prepare for the inevitable is a constant debate.  In this case, my friend was there one moment and in the next she was gone.

Inevitably, when confronted with such sudden tragedy, we tend to think of our own mortality.  I recall after the Twin Towers came down in NYC, how families were drawn closer together even if they didn’t have a direct connection to the victims of the terrorist attack.  And the interest in insurance and estate planning was at a high point.  Lawyer friends reported doing more wills and guardianship plans.  Insurance agents were fielding calls for new insurance policies.

It shouldn’t take a tragedy – whether public or personal – to get people motivated to act in their best interests but we are frail humans and tend to look at the present disregarding the future.

But we do that at our own peril.

Someday is Today

A person with friends is truly rich – remember “It’s a Wonderful Life.” While I truly believe that sentiment, it doesn’t mean abdicating one’s responsibility to care for family and friends by skipping the planning.

It is frustrating to be a financial planner and in trying to deal with such issues receive either blank stares or promises to deal with it later. At other times there is the all-encompassing answer to all: I’m All Set.

  • Someday, I’ll draft a will.
  • Someday, I’ll check my insurance coverage.
  • Someday, I’ll talk to my brother (or sister or friend) about guardianship of the kids.
  • Someday, I’ll deal with all these financial planning issues.

Someday is now.

Planning for the inevitable is not for you.  It is to help others.  It is selfish to think that things will just take of themselves.  Sure, plans will together.  But the stress on the family, friends and loved ones left to deal with picking up the pieces is not something you should burden someone with lightly when taking a few steps will help smooth the transition.

  1. At the very least, get a Will.  You don’t need to be rich to have one of these.  Better yet, make sure you have a Durable Power of Attorney in place so that your financial affairs can be coordinated.
  2. Review and update your Will periodically. Even if you do have a Will doesn’t mean that it still works for you.  Times change and so do tax and estate laws.
  3. Include written instructions.  Do you want to be buried or cremated? Who do you want to have certain sentimental, personal effects?
  4. Have a list of online passwords for your banking and social media accounts in a safe but accessible place.  Without them your heirs will have trouble dealing with some of your financial matters or your social media accounts could possibly be shut off.  And since most of our lives and communications are now so much online, your family might not be able to notify your extended network of your passing unless they can get online.
  5. Review your insurance as part of a comprehensive financial needs analysis regularly.  Too often people simply think that what they have in place covers them regardless of the simple fact that personal circumstances change and dictate changes in coverage.
  6. If you own property and have a mortgage or have young kids who would be raised by someone else when you’re gone, make sure you have insurance that at least covers the bills.  This means having a term insurance policy for at least the balance of the mortgage.  And if you have kids, figure out the costs to raise them (and pay for college maybe) and put a policy in place to equal that.  Otherwise, you may be leaving a spouse, friend, family member or business partner with trying to carry the costs without benefit of the resources.
  7. Check and update the beneficiaries on insurance policies, annuities, company-sponsored 401ks and personal IRAs. Maybe you had a divorce and never updated this so your ex-spouse may be the unintended recipient.  Or new kids, nieces or nephews have been born since the last time you did this.

In my banking and financial planning careers, I have seen both personally and professionally the impact on survivors left behind to pick up the pieces.  There was the client who needed to refinance to help pay for an elder parent’s funeral.  There was the friend who battled bravely against cancer but eventually succumbed leaving behind a wife, a three-year old toddler and a mortgage.

The pain caused by the loss of a loved one doesn’t need to be compounded by the stress, frustration and confusion of having to unexpectedly deal with financial challenges.

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Divorce is emotionally traumatic on everyone involved especially if there are children.  While it may seem mundane, dealing with the money and tax issues that arise from the unwinding of a life together is as important for both psychic and fiscal sanity.

In the big scheme of things, there are more important things than money.  And many who are faced with this kind of life-changing event will cope by simply ignoring the details, shutting down trying to avoid confrontation and more emotional pain. The personalities of each person involved (including family, friends and lawyers) will come out to wreak havoc.  And if someone was a submissive person, then they may become more withdrawn from the process.  Someone who was more dominant in the relationship will likely be more so.

If I’ve learned anything from years of working with people and their money, it is that money is emotionally charged.  And while it may seem satisfying to try to extract some sort of revenge for the pain by attaching a price tag to impose on the other spouse, it is more important to get to closure and strike a deal which best positions each person for moving ahead.

I’ve often said that life is a journey.  And along this journey we’ll each encounter all sorts of things.  A divorce, like any other sudden, life-changing event, is just another part of the journey.  And while we cannot plan perfectly for this or anything else, we can prepare.

So it is with divorce.

I’ve written in the past about the critical mistakes that divorcing couples will make that can set them up for financial failure now and as they start the next stage of their new life.

Dealing with the Family Home in Divorce

For many the key to the settlement is the home.  While each may want to keep the home, it may be wiser to consider other options. For some, there may be sentimental reasons for keeping the home or emotional reasons and bad memories prompting one to put physical and emotional distance between themselves and the home.

For many, the main reason to keep the home is to avoid further disruption especially if there are kids involved which might entail changing schools or at the very least dealing with a move while school is in session.

Financial Triage

Despite the pain, you will need to step up and deal with these issues.  Otherwise, there is a greater risk that the financial foundation put in place for your post-divorce journey will simply not stand up.

At the very least it is important to make sure that all legal documents properly reflect who is responsible for the debts and bills associated with the property going forward.  This means contacting the utilities to change the name on the account.  In the event that the marital home was a rental, then make sure that the landlord changes the name on the lease. Get confirmation in writing.  Otherwise, there is the risk that an unpaid bill may end up in collection and lead to a black mark on your credit report.

The same can be said for credit cards.  It’s in everyone’s best interests to contact the credit card issuer to freeze the account to any new charges.  Don’t forget about old credit cards that you may not use or can’t find the actual plastic card.  To help with this get a copy of your credit report and make contact with each listed creditor appearing on it.

For property that is owned or mortgaged, this becomes a little more tricky.  The mortgage company won’t simply release someone from the debt not even with a valid final divorce decree.

In this case the only way to get this liability off your back is to sell the property or through a cash-out refinance by a spouse who will then assume the ownership and debt solely.

And as long as you are both on the deed, then the property tax liability and even water, sewer or other municipal charges will be the responsibility of each of you.  Only when the property is sold or refinanced will these liabilities be behind you.

Keeping the Home: Will It Make Sense?

A lot of my divorce financial planning practice centers on this very question.  Now if someone insists on keeping the home, I’ll spend a lot of time modeling the impact on near-term cash flow and long-term financial security.  It is not a guarantee that keeping the property is the best option.

It may not make sense at all.  There are the costs of running a home now on one source of income.  Even if one is receiving alimony to supplement this, it may not last long.  There are the added costs for maintenance that may need to be done by outside vendors that were once done by the spouse “for free” before such as snow removal, lawn care, repairs or house cleaning.

And while there may be support payments expected as a source of cash flow to cover these costs, what happens when or if your ex-spouse is unable to pay or simply decides to stop paying? Sure, there are legal remedies.  But these take time and cost money.  In the meantime, the bills may pile up and risk not only your credit.

In some cases, an ex-spouse may continue to provide help in these areas.  But they may want to negotiate the classic side deal: Do the repair and deduct it from the support owed.  This isn’t proper and will not help your long-term cash flow. In some cases, the ex-spouse will try to claim the funds used for these repairs as part of alimony so that it can be a tax-deductible expense.  This is also flat-out wrong and distortion of the tax and divorce rules.

Selling the Home May Make the Most Sense

It may be easier and wiser to simply sell the home, split the proceeds, pay off outstanding debts, fund the emergency reserves and start off fresh without the added burden of running a home.

And while not seeming to be critical in a time of depressed real estate values, by keeping the home you risk losing out on a very valuable capital gains exclusion on the sale of property.  As long as you’re married when you sell your home, the first $500,000 in gain above the original purchase price and subsequent costs of improvements will be exempt from any capital gains taxes.

Once you are divorced this exclusion drops to only $250,000.  For those couples who bought homes several years ago before the huge run up in values, this may be a critically important consideration.

Seek Professional Guidance

Dealing with the many tax, financial and real estate issues related to a divorce can be complicated.  You may want to seek advice from someone specifically trained to handle such issues.  Not all CPAs, attorneys and financial planners are qualified or set up to help clients through this type of life-changing event.

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Given the roller coaster ride that stock market investors have experienced and the negligible rates offered by banks on savings, it’s easy to see why someone might want to use their cash to pay off their mortgage.

Being debt free is not only noble but can provide a buffer in tough times since you’ll have one less cash outflow each month.

For every dollar you pay off in a mortgage, your rate of return is equal to the amount of interest that you’re saving. This is measured by the interest rate (net of the amount that is deductible of course).

So in this example, you could be “earning” 6.125% (less the deductibility of the mortgage interest based on your tax bracket).

Compared to other savings alternatives, that’s a great return. And compared to other equity investments it can seem a lot less volatile.

But before you drain the cash reserve, let’s look at this more closely.

  1. Tying up a lump sum of cash in a property can be risky. You may come up short on emergency reserves by using the bulk of it to pay off the loan.  Will you have enough cash to cover 12 months of your living expenses?  Will you have enough to cover operating expenses for the properties if they were vacant or you lose your job?
    • Considering that in this case you have three other investment properties and your primary residence, there is always the likelihood that you might need cash for an emergency repair or the cost of compliance with any changes in building codes or prepping a vacant unit for a new tenant or even to cover the carrying costs while a unit is vacant.
  2. Real estate is an illiquid investment. Once you send in the check to the bank you no longer have the cash readily available for use either to pay for ongoing expenses, cover emergencies or for other investment alternatives that may come along.
    • What if a really good deal on another investment property came along?  Depending on your market, you could find a very inexpensive property to buy that could more easily cash flow now but without the cash you’re out of luck. Sure, you’ll have more equity but to tap into it will require a bank to agree to give it to you which is more difficult on investment properties and your primary residence may not have enough equity to allow you to get a home equity line of credit (HELOC) or home equity loan to recoup the cash you may need.
  3. Property prices are still in flux.While savings bank rates are abysmal, losing money is even less appealing. By investing more in your property, you could actually see a negative return.  In some markets, real estate prices are still going down so it is conceivable that you could turn each $1 paid in principal into 90 cents.

What Are the Alternatives?

Consider a non-bank financial firm that is offering one of those ultra-high yield money markets for a good portion of this reserve fund.  It’s accessible and won’t cost you anything to hold and they tend to offer higher rates than most brick-and-mortar banks.

You could also split off a portion of the funds and find a ultra-short term bond mutual fund.  Average yields are about 2%.

For a small portion (starting at around $2,500) you could even use a convertible bond fund.  These are hybrid investments combining the fixed income of a bond with the potential capital appreciation of a stock.  These types of investments have held up well when interest rates rise because of Fed action or inflation.

For more information on these, you could check out my article posted on www.ezinearticles.com here.

Likewise, you could also consider other types of short-term bond investments like mutual funds that target floating rate notes.  These types of commercial loans are regularly reset and are a good way to hedge against inflation.  Since there is credit risk, you don’t want to put a whole lot of eggs in this one basket but 5% to 10% of your funds is prudent for you to consider.

As in all things, read the prospectus and speak with your adviser to determine if these are right for you in your situation.

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Much of the US economy is tied to real estate.  Buying and maintaining a home creates a very big ripple that impacts lots of industries and jobs.  Certainly, the bursting of the speculative bubble in building and lending has resulted in a devastating chain of events including an increase in home foreclosures.

In the economics textbooks I had to study back in college, the theory is referred to as “creative destruction” as industries change and assets are repositioned.  In reality, we’re dealing with individuals and families and it is a painful process.

In news accounts and on our own streets, we can see the impact as families who once were proud homeowners or even responsible tenants are forced to leave their homes as part of the foreclosure process.  And foreclosures continue to have a negative impact on real estate values.

Aside from the pain it is a necessary process to get to a floor in prices that will help lay a foundation for stable or future increasing prices.  And as the pendulum swings in the positive direction it will hopefully lead to a virtuous cycle for an improving economy.

Between here and there, between continued gloom and future hope, there’s some scary ground still to cover and put behind us.  Just like in the horror movie where the heroine is within sight of safety when the bad guy pops up again, we now have to look over our shoulder at some little noticed trends that threaten the nascent recovery.

Recently, the entire foreclosure process has been forced to grind to a halt in many communities because of the “robo-signing” of foreclosure notices by many of the nation’s largest banks and mortgage servicing companies.

But besides this well-reported issue there are other developments that are easily overlooked by those not involved in the industry.

  • No Title Insurance: Mortgages are secured by collateral.  In this case that means the land and buildings that sit on it.  Evidence of this comes in the form a deed that describes the location and the chain of title showing who owned it and what loans or liens have ever secured it. A loan cannot be closed without the lender being able to secure “title insurance” which protects the lender in the event that there is a claim by someone or some bank that says that the new bank’s borrower really doesn’t own it.  And right now title insurers are protecting themselves by avoiding issuing any insurance on any property that has a foreclosure in its history of ownership.
  • Uncertainty Leads to Gridlock: Nearly 20% of all real estate sales in August 2010 have been of distressed properties.  With the prospect of increased litigation and the drying up of lending sources, this will lead to fewer sales.
  • Legal Challenges to Evictions and Foreclosures Have and Will Increase: Such legal challenges will make it harder to clear the backlog of foreclosed inventory.  Costs to potential buyers and banks to defend claims will increase and make the idea of buying a “bargain” foreclosure property very expensive.
  • Banks Face Higher Unknown Costs That Threaten Their Survival: Aside from legal costs, the potential for fines and other penalties imposed by courts for the alleged fraud perpetrated by “robo-signings” means that banks will need to set aside more in reserve against this potential outcome and have less available to lend to consumers and businesses.
  • The System of Electronic Trading of Mortgages Is in Question: In the fast-paced world that we live in, we prize speed, convenience and efficiency. To help make the processing of lending and refinancing more efficient, the banking industry created the Mortgage Electronic Registry System (MERS) to allow banks to sell, package and transfer mortgages and mortgage servicing rights among them.  But one of the results of the “robo-signing” scandal is that courts may scrutinize MERS and rule that it really doesn’t own the underlying mortgages and has no right to transfer them.  If that happens, that will call into question who actually owns the loan.
    • Without clear ownership rights, then it calls into question who has a right to foreclose on a property.
    • If the lender is not really the lender, then homeowners can and have started ignoring the eviction and foreclosure attempts by these lenders.
    • If it is questionable about which bank owns the loan, then that devalues a big source of bank income from servicing the billions of dollars of mortgage, tax and insurance payments that it handles every month, a source of revenue to the bank and an important part of its valuation which will now also come into question.

However this plays out, it looks like the lawyers will be busy for a long time.  And the rest of us are left with a very big cloud over our head trying to recover from something way worse than any witch or pirate appearing at the front door this Halloween.

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