Jeff Haywood, CPA

Posts Tagged ‘Home’

Ideas: How Young People Can Become Entrepreneurs and Find a Home

August 18th, 2011 | Author: admin

How Young People Can Become Entrepreneurs and Find a Home

I wish I had started purchasing properties that were or would become income producing when I first moved out of my parents home. I had no idea it was even an option rather than renting so I want to let kids and parents know it can be done. I know of several young people who bought properties instead of renting. Yes, most of them had to have some help from their parents but it was a great learning opportunity for them and an opportunity for the parents to help their children learn about business and real estate.

Let me give you two examples. First, my nephew bought a one bedroom condominium with some assistance from his parents and the generosity of the requirements for an FHA loan. It was several years ago and it was a challenge to get an FHA loan on a “condo” but he got it done. In my last post I noted that you can rent a one bedroom apartment in McKinney Texas for about $800 a month. My nephew bought a “condo” instead, also in North Dallas, and got a monthly payment at less than half that amount. Of course he is responsible for the maintenance and repairs but with the lower monthly payment that need not be an issue. He has been in that “condo” for several years now but could turn it into an income producing property by renting it and getting a positive cash flow.

I like this second example even better. A friend after college bought a three bedroom “condo” and rented the other two bedrooms to friends and covered his monthly payments. How do you like that idea? Ideally you save up the money to put down, perhaps while living with your parents, and you purchase the property and rent the other bedrooms to your friends to at least cover your monthly payments. Your friends may find this more attractive than paying $800 a month in rent for their own one bedroom apartment.

If you do not qualify to buy the property you probably should wait until can save enough and establish your own credit so as to qualify. Another option would be for your parents to co-sign on the property for you with an agreement that you will refinance the property to get them off the note within a few years. I am not a mortgage expert but I assume this can still be done. However, your parents and you together would have to qualify. When you do this and rent the other bedrooms to your friends you can learn how to buy and rent properties and run a business. It is great training for a young person. Of course eventually you will be ready to buy your own property to live in and raise a family but you will still have this “condo” as a rental property to give you another stream of income.

Parents should be excited about this opportunity for their kids and the opportunity for their kids to learn about money and business. I know many families do this when their kids go away to college. Often the kids develop into entrepreneurs who become very successful.

If I had known I could get a lower monthly payment by purchasing a “condo” using 3% of my own money with an FHA loan I would have discussed with my parents staying with them for less than a year to save up that money and make the purchase happen. I would probably still own that “condo” and by now it would be paid for and I would be getting a great monthly cash-flow on it. If only I had known. Well now you can know and take advantage of it.

So I hope I have helped you to see that there are options to renting an apartment and actually ways to start building other streams of income.

In addition to your housing expenses if you purchase or rent a property you also need to count the cost of your other living expenses. See my previous blog about Are You Ready for Your First Apartment/House.

Remember I prepare tax returns for people for a living. When you buy your first property and rent out bedrooms to your friends your tax return gets complicated. In that situation you will likely want me or another tax professional to do your taxes for you. Also, please call before you start a business as I can help you avoid many surprises and save you money. In the case of buying a rental you will want to look at some ways to protect yourself from liability issues. I would be happy to talk to you about those issues and help you with your tax returns. Feel free to contact me using the information below.

Jeff Haywood, CPA
972-439-1955
jeff.jhtaxes@gmail.com

I prepare the following types of tax returns:

Personal
Business
Estates
Trusts
Federal and State Returns

I especially enjoy discussions about you, your business, your dreams and goals.

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For recent US income tax content see the following links:

IRS Top Ten: Facts about Amending Your Tax Return
Are You Ready To Get Your First Apartment/Home?
How to Succeed in Business: Pricing
Credit for Education Expenses: American Opportunity Credit – Extended Through 2012
How to Prepare Before a Disaster Strikes
IRS: Summer Day Camp Expenses May Qualify for a Tax Credit
IRS Tax Tips for Students Starting a Summer Job
IRS Tax Tips for Deducting Charitable Contributions
Tax Planning Tips
Tax Tips – Tip Income
Stratospheric Success
Are You Ready to Purchase a Home? Factors to Consider.
Foreign Earned Income Exclusion
A Most Valuable Resource for Entrepreneurs
How to Profit From Your CPA
Begin With The End In Mind
If the band you are in starts playing different tunes
Where Is It? Tax Refund
Deadline for 2010 Personal Tax Returns Moved
Now is the time to file those late tax returns for previous years
IRS: 8 Things to Know if You Receive an IRS Notice
IRS: Nine Fact on Filing an Amended Return
IRS: Eight Facts on Penalties
IRS Top Ten: Making Federal Tax Payments
Forming a New Business – Please Consult With Your CPA First
Questions After I Have Filed My Return

For a full list of prior posts see the CPA Tax Blog.

Standard Disclaimer:

As always keep in mind that the content provided on this site is general in nature and may or may not apply to your particular case. It is best to check with a tax professional about your circumstances and what is best for you personally. Also, IRS regulations and tax laws are constantly changing and the information on this site is not constantly updated. Again please check with me about your particular circumstances and what will be best in your situation at the given time and law.

Comments:

If you have a comment to share about this post or for me, please email me at jeff.jhtaxes@gmail.com.

This article was written by Jeff Haywood, CPA.
Jeff is a licensed CPA in both Texas and Illinois.
He has prepared income tax returns for the public for over 10 years.
He also has an MBA in Finance from Loyola University in Chicago and he has 24 years experience in Corporate Finance and Business Analysis.

Posted in Business, Income Taxes, Life | Tags: CPA, Entrepreneurs, Home, Kids, Rental Property, Taxes | 1 Comment »

Are You Ready To Buy A Home? Factors to Consider.

June 17th, 2011 | Author: admin

According to news stories many people in the U.S. are letting their homes go back to their lenders. As a result their credit has been seriously damaged and home values have fallen and may continue to fall. So you are thinking about buying a home and you do not want to get hurt by purchasing a home before you are ready. Are you financially and emotionally ready to purchase a home and take on the responsibilities that come with it? Here are some factors to consider.

Buy a Home?

In the late spring and summer before school starts are the prime months for home buying but are you ready to buy a home? Is it a good idea to buy a home? I have owned a few and I can help you to have in mind the points to consider before deciding if you should buy a home. It is important to consider all aspects because those who want to sell you a home or the related services do not mention everything you need to consider. They will typically mention how you can gain equity in a home, you will get tax breaks but not as much as they would lead you to believe, and sometimes they claim you will actually spend less buying a home. What is the truth and what else do you need to consider?

Emotions:

Most often emotion is the primary factor in deciding to purchase a home. In fact people who sell homes and the related services try to get you emotionally in the decision to purchase a home. However, for some emotions are also a primary reason for not buying a home. How do you feel about the “American Dream” of owning your own home? How do you feel about the responsibility of taking care or your own home and its costs? As you drive around looking at homes notice how many people neglect their homes and or yards. You do not want to be like that so you need to consider how you feel about the responsibility. Obviously many do not want that responsibility because as you can see they neglect their home.

Costs:

How much will it cost you to own your own home? Even Jesus recommended that you “count the cost.” Now those in the business selling homes may want you to look at just the monthly cost you will have in the form of interest and principal in your mortgage payment. While you want to consider those costs there are many more costs to consider. First of all, you need to consider your monthly cost for your real estate taxes and insurance on your home. In Texas many home buyers have been shocked in about the second year of owning a new home. How does that happen? When they bought the home the realtor and mortgage person figured their monthly payment including taxes and insurance based on the prior years real estate tax on that property. Unfortunately the prior year it was just a piece of land with no home. Surprise comes when the taxes go up based not on a $20,000 to $30,000 piece of land but now on that land plus a $200,000 to $300,000 home. If your budget was tight with the payment they calculated for you now you may have a monthly payment you can not afford. This is why it is good to have a CPA you can discuss these huge decisions with.

We have not finished with the costs yet but we need to discuss who does not have your best interest at heart. Those who make money on selling you a house do not usually help you consider everything involved with buying a home. In fact the real estate and mortgage industries have become widely considered to be dirty in the U.S. The so called professionals in those industries were major contributors to the housing bubble and subsequent economic collapse in the U.S. and the world. Those in this industry now are viewed in the same category as used car salesmen or just car salesmen, lawyers, and politicians. Not every professional is dirty but the profession now has a horrible reputation. You should be fully informed and prepared to own the home you are buying. Clearly in the last several years many were not.

So you need to know how much your home will cost you monthly. That includes principal and interest, taxes and insurance right? Not so fast. What about home owners association dues? Additionally, the most overlooked cost is maintenance. So what does it cost to maintain a home? To illustrate this and the point about your best interests notice these points from a realtor, Coldwell Banker:

Many people don’t think about short-term maintenance costs when buying a home, but they should. Whether buying an older home or a newly constructed home, major home systems like furnaces or hot water heaters can break down in the months following a home’s purchase. And typically, this kind of equipment can be costly to repair.

Often a home’s purchase price can be helpful in projecting maintenance costs. The recommendations for annual maintenance costs range from 1.5 to 4 percent of the home’s original cost. While this is not always true, especially when the purchase price of a home is three-quarters of a million dollars or more, it is a good rule of thumb for the average home buyer.

So according to their website your maintenance can be $3,000 to $8,000 a year for a $200,000 home. That can add up to $666 a month to your cost. However, their website goes on to include the following about a home warranty plan, which I think is a great idea:

Since most home buyers are focused on covering their down payment and closing costs – not saving for future repairs – a home warranty can provide a good back-up plan.

Most home warranties cost between $300-$600 and will cover many major home systems and built-in appliances for one full year after close. A home warranty will pay to repair or replace a covered item, allowing the homeowner to fund a small deductible rather than carry the full cost of repairs. It’s an easy way to help ensure that unexpected ‘break downs’ don’t also break a family’s budget.

While I think this is a good idea I am appalled by what they are not saying. These maintenance costs are related to “major home systems and built-in appliances.” OK, but now when you go look at homes and you look at both new and used homes some realtors will point out that a used home is outdated. What does that mean? The style, paint, wallpaper, and sometimes layout of the structure is not the latest style that people are looking for. So in addition to keeping you home functioning it needs to be updated so when the time comes you can sell it and get your money out of it. So you could be looking at putting in new carpet or floors, painting, wallpaper, even changing the layout to keep your home up to date. In addition you at some point will need to replace the roof and or fence or in Texas have your foundation repaired. These things realtors often neglect to discuss with you and a mortgage person will almost never talk about. In the last 20 years or so they have just wanted you to get into a house and did not worry about if you could afford all the costs or were prepared to deal with these costs. You need to be prepared financially and emotionally to handle these cost over the time you will own the home.

Notice this helpful article about updating your home. The author explains ways to update your home so that you can get your money back.

Top 7 Ways to Radically Update Your Home (And Not Lose Money!!!)

While I appreciate the information about updating your home and how to do it and not lose your money, as a CPA I see something that needs to be clear to you the homeowner. You need to be able to cash-flow or finance these updates until you sell the property and get your money out of it. So you need to ask yourself can I afford it and do I have room in my budget for the down-payment, monthly principal and interest, insurance and taxes, utilities, lawn care, home owner’s association fees, a home warranty, and set aside money monthly for updating your home? If you buy a new home you will probably want to set aside a little more for updates each year as the home ages.

Cost of Selling Your Home:

Finally, you need to consider what your cost will be to sell the house. This often surprises many first time homebuyers because the realtor and mortgage person are not anxious to talk it when you are considering purchasing the house. Typically, you as the seller will pay not only your closing costs from a legal/title standpoint but also the commission for the realtors. In Texas the typical commission for the realtors is 6%. So think about that cost. If you purchase a house today for $200,000 and if you sell it in several years for $250,000 your commission cost at 6% would be $15,000. Now how have you done on the purchase of this house. Instead of a $50,000 profit you subtract the commissions, other closing costs, your maintenance expenses and the cost of upgrades and what do you have left? That is not even considering what you paid in interest and taxes over the years. So before making the biggest purchase of your life give it some serious consideration.

Tax Benefits – Not As Much As They Lead You to Believe:

Yes, you can get a break on your taxes by deducting your mortgage interest and real estate taxes for your home. How much of a break? Many would answer that question simply as the amount of your mortgage interest plus real estate taxes times your tax rate. So if you had $15,000 in mortgage interest and real estate taxes and your tax rate is 20% you could save $3,000 in taxes? Actually your itemized deductions may be even more because you can also deduct other expenses, the most common being charitable contributions. So in this example if you also have $2,000 in charitable contributions then you would save $3,400 in taxes in theory. Your itemized deductions would entitle you that pay that much less in tax compared to no deductions. However, the real comparison is what you save using itemized deductions versus the standard deduction. For example the standard deduction for a married couple under 65 years of age in 2010 was $11,400. So if your mortgage interest, real estate taxes and charitable contributions total $17,000 then your tax savings resulting from purchasing your home was only $1,200 rather than $3,400 ($5,600 difference in itemized deductions over standard deduction times a 20% tax rate). The point is the savings on your taxes is not as much as what most advisers claim.

Clients often ask me about deducting their cost of repairs and upgrades or additions to their homes. The IRS does not provide a deduction for these costs in the year you incur them. You do get to deduct these costs when you sell your home to reduce your capital gains. However, you currently do not pay any capital gains on your homestead unless they exceed $500,000 for a married couple. So typically there is no tax benefit from those expenses.

Decision:

Once you have a handle on the costs over the years you will own the home and your tax savings and what you think will happen to the value of the home by the time you are ready to sell it then you can compare buying a home with your other options. You can look at renting an apartment, a house, or condominium or townhouse. What will be the best decision will depend on you, your circumstances, and the area you live in. The lessons learned about real estate the past few years have been hard lessons. Remember what happened and do your homework to make a good decision.

For some analyzing the possibility of purchasing a home is overwhelming. I would be glad to walk you through the financial part of the decision. Call me today and let’s talk it. Use my contact information below.