Tuesday, November 30, 2004

Denial Worst Enemy When Hard Times Hit

I have found in my short life that our "trending" chart can resemble a roller coaster rather than a blue chip company's profits chart and that can mean major challenges when it comes to homeownership.

There are times in our lives when we must come to grips with reality and make very difficult personal decisions to preserve our financial and mental well being. Job loss, sickness, death and divorce are all reasons for someone needing a home -- quick and for short term -- while they disperse with the property or find a more permanent housing situation.

The most common problem is when a homeowner loses a job (or in our double-income culture, just one of the two jobs is lost). For some folks, this is a liberating event that launches them into a different direction, professionally. If they have some savings, they may start a business. For many of my colleagues, that's exactly how they started up their real estate careers -- through a job loss. When the dot-coms melted down four years ago, the ranks of Realtor population locally in the national Capitol area swelled by nearly 20 percent per year. And now many of those former IT professionals are using their skills to make pretty good money in a growing industry.

Then I've seen the folks who live in denial. They think things will turn around -- sooner rather than later. And two to three missed mortgage payments later, they are facing late notices and threats of foreclosure.

Regardless of how you lost your job -- downsizing, health, whatever -- don't wait too long before making the tough decisions that need to be made about how to preserve your wealth in your home.

First of all -- cut all your expenses to the bone. You would think most people in this situation would do this, however, it's amazing how plastic gives people a false sense of security. Instead of paring down to the basics, they hang on to the extended cable, satellite, two cell phones, extra car payment, dinners out with friends and gift buying, because they just know their unemployed situation is not going to be a long-term problem. Hopefully, you're right -- but don't be foolish.

Obviously, you need a financial support team. Get over the embarrassment and call family, friends, clergy, etc., and let them know you've just lost your job or can't work because of your health and that you need help now or will in the near future. Then the real tough decision needs to be made … do you need to scale down in your living? This means either selling your house or renting it out and moving into something more affordable.

The average household spends more than 20 percent of its income on housing payments, according to the 2004 State of Housing report published by the Joint Center for Housing Studies at Harvard University. It is the first payment that should be made when you are faced with a drop of income. If you cannot make that payment -- reach out to your support team.

Other options include:

Moving out temporarily (leaving furniture in place) and rent your home out as furnished for a short-term rental. The good thing about furnished rentals is that you can charge a lot more than the going rate. Add on to the fact that it's a short term and you can charge a bit more. Check with a local real estate company that has a corporate or relocation division. They are regularly looking for temporary housing for corporate clients moving in to your area or who need a place to stay while on assignment.

Scale down into a smaller, less expensive home and rent out your house for a year. Go ahead and take the plunge, pack up and move into a smaller dwelling or in with family/friends while you're getting back on your feet. Check with your local housing services, churches, synagogues, mosques, etc., for community support.

Sell. If you're in a robust market, it may be time to sell and take your equity to purchase another home outright with cash. Or -- find the temporary housing as described above and use the equity to live on until you can get back on your feet.
There are plenty of resources available to those who have hit the downside in life. Remember -- most likely, this is a temporary situation. Don't let pride and denial stand in the way of making the hard, but wise decisions.

Thursday, November 11, 2004

International Property Option For Anti-Bush Buyers

If you’re still aching over the Bush presidential victory – all is not lost. There’s plenty of property north of the USA to look at in case you’re considering leaving the country for the next four years.

I was quite humored to hear that Canada’s Immigration web site received an extra 100,000 visitors right after the 2004 presidential election. To think that people would consider leaving a country (one with as many freedoms we have) because their candidate lost is beyond me – but here’s a little research in case they really want to emigrate. (It looks like our northern neighbors are losing quite a few citizens with the Montreal Expos relocation to Washington, D.C., so maybe we can have a citizen exchange to keep relations on a good footing, eh?)

First of all, as with all real estate purchases – you want a really good Realtor to get you started. Fortunately, the American-based National Association of Realtors has several Canadian branches, which means they have Canadian properties on their monstrous web site, Realtor.com, from which to search. Just select a state ON, BC, etc. and then fill in a city and you’ll be on your way.

In Toronto, it looks like their 1 and 2 bedroom condos range in the C$105,000 arena. Fortunately, their economy is such that US$100,000 will convert to about C$115,000. So you actually walk in with more money in your pocket because of the strength of the US dollar over its Canadian counterpart.

Keep in mind, that if you want to benefit from the robust real estate appreciation in this country by holding on to your American property while seeking out citizenship in the Maple Leaf country, you’re going to get hit with some taxes that U.S. citizens don’t pay.

CanadianLawSite.com (a, well, Canadian law site) reports this insightful information to its citizens who own vacation property:

“If, as a Canadian owner, you rent out your U.S. vacation home, the rental income you receive is subject to a flat 30 percent tax in the U.S. before any deductions for expenses incurred in earning this income. As the tenant must withhold and remit this tax to the IRS, the Canadian landlord does not have to file a U.S. personal income tax return for that year, provided the taxes are remitted.”

In addition, the rental expenses also come with ties to the American government even after you jump the border.:

“To benefit from the deductions for your rental property expenses, you must elect to be taxed within the U.S. on a net basis. Before making this election, you should be aware that you must rent the property for a minimum length of 15 days per year, or the deductions will not be allowed. Even if you meet the 15-day requirement, there are other rules that further limit the amount of expenses considered deductible.

“Having made this election, you will be required to file a U.S. return annually. This election remains in force for subsequent years and can only be revoked with the consent of the IRS. When you file, your rental income will be subject to the graduated tax rates applicable to a U.S. resident on the taxable income realized from a rental activity.”

So if you’re seeking to run from Bush during the next 4 years, it’s going to cost you (at least in the arena of real estate) unless you completely divest of all your holdings. Fortunately, real estate prices in Canada and their appreciation rates are moving up pretty well this year. Average prices and appreciation rates are as follows, according to the Wall Street Journal’s Real Estate Journal:

St. John, New Brunswick – C$114,000 (17 percent)
Manitoba – C$111,000 (15.6 percent)
Vancouver - C$363,000 (14.9 percent)
Montreal - C$184,000 (14.2 percent)
Toronto – C$307,000 (5.8 percent)

At these prices and with the political climate we’re facing the next four years, it looks like for American liberals, Canada homeownership might be the right place, at the right time, for the right price. Michael Moore – are you listening?

Your Home Is A Liability

I hate to share the news with you, but your house is a liability. This month, my house has cost me more than $2,000. On the other hand, it has grown in value, at about a rate of 1.5 percent this month – that would be roughly $2,000 as well – but it’s still a liability. Let me explain.

Real estate has created a lot of wealth in this country; however, during the last refinancing boom – Americans mortgaged a large portion of that wealth because they wanted access to the equity NOW. The mortgage companies have done a great marketing job on the American public, and assisted them in lowering payments and dropping the cost of debt. However, Americans are still in debt at record levels and we still haven’t learned to save. Many of us have been relying on the growth in the value of our homes to create wealth. If that’s your only savings plan, you’re in for a big, ugly surprise. More on that in a moment.

This “investment” that we live in, is actually a liability. I just paid my mortgage payment; repair bill for some drywall work; fixed the sink and leaking toilet; paid the water and trash pickup bills; and sitting in front me are the phone and electricity bills. By the end of the month, I’ll put out $2,523 – just so I can sleep here, clean up the yard, wash the windows, winterize the doors and windows and shout at my teenagers under a non-leaking, warm dwelling.

Does this expense mean I should move out and stop the madness? Not at all. To rent in this same house in my marketplace, would cost me about $400 more per month (which is the going rental rate for my house.) And therein lies the difference between my house being a liability versus an asset. While it has value, it’s not creating income for me. It’s creating wealth, but the only way I can gain access to it is to go deeper into debt or sell it (something none of my kids or wife would agree to right now…but give me one bad weekend and it may be RV land for all of us.)

There are two houses around the corner on the market for rent. The owners of those properties have income-producing assets, in addition to the wealth being created via appreciation at nearly 20 percent per year over the past two years. (The national average stands at 7.7 percent appreciation, according to the National Association of Realtors.)

On top of that, the mortgage expense of the property, hopefully, is being covered by the rental payments, and thus, the owner doesn’t even have the monthly mortgage payment to contend with. And since the renter will pay for garbage, lawn maintenance and all utilities, the owner needs to be concerned only with breakdowns of appliances, hot water heater, a/c and other functions of the house. A rental property is truly an investment and money-making asset.

Now, back to the savings. Your home, in a liberal sense, could be considered a forced savings account. In my marketplace, Washington, DC, it’s definitely making money for everyone. However, some markets are still headed downward and you must determine what role the value of your home plays in your overall financial plan.

It cannot be denied that if the house is growing in value, it can create some wealth for future use. However, the reality remains that we as a country are not saving enough.
A recent AARP study found that less than half of baby boomers save for retirement regularly. According to the 2002 Retirement Confidence Survey, 44 percent of retirees age 60 and older have saved $75,000 or less for their retirement and 11 percent have saved nothing.

Your home should not be used as the substitute retirement plan. Practice the GOOD principle (Get Out Of Debt) and then use your payments to your creditors as investments in your future.

Friday, November 05, 2004

Real Estate Investment Clubs Provide Good Training Ground

If you’re nervous about taking that real estate investment plunge on your own, you may want to consider finding a team of experienced investors you can learn from in your area. Real estate investment clubs are located all over the country. I’ve listed some web sites below where you can look up clubs in your area, but first let me provide you with a couple of safeguards about how you should approach a club.

1 – Make sure the people attending the investment club are actually investors. Sometimes you can attend a club where everyone attending, except for a few people, are all wannabes. I belonged to a writer’s club like this once. It was exciting for about two meetings. That’s about how long it took me to realize I was the most experience writer there. I needed a club of strictly published authors and writers to learn from. Instead, each meeting would end with people surrounding me asking how to sell articles, columns and books. You want a club full of bona fide investors who hold property and are always on the search for new investment opportunities.

2 – Investigate whether the club is there to inform on investing, or inform on books and tapes about investing. Some clubs are nothing more than a forum for the organizer to sell his or her programs for hundreds of dollars a pop. You only get a taste of investing tips, not the real deal.

3 – Watch out for sharks. It’s sad to admit, but there are some “investors” in our community who believe they should never have to use their own money to get into a transaction. Instead, they prey on those who are excited and na├»ve about the real estate investment process, but who may have some cash set aside to begin investing.

The line goes something like this: “I’ll find the deal, we’ll use your investment cash, then we’ll split the proceeds 50/50. Besides, you wouldn’t find the deal without me and I’m going to guide you through the process.” The challenge with this scenario is that you lose half the profit from the rental income, as well. It’s not a relationship I would always be against; however, there are plenty of experienced investors who would be willing to share their expertise with you without taking part of your first transaction.

There are just too many potential problems with this type of relationship. More can go wrong than right:

Your new investor friend could have credit problems and could be using your credit to buy properties
Being half owner and the “more experienced” investor, he or she could force you to sell property too soon or too late, causing you to lose potential profit
You lose control of the decision-making process.
By being party to the transaction, the investor is now tied to the profit of the investment and may not be as objective in the decision-making process.

4 - Before partnering with anyone, investigate them.
Are they licensed to practice real estate (though you don’t need a license, it’s good to know.)
If they’re licensed, have they had any complaints registered against them through the real estate commission.
Ask him or her for references from other investors. What you want to here is: “Ask anyone here about me.”

Just be careful in working with someone that you’ve never met before your first visit. Drop by the investment club several times before linking up with someone.

I had two Realtors in one of my training sessions - brand new to the business – who informed me they were going to be partners. When I inquired on how long they had known each other, they told me they had just met that week. I suggested they try working on their own to start and then determine if they wanted to partner up with someone who, quite frankly, they knew nothing about. A few weeks later, I saw one of them and asked how it was going…she informed me that she had no idea where her new partner was – it seemed he had dropped off the planet. Be careful. Be informed and have fun.

Here are a list of web sites with links to real estate club lists:

www.RealEstateLink.net (includes Canada)

As you’re researching, you may want to search at your favorite search engine for “real estate investment club” with your state attached. Not all clubs are listed in the lists above.