Investment

It’s about that time. It feels like you just clinked glasses to ring in the new year, and already it’s time to file your tax return. Congress passed the largest piece of tax reform legislation in more than three decades. The bill went into place on January 1, 2018, which means that it will affect the taxes of most taxpayers for the 2018 year (filing this spring). Here is a quick guide to some of the changes. While I try to provide you with accurate information, I do not pretend to be an accountant. Please contact your CPA for further information and advice.

Individual Tax Rates Drop
Tax rates have dropped across all brackets for individuals.

• The old brackets are: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
• The new brackets are: 10%, 12%, 22%, 24%, 32%, 35% and 37%

Standard Deduction Increases
No matter your filing status, the standard deduction increases in 2018. The new tax law nearly doubles the standard deduction amount.

• Single and Married Filing Separately: $12,000
• Married Filing Jointly: $24,000
• Head of Household: $18,000
• If over 65, additional $1,600 Single ($1,300 Married)
• If blind, additional $1,600 Single ($1,300 Married)

Personal Exemptions Eliminated
Under the tax reform, taxpayers can no longer claim the $4,050 personal exemption for each of their qualifying dependents.

Child Tax Credit Increase
The Child Tax Credit increases in value from $1,000 to $2,000. Income phase-out thresholds rise to $200,000 for Single filers ($400,000 for Married filers). The credit is refundable up to $1,400.
The tax reform also introduces a new non-refundable credit of $500 for non-child dependents.

State and Local Capped
Taxpayers can only deduct up to $10,000 in state and local income taxes. This includes real estate taxes, personal property taxes, and the alternative general sales tax (for taxpayers in states with no income tax).

Miscellaneous Itemized Deductions (subject to 2%) Eliminated
Another casualty of tax reform is the category for miscellaneous itemized deductions. This includes employer Unreimbursed Expenses, Investment Fees, Tax Preparation Fees, Safety Deposit box, etc.

Mortgage Interest Deduction Decreases
Individuals who purchase a home in 2018 can only deduct interest up to $750,000 in mortgage debt used to acquire a personal residence (previously $1,000,000). Interest deductions on home equity loans, not used for home improvements, are now eliminated.
Contracts entered into before 2018 will have the old limitations grandfathered in. That would be $1,100,000 of debt used for home acquisition and/or home improvement.

Entertainment Expenses No Longer Deductible
What was previously known as “Meals & Entertainment” is now just “Meals.” All entertainment expenses associated with sports games, golfing, and other ticket venues associated with entertaining clients are no longer deductible. Only the meal portion of your business meeting is a deductible.

Qualified Business Income Deduction
With the corporate rate dropping to 21%, the IRS had to make an offset for pass-through entities. Active Pass-through entities and sole proprietorship’s are now eligible for a 205 deduction on qualified income. Many rules and limitations exist for this deduction and should be determined case by case.

Alternative Minimum Tax (AMT) Less Invasive
Initially enacted to stop high income taxpayers from avoiding tax, AMT over the past couple decades had actually turned into a tax that was targeting the middle class and retirees. However, tax reform finally made permanent increases to income thresholds and standard deductions. That along with the reduction in preference items due to SALT caps, means a majority of taxpayers that were subject to AMT prior to 2018 will no longer be.

529 Plan Now Include K-12 Expenses
For 2018, qualified education expenses now include up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. Previously, qualified expenses only included post high school education costs.

ACA Individual Mandate Repealed for 2019
Beginning in January 1, 2019, individuals who choose to go without healthcare coverage for the year will not have to pay tax penalties.
C Corporation Tax Rates Drop to 21%
In order to be globally competitive on a corporate level, corporate rates have been adjusted for a flat 21% tax. Previously there was a graduated rate reaching a maximum of 35%.

Chris Ulrich – United Home Loans
NMLS #215735

What’s a cash out refinance? Quite simply, a cash out refinance is when you finance the equity you have in your home with a long term mortgage, not an equity line of credit. This is typically done by paying off your existing mortgage balance with a new loan that’s greater than the loan amount you are paying off and your proceeds are greater than $2,000.

With the Fed continuing to raise interest rates, short term loans like home equity lines of credit are directly affected and have become a less desirable option if you’re in need of some cash. The equity in your home is just sitting there, so a cash out refinance is a great way to put that equity to work. Whether you want to pay off some debt, help fund your child’s education, do some home renovations or consolidate your home equity line with your current mortgage, a cash out refinance might be a great option for you.

Let’s look the max loan-to-value (LTV) for a cash out refinance on conforming-conventional and government loans:

How It Works

Here’s an example of how a cash out refinance works for an owner occupied single family home. Let’s say you have a $200,000 loan balance and your home appraises out for $300,000. Since we can take the new loan to 85% of the value, we can pay off your existing $200,000 with a new $255,000 mortgage, giving you $55,000 in proceeds.

Consolidating Current First Mortgage and Home Equity Line

Let’s say you currently have a first mortgage as well as a home equity line of credit. You’ve probably noticed that your rate & payment has been going up on the equity line. Does it make sense to consolidate both loans, especially if you have a great interest rate on your current first mortgage? It depends on what the blended rate between both loans are versus what the new rate will be on the new consolidation loan. Most home equity line rates are structured around the Prime Rate. As Prime continues to rise, so does your blended rate. So even if your current first mortgage rate is lower than the rate on a new cash out refinance, it might still be worth consolidating to a new loan with a rate lower than your current blended rate.

I am happy to run scenarios for you and determine what options might be best for your specific scenario. Don’t hesitate to call or message me for a free consultation. My goal is to help you maximize your balance sheet but also find the right loan structure that fits your current and future goals.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

So you want to have work done to your house. Maybe you want a simple update, rehab your kitchen & bath, or maybe you want to put a full addition on the house. Where do you start and what program is best for you?

It starts with having to know a few things.

• Get a rough estimate in costs needed for the work (labor, materials, repairs, permits and architect/engineer if applicable). It’s a good idea to get a quote from a general contractor & architect up front.
• Speak to an agent to get an idea of what your home may be valued at once the work is completed.
• Know your current home loan balance.

Knowing the answers to these questions will help us determine your program options.

Construction Loans or Construction-to-Perm loans
These typically are used for big jobs, additions and knock down/rebuilds. These loans require a bit of equity and/or additional funds out of pocket. Construction loans may require 20%-30% equity in your future home value. For example, if you have a $300,000 loan on your home and the future value after construction is $500,000, a construction lender that will finance up to 80% means your total loan can’t exceed $400,000 (80% of $500,000). The construction loan will pay off your existing $300,000, leaving you $100,000 for the work to be completed. However, if the work costs $125,000, you will have to put the additional $25,000 into the project.

Construction loans are typically short term. They have higher than market interest rates and are typically variable rate loans. As your home is being built or renovated, the lender will pay the contractor directly after each interval or phase of the build is completed. This can require multiple inspections and title updates/fees.

Once the work is completed and/or you obtain a certificate of occupancy, you’ll want a permanent or fixed loan. This is usually done by refinancing yourself out of the construction loan and into a fixed rate mortgage.

If you don’t have that much equity in the home or the future appraised value (based on comparable home sales in the area prior to the build), you can expect to have quite a bit of skin in the game.

Cash Out loans
This is the easiest way to get financing but will require the most equity because the future value of the home is NOT taken into consideration. We will look at your current appraised value and can lend up to 80% of it. For example, your home is worth $300,000 but valued at $400,000. We can only lend to $320,000. So your existing loan gets paid off with the refinance and you are left with an additional $20,000 cash. This might be perfectly fine if you just want to do a small job, update your kitchen cabinets or a bathroom.

Unlike a construction loan, you are given the money directly. This is nice because if gives you the flexibility to do some work yourself and purchase items that normally wouldn’t be included in a construction quote i.e. furniture, home theater or the catering for your house warming party.

United Home Loans Mortgage Makeover & FHA 203k
These programs are perfect for those people that have very little equity in their home. It is very similar to a construction loan but caters to individuals that just don’t have the funds saved to do the work. You’ll still need a licensed contractor, a quote for labor, materials, repairs and permits, and the contractor gets paid in phases throughout the process. The lending is also based on the future value of the home, but unlike the construction loans these are FIXED RATE loans and they have loan limits. Typically these products are used for renovations but NOT major additions. Do you have 5%-10% equity in your house and need $20,000 – $50,000 for updates? This is likely the perfect product for you.

Home Equity Line Of Credit
Think of this as a credit card with a lien (mortgage) on your house. You only make a payment based on the loan balance. Payments are interest only and can adjust with the Prime Rate. Anytime you hear about the Fed raising or lowering rates, you’re rate will be affected. Lenders are becoming a bit more flexible with credit lines up to 90% or 95% of your home value, but variable high interest rates make this product less desirable. The upside of the line of credit is your ability to draw on it, pay it off, then draw again and again as long as you leave the equity line open.

Whether it’s a minor update or major facelift, there are programs designed for your situation. Call or message me to discuss which option best fits your needs.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

Putting your foot in the door of the real estate investment market can be both exciting and nerve-wracking. Like anything new, it will take time and research to get a handle on how things work to ultimately reach the goals you desire. But once you do get a grip on the learning curve, you will find that the results can be very rewarding.

Before you buy your first property, consider these five essential steps you’ll need to take.

Prepare For The Down Payment and Interest Rates
Financing the purchase of an investment property is much different than purchasing an owner-occupied home. As an investment, you want to maximize your balance sheet, so should try to put at least 20% down payment to eliminate the expense of Private Mortgage Insurance (PMI). The minimum down payment is 15% for a one-unit property, but PMI can be expensive. Multi-unit properties can require an higher down payment and lenders also require you to have reserves. So you need to be prepared and save.

Interest rates are different for investment properties as well. They are typically a bit higher, so make sure you consult with your lender for an accurate quote based on your specific scenario.

Decide If You Want To Rent or Flip The Property
It is important to know which method you intend on pursuing from the start: Renting or flipping the property. Renting and flipping an investment property require different strategies that you should know to be successful with your venture.

Flipping a home requires much more upfront cash and energy to buy, fix, and sell the home. If you are able to sell quickly, this route offers a faster profit. But beware, most mortgage lenders will request that you keep your loan for a minimum 6 months. Lenders lose any revenues earned for an early payoff, so for the super-quick flip, you may be best using an existing line of credit or cash for the home purchase.

Renting however, requires less expensive and fewer repairs, but it will take much longer to make your initial investment back. Rental properties require long-term commitments for maintenance and finding tenants, along with offering long-term, more static income.

Understand The Local Economy
Knowing the neighborhood and surroundings of the property can go a long way and be very beneficial to you. It is especially important to think long-term if you intend to rent an investment property. Is there a lot of room for growth and new employment, or does the area rely more on dying industries? Ideally, you want an economy that appeals to quality buyers and attracts potential tenants in your price range.

Research is always important and valuable to utilize, but nobody understands a city like a local. Between learning the ropes of renting or flipping a property and learning about a new area and their economy can be very overwhelming. This is why it is often recommended to start out by investing in a property near where you already live, or in an area that you know very well.

Research The Market
Once you have a building in mind, you’ll then want to take a look at similar properties in the area. Look through local listings to get an idea of the going rental rate or asking price for comparable properties. What’s the going rental rate? Will you cash flow positive as it compares to your mortgage payment? Is it worth a breakeven or negative cash flow if you feel the home value is going to improve?

Dig into the details to get a better look at the current market trends. Are rental properties listing lots of incentives or do they mention a waitlist when you call? If real estate agents and rental managers are eager to offer incentives, that often indicates a competitive market with too few renters. If you’re waitlisted or average prices seem higher than usual, it’s more likely to have potential lookers than there are available properties.

Factor In Repairs And Other Costs
The approach to considering if a property needs repairs depends on whether you intend to flip or rent the property. For either route, you will want to bring in a home inspector who can find problems that aren’t blatantly obvious to the average eye.

If you plan to flip, you will want to estimate the value of the after-repaired property and determine roughly how much the property could sell for after all the necessary renovations are made.
You will then want to look at repair costs. Factor in what you can do on your own, and repairs that will require professional labor. As you calculate the price of purchase and repairs, don’t forget to also include property taxes, closing and holding costs. Depending on how long it takes to sell, you could end up losing money on the flip if you don’t take these things into account.
If you plan to rent, it is best to avoid major, expensive repairs because renting is a long-term investment plan. Normally with long-term investments, you want to minimize your upfront costs.

Recap
Remember to keep these things in mind before purchasing an investment property: Be prepared to make the down payment and find out the accurate interest rates. Make the decision if you want to rent or flip the property before you get going. Understand the local economy and the area of the property you are investing in. Give yourself an advantage and research the market you will be working in. Lastly, factor in repairs and all other costs to allow yourself to earn a profit. Knowledge is power, the more you know about your surroundings, what you are doing, and why you are doing it, the better chance you have at achieving your goal, maximizing your balance sheet and making a profit. As always, feel free to call me with questions and to review your current ability to purchase an investment property.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735