Monday, December 31, 2012

Banking on real estate to fuel your retirement

Be smart about where and how you invest
By Bernice Ross
Inman News®
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Editor's note: This is the first of a two-part series.
If you are searching for a way to build a nest egg for your retirement or to put aside enough money to send your kids to college, one of your best possible strategies is to invest in real estate and to hold that property for an extended period of time.
I once remember reading that 90 percent of the fortunes made in this country were based upon owning real estate. Given the market downturn over the last few years, many people took serious losses in the value of their real estate holdings. Nevertheless, real estate investment is still one of the soundest financial moves that you can make, provided you are smart about where and how you invest.
This is especially true now due to the low prices and the low interest rates. Moreover, property values generally keep pace with inflation. This also means that you are paying off today's purchase with tomorrow's inflated dollar.
The people who build major fortunes in real estate tend to be contrarians. They buy when others are selling and sell when others are buying. They also avoid flipping, because, as one investor put it, "Flipping is nothing more than a Ponzi scheme." Instead, they consistently build their real estate portfolio by buying and holding their investment properties.
While the value of your property may go up and down, very few properties ever go to zero value. This means that if you pay off your property in 15 years, you will have an asset that has cash value that also functions much like an annuity. Here's a real-life scenario to illustrate this point:
A buyer who wanted to establish additional cash flow for retirement purchased a duplex for $245,000. The buyer put 20 percent down. The property required minor repairs and ran about $700 per month negative. (Under normal circumstances, this property would have been about $100 per month negative if the client could have taken the depreciation and other allowable deductions. He was unable to do so due to the alternative minimum tax requirements.) The client elected a 15-year loan to pay off the property as quickly as possible. That was 16 years ago. Here is where he is today:
1. Despite the real estate downturn, the property is currently worth $550,000 (i.e., it has more than doubled in value over the last 15 years). Even though the property was under rent control, the owner was able to increase the rents sufficiently to break even after five years.
2. Current operating expenses are about $12,000 per year (this includes reserves for repairs, taxes, vacancies and other operating expenses).
3. Gross income (the amount earned prior to expenses) is currently $36,000 per year with net income at $24,000 per year.
4. To sum up, the property is now free and clear. The buyer has recuperated all of his down payment and has an asset worth $550,000 that spins off $24,000 per year in net income.
Compared to other investments, a CD at 2 percent would require an investment of $1.2 million to generate an income of $24,000 per year. A stock investment that yielded a 6 percent return of $24,000 per year would have required a $400,000 investment. In this case, the buyer's initial investment was only $49,000 plus closing costs.
The buyer is approaching retirement age and would like to maximize the cash he has tied up in his real estate investment. He could sell the property and pay the capital gains tax. A different alternative is to do a 1031 exchange for a single-family residence that he rents out for the first 12-24 months he owns the property. He can then move into the property and live in it as his primary residence. When he sells, he and his wife could take $500,000 of the money from the sale and pay capital gains only on the amount above $500,000.
What are the downsides? Tenants can be a nightmare, and a vacant or damaged property can quickly eat up cash reserves. Furthermore, like any other investment, real estate investments can go down in value. It is also unclear what the current tax consequences will be in terms of capital gains, dividends and alternative minimum tax requirements.
In spite of these issues, the 1031 exchange provisions are an important plus. Because owners can exchange up (i.e., buy a more expensive property), they can continue to grow their wealth more quickly because they are able to defer their taxes until they cash out. As a result, real estate may become an even more attractive vehicle for increasing wealth in the future as well as providing a powerful hedge against inflation.
The question is how can one find, buy and rent an investment property? See Part 2 of this series to learn more about the secrets of "Hold."

Saturday, December 29, 2012

The Foreclosure Report - November 2012

Top Story
California Foreclosure Inventory Continues to Decline
November 2012 California foreclosure inventory—the total of Preforeclosures, properties in foreclosure that are Scheduled for Sale, and Bank Owned properties (REO)—fell 7.6 percent from the prior month and is down 31.8 percent compared to last year. While the November decline in inventory is not an unusual event, the significant decline in foreclosure inventory over the past year has contributed to what some are calling an “inventory crisis” of total homes for sale.
The November foreclosure inventory shortage is partially due to the jump in California Foreclosure Cancellations. Cancellations were up 4.7 percent from the prior month, up 69.9 percent in the past two months and up 34.7 percent compared to last year. In taking a closer look at the reason for cancellations, it did not appear the majority were due to statutory time frames or filing errors, but were more likely due to short sales or successful loan modifications.
November 2012 California Notices of Default were down 19.9 percent from the prior month and down 51.5 percent compared to last year. November 2012 California Foreclosure Sales were down 14.8 percent from the prior month and down 30.3 percent compared to last year.

 

Thursday, December 27, 2012

Don't let conflicting inspections kill your sale

Neutral third party can help break the stalemate
By Dian Hymer
Inman News®
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Very little that has to do with buying and selling residential real estate is black and white. This is often evident when inspections are done. And inspections are a critical part of a home sale transaction.
Buyers usually make offers to buy a home contingent on inspecting the property to their satisfaction. An inspection contingency gives buyers the permission to inspect the property and can give the buyers the right to withdraw from the contract without penalty, depending on how the contract is written.
For this reason, and to help sellers make accurate disclosures about their property, sellers often choose to have presale inspection reports done before they put their home on the market. Minimally, they order a "wood-destroying pests and organisms" inspection (loosely referred to as a "termite" inspection) and a home inspection.
If the home inspection recommends having an old roof inspected by a roofing contractor, it's a good idea to follow through with this, and any other similar recommendation. Any presale inspections should be made available to buyers to review before they make an offer.
HOUSE HUNTING TIP: The reason for ordering presale inspections is not to preclude buyers from doing their own inspections. Buyers should inspect the property to their satisfaction. A well-inspected property protects both the buyers and sellers.
Some sellers wonder why they should pay for presale inspections when buyers are likely to pay for their own inspections. The reason is that it's beneficial for the buyers to have as much information about the property before they make an offer.
This results in an offer from educated buyers who are less likely to withdraw from the contract or renegotiate the price than they would be if they didn't have pertinent information about the property condition before they made the offer.
This doesn't mean that presale inspections guarantee that there will be no further negotiations after the purchase contract is signed.
Sellers rarely follow up on all the further inspections recommended by the home inspector. For example, in one case an Oakland, Calif., homeowner didn't have an older furnace inspected, as recommended by the home inspector.
After a purchase contract was signed, the buyers had a few inspectors look at the property, including a furnace inspector. The inspector said that the furnace was shot and should be replaced. The sellers then called in a different inspector to look at the furnace who said it was old but serviceable, and didn't need replacing.
To break the stalemate, the buyers and sellers agreed to have a representative from the local gas and electric company look at the furnace. If the heat exchanger in a gas furnace is cracked, it can leak noxious carbon monoxide fumes.
The utility company would shut the furnace down if the heat exchanger were cracked. However, the inspector agreed with the sellers' inspector and the buyers accepted the furnace in its "as is" condition.
Inspection findings can be somewhat subjective. For example, one termite inspector may say a window can be repaired, while the other says it needs to be replaced. One solution would be for the sellers to credit the repair cost to the buyers at closing. The buyers can decide whether to repair the window or use the credit as partial payment for a new one.
Conflicting reports may be an issue of price. Recently, the owner of a home that needed painting asked two painters to provide estimates for painting the interior. One bid was more than double the amount of the other. Often the difference in price has to do with the quality of the work.
THE CLOSING: Sellers needn't be obliged to provide the buyers with a "Cadillac" job. A quality job at a reasonable price should suffice.

Sunday, December 23, 2012

Glowing Snowflake

This easy-to-make snowflake fashioned from steel strips and mini lights is sure to dazzle. Hang it in a high-visibility spot such as a front porch for maximum impact.



 Glowing snowflake on front porch


Step 1: Arrange the steel strips in a snowflake pattern as shown above.

Step 2: Connect the three strips together in the middle using a bolt, washer, lock, and nut. 

Step 3: Wrap with a string of clear mini lights -- poking bulbs through the holes in the steel strips -- then hang.

Wednesday, December 19, 2012

How To Make a Tiered Serving Tray

Turn a few clay pots and saucers into something special. This tiered stand is inexpensive and easy-to-make. Use it to serve cupcakes, drinks, or quick finger foods.
 

Clay stacked serving tray on patio


Step 1: Wrap twine around pot just under the lip of the pot. Tie on a knot. Continue wrapping twine around pot until desired thickness is achieved. Tie end in a knot and cut off excess. Repeat on second pot.

Step 2: Spread glue across the bottom of one pot. Glue pot to center of 10” saucer. Make sure the pot is centered.

Step 3: Spread glue around the rim of the first pot and attach 8” saucer. Make sure saucer is centered.

Step 4: Spread glue across the bottom of second pot. Glue pot to center of 8” saucer. Make sure pot is centered.

Step 5: Spread glue around the rim of the second pot and attach 6” saucer. Make sure saucer is centered.

Step 6: Glue the bottom of finial to the center of the 6” saucer. Make sure finial is centered.

Step 7: Allow entire piece to dry until set, two hours or more.

Monday, December 17, 2012

The Foreclosure Report - October 2012

Top Story
Dramatic Increase in California
Foreclosure Cancellations
October 2012 California foreclosure Cancellations were up 62.1 percent from the prior month, and 36.7 percent compared to last year. While this is not the first time Cancellations have spiked, this is the largest one-month increase since we started tracking foreclosures in September 2006. It seems likely that the increase is being driven by the Homeowner Bill of Rights legislation that goes into effect on January 1, 2013 and its provision to restrict the dual-tracking of foreclosures. Dual-tracking is the term applied to loans which are being considered for either a short sale or loan modification while simultaneously proceeding through the foreclosure process. Prior to January 1, lenders will have to cancel any foreclosure on a loan for which a short sale or loan modification is being considered, and it appears that process has likely already begun.

October 2012 California Notice of Defaults was down 8.0 percent from the prior month, and down 48.9 percent compared to last year. October 2012 California Foreclosure Sales were up 9.3 percent from the prior month, but down 38.9 percent from the prior year.

 

Thursday, December 13, 2012

Floating Wall Shelf

This do-it-your-shelf project features helpful storage and an eye-catching design.

Yellow_Floating_Shelf  Floating_Shelf_Detail
This high-function, high-style shelf sports a vibrant yellow color and a sliding door painted in the black-and-white pattern of a bar code. To make your own, follow these steps:

Step 1: Machine the case parts

From a 21/32"x11-1/4"x8' primed MDF board, crosscut the top and bottom (A) 1/2" longer than listed and then rip the parts to finished width (Cutting List, Project Diagram). Crosscut the remaining board 1/2" longer than listed for the back (B) and then rip the back to width. From the remaining piece, cut the sides (D) to length and 1/16" wider than listed. Cut the divider (C)to finished size.
GOOD TO KNOW: To make it easier to transport and to save time in the shop, ask a Lowe’s associate to crosscut the primed MDF board into the three oversize pieces for the top and bottom (A) and back (B).
For a square cabinet with tight joints, the top and bottom (A) and the back (B) must be exactly the same length. Here’s how to ensure the best results. Adhere the over-length pieces for the top, bottom, and back face to face with small pieces of double-faced carpet tape. Keep the ends and one edge of each piece flush. Use a table saw to shave a thin slice off one end of the stack and then trim the other end to finished length. Separate the boards.

To cut grooves in the top (A) for the sliding doors (E), adjust the blade of your table saw to cut 7/16" deep. Position the rip fence 3/8" from the blade and cut a groove. Moving the rip fence away from the blade in small increments, make additional passes to widen the groove until the plywood for the doors slides easily in the groove. To accommodate paint on the case and the doors, the fit should be fairly loose. Reposition the rip fence 1" from the blade and cut a groove for the second door. Repeat to cut door grooves in the bottom (A), this time increasing the depth of the groove to 3/16". Sand the bottoms of the grooves flat.
GOOD TO KNOW: Instead of measuring for the second set of grooves on the bottom, place the top over the saw blade while it’s off and press it against the sides of the saw teeth while sliding the fence into position.
From a 1/4"x2'x2' piece of birch plywood, cut the doors (E) to size. To make inserting the doors in the grooves easy, sand along the top inside edge of each door. From a 1/4"x1/4"x36" square dowel, cut the handles (F) to length.

Step 2: Assemble the case

From MDF scrap, cut four 3/8"x2" spacers. Apply glue to one edge of the back (B). Place the back on the spacers on a flat surface. Clamp the top (A) to the back, keeping the ends flush.(The spacers create a 3/8" recess at the back of the case for the hanging hardware.)Let the glue dry.
Apply glue to one end and one edge of the divider (C), and clamp it, centered, to the top and back. Make sure the divider is square to the back. Let the glue dry.

Apply glue to the edges of the back and divider, and once again place the back on the spacers and clamp the bottom (A) to the assembly with the ends of the back and bottom flush.

Cut 1"x10" shims from tablet-back cardboard. Apply glue to the ends of the top, bottom, and back, and place the assembly on the shims on a flat surface. Clamp the ends (D) to the assembly with the front edges of the top, bottom, and ends flush. (Because the top/bottom/back/divider assembly rests on the shims, the upper and lower edges of the ends protrude beyond the outside surfaces of the top and bottom.) When the glue is dry, use a sanding block and sandpaper to sand the edges of the ends perfectly flush with the top and bottom. Sand the front edges of the top, bottom, and sides flush and smooth. Sand slight bevels on all edges and corners.

Finish-sand the doors (E) and handles (F). Glue and clamp the handles to the doors. Note: If you will be painting the doors with the optional bar code pattern, do not glue the handles to the doors at this time.

Step 3: Paint the cabinet

Paint the case, inside and out, lightly sanding between coats with fine sandpaper. (We used Valspar Signature Colors interior semigloss paint in Gold Tone #CI 3001-1C color.)
GOOD TO KNOW: Because the cut edges of the MDF soak up more paint than the primed faces, you’ll get uneven coverage. To avoid this, seal the edges by brushing on “glue sizing,” a one-to-one mixture of wood glue and water. When the sizing is dry, sand it smooth and then apply paint.

Step 4: Paint the doors

Apply three coats of white semigloss spray paint to both sides and all edges of the doors and all but the back surfaces of the handles, sanding lightly between coats with fine sandpaper.

To replicate our bar code-inspired pattern on the doors (E), cover the outside face of each door with painter’s tape. Then use a crafts knife and a steel ruler to cut through the tape and create a stripe pattern. For the barcode effect, cut a variety of widths. To “hide” the white handles in the barcode pattern, make sure there is a 1/4"-wide white stripe 1" from the opposing ends of each door. Also, paint the handles white except for the bottom surface, which you’ll glue later.

Carefully peel back alternating tape strips. Burnish the edges of the remaining tape strips, pressing them tightly to the panels to prevent successive coats of paint from bleeding under them. To seal the edges of the strips and create super-crisp edges, spray on another coat of the white paint.

After drying for 24 hours, give the outside faces of the doors two coats of black spray paint. With the paint dry to the touch, remove the remaining tape. Let the doors dry for 24 hours.

Arrange the doors on your workbench with the top edges away from you and the 1/4" white stripes for the handles (F) at the left- and right-hand edges. Apply glue to the backs of the handles, and clamp them to the doors within the 1/4"-wide white strips and with the bottom ends 3/8" from the bottom edges of the doors. Wipe away any excess glue with a damp cloth.

Step 5: Hang the cabinet and install the doors

Drill pilot holes and screw the Hangman Anchor System case member to the back (B), centered with the top edge of the case member 1-1/4" from the bottom edge of the top ,(A). Drill pilot holes and screw the Hangman wall member to the wall, using the bubble level accompanying the hardware to ensure it’s horizontal. Drive at least one screw (preferably two) into a wall stud and use drywall anchors for the remaining screws. Hang the cabinet on the wall, interlocking the Hangman case and wall members.

Install the inner door with the handle next to the side by inserting the top of the door into the rear deep upper groove and then dropping it down into the shallow rear lower groove. Repeat with the outer door in the front groove.

Tuesday, December 11, 2012

Where Are Rents Headed?

When deciding whether or not to buy a home, one consideration will be the cost of alternative housing options. Renting an apartment is one such alternative. Where are rental prices heading over the next few years?

Rental prices usually increase by about 3 percent annually. Trulia just released their Trulia Rent Monitor where they revealed that rental prices have increased dramatically in the last year.
“Nationally, rent gains continued to outpace home price increases in October, rising by 5.1 percent.”
Based on the concept of supply and demand, we believe rental prices will continue to substantially increase over the next few years. The long-run 30-year average increase in multifamily rental households is 200,000 each year. Over the next few years, those numbers will more than double to over 500,000 each year. Freddie Mac in their latest report, Multifamily Research Perspectives, projects housing demand going forward.
“Given assumptions consistent with economic growth slightly slower than long run averages, multifamily demand is likely to be in the range of 1.7 million net new renter households between now and 2015.”
The cost of owning a home will begin to increase as both prices and mortgage rates are expected to inch up in 2013. Perhaps now is the perfect time to lock in your long term housing expense by purchasing your own home.

Sunday, December 9, 2012

Embellish a Plain Dresser with Paint

Embellish a Plain Dresser with Paint

Give a nursery or kid’s room a fun burst of color. Update a boring dresser by covering the drawer fronts with paint and kid-approved stencils.



 Kids’ bedroom dresser makeover


Step 1: Sand the drawer fronts with 220-grit sandpaper and then wipe off with a clean cloth. Apply primer to drawer fronts using a cabinet and door foam roller. Be sure to prime the edges of the drawer front. Allow the drawer fronts to dry for two hours.

Step 2: Paint drawer fronts and edges in Kiwi Splash using a foam roller. Follow the label’s instructions for allowing the paint to dry completely. Apply a second coat of paint, let dry. Make sure to cover the sides as well as the fronts. Apply additional layers as needed to reach your desired color. Allow the final coat to dry overnight. Tip: Speed up the drying process by directing a fan at the drawers.

Step 3: Download the animal and number patterns. Enlarge the patterns to approximately 5” tall. Take the patterns to a local copy or office supply store to have them laminated.
 Download Number and Animal Patterns

Step 4: Use a utility knife or crafts knife to cut out laminated patterns to create stencils. Be sure to place a layer of protection over your cutting surface, such as a stack of newspapers or a cutting mat. 

Step 5: Stand the drawers on their backs so the fronts are facing up. Spray the back of a stencil with one coat of spray adhesive. (Follow the manufacturer instructions for a removable bond.) Choose a location and place stencil, sticky side down, on a drawer front. 

To fill in the stencil, dip the paintbrush in a small amount of white paint. Apply paint by moving the brush up and down in a pouncing motion. Add additional layers of paint until the shape reaches your desired color. Allow each coat to dry completely before applying the next layer. Repeat with additional stencils. Use this same technique for drawer fronts two and three.
Good to Know: Apply multiple stencils at once so you can fill in a different stencil while waiting for another to dry.
Step 6: Once the painted drawer fronts have completely dried, seal them with a clear satin poly-acrylic spray sealer.

Friday, December 7, 2012

DIY Paint Can Lights

DIY Paint Can Lights

Decorative paint containers plus candles equal a beautifully in-can-descent effect.



 
Paint Can Lights


INSTRUCTIONS:



Step 1: For a paper pattern like the one shown, first draw a 13-1/4"x4" rectangle on a piece of legal- or tabloid-size paper; then draw three lines to divide it into four equal sections 3-5/16" wide. Draw an “X” between the corners of each section. Lay a ruler on both diagonals of each “X”, and mark the lines every 3/8" from the center to the corners.

Step 2: Cut the 13-1/4"x4" pattern to size. Using transparent tape, fasten the pattern snugly on the can. Now rest the can in a shoebox with one end removed to collect the metal fragments as you drill. This also lets you hold the lantern with one hand to steady it.
GOOD TO KNOW: If you plan to craft several lanterns, make photocopies of your finished pattern. You can even scan it to save as a computer image file and print as many patterns as you need.
Step 3: Wearing safety goggles, drill the pattern into the can using a 3/8" drill bit. (Adjust drill bit size to suit your taste.) This can be tiring and is best done half a lantern at a time. 

Step 4: To paint the lanterns, prime with the spray primer, then apply a base coat in the colors shown with a small flat 2" paintbrush. Re-coat if necessary and allow to dry overnight or at least 4–6 hours before using. 

Step 5: Place a glass votive candle or tea light inside the can -- and let it shine!

Thursday, December 6, 2012

Understanding Withholdings on Real Estate Sales

When did withholding start for California residents?
The withholding law applies to dispositions of California real estate by both residents and non-residents which close on and after January 1, 2003. Previously, withholding was only required of non-resident sellers.
 
Why was this withholding law enacted?
As part of attempting to balance the state budget, this withholding provision was added to legislation on the last day of the Legislative session in 2002.  It was estimated to accelerate collection of $285 million in additional state revenue.
 
Who is responsible for withholding?
The law requires the buyer (called the transferee) to withhold from what would otherwise be paid to the seller.
 
What unit at the Franchise Tax Board handles the withholding?
The Withholding Services and Compliance Section handles the withholding.  The phone number is (888) 792-4900.
 
You may check the Franchise Tax Board website both to see how the process currently works and for any updates.  The Franchise Tax Board website currently has guidelines which include over 100 questions and answers.  See FTB Pub. 1016.
 
How much is the withholding?
The withholding is 3 1/3% of the gross sale price.  It does not take into account costs of the sale such as real estate commissions or other settlement costs. Withholding is currently due by the 20th day of the calendar month following the date title is transferred or may be remitted on a monthly basis in combination with other transactions closed during that month.  California Forms 593 and 593B are used to report and a remit copy must be provided to the seller to attach to their tax return.
 
What exemptions apply?
If you are an individual selling property, the buyer will not have to withhold from your proceeds if the sale price is less than $100,000, or you are selling your principal residence or if you are selling at a loss.  Other exemptions are for tax deferred exchanges and involuntary conversions of property.
 
Does the seller have to do anything to qualify for exemptions?
Yes.  The seller will be required to sign a statement under penalty of perjury to establish eligibility for the exemption.
 
Can the seller apply to the Franchise Tax Board for an exemption?
The law allows applications for reduced withholding and waivers but not by individuals, only by corporations and other entities.
 
What happens if there are several sellers on title?
If the total purchase price exceeds $100,000.00, withholding rules apply.  To determine the amount of withholding, each owner is considered separately and the withholding is calculated on each owner's pro-rata share of sales proceeds. It is possible for the transaction to be exempt for one seller but not for the other part owners.
 
How do I know if the property qualifies as my principal residence?
The rules incorporate Internal Revenue Code Section 121 to determine whether the property qualifies as a principal residence.  There are two separate exemptions under California law which relate to the use and ownership tests under Section 121.  Generally, the seller will either have had to have owned and lived in the property for two of the previous five years or the last use will have to have been as the seller's principal residence.  Note that the two year period may be made up of different blocks of time which add up to two years over the five year period.  A seller who lived in the property for one year, then rented it out for a period of time followed by another year of residency in the property would qualify for the exemption.
 
What is the role of the escrow holder regarding withholding?
The law requires the escrow holder to provide a notice of the requirements.  The escrow holder cannot make a legal determination as to whether any exemption applies.
 
Will the escrow agent do the withholding of the seller's money on behalf of the buyer?
The escrow agent may withhold and remit to the Franchise Tax Board if the parties agree.  The fee for this service may not exceed $45.00.
 
How will a seller get the withholding returned?
The only way to recover the withholding is by filing a California State Income Tax Return for the year in which the sale occurred.  The seller will be entitled to a refund in the amount that the withholding exceeds the amount of capital gains tax due by reason of the sale.
 
Does it matter if the seller lost money on other real estate or non-real estate transactions?
No.  Each transaction is considered separately.
 
What happens if the property is held in trust?
If the trust is revocable, then the rules apply as if the seller was the individual who has the power to revoke the trust.  If the trust is irrevocable then the trust itself is treated as the seller and withholding may be required if there are no exceptions.
 
What type of real estate is covered by the law?
All real estate interests are covered unless one of the exemptions applies.  This means the sale of fee title or easements or other interests may be subject to withholding.

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