Turn on the television or scroll through Facebook, and chances are you’ll see at least one advertisement that promises to teach you how to “get rich quick” through real estate investing. The truth is, much of what they’re selling are high-risk tactics that aren’t a good fit for the average investor. However, there is a way to make steady, predictable, low-risk income through real estate investing. In this blog post, I’ll examine the tried-and-true tactics you can use to increase your income, pay off debt, even fund your retirement!Continue reading Why Real Estate Investing Makes (Dollars and) Sense
Planning for retirement is obviously important and many times, an activity plagued by procrastination. Some people plan to have their home paid for by that magical date so they won’t have payments after they retire. It makes sense to eliminate a large recurring expense before they quit working.
One strategy would be to be make regular principal contributions in addition to the payments so that it will eliminate the debt by the target retirement date.
Let’s say that a homeowner refinanced their $200,000 mortgage at 4% last year with the first payment due on May 1, 2012. Under normal amortization, the home would be paid for at the end of the term; 30 years in this example.
By making additional principal contributions with each payment, it would accelerate the payoff on the home. An extra $257.13 a month would pay off the mortgage in 20 years. $524.55 extra with each payment would pay off the loan in 15 years; and $796.23 would pay off the loan in 12 years.
Having a home paid for at retirement has the obvious benefit of no house payment. It is also a substantial asset that could be borrowed against or sold if unanticipated events should occur.
Another strategy might involve purchasing a smaller home now to use as a rental that you intend to live when you retire; see Retirement Home Now.
To make some projections to pay off your own mortgage, use this Equity Accelerator.
Some homeowners, who were not able to sell during the recession, chose to rent their homes instead. In some cases, they didn’t need to sell their home at the depressed prices and opted to rent it until the market recovered.
It’s a valid strategy but there are time restrictions that could have serious tax implications for some homeowners.
The section 121 exclusion for gain in a principal residence requires that the home is owned and used as a main home for at least two years during the five year period ending on the date of the sale. This allows a homeowner to rent their home for up to three years and still have some part of the exclusion available.
The sale of a home with a $200,000 gain that qualifies as a principal residence would result in no tax being paid by the owner. Comparably, a rental property with the same gain could have a $30,000 or higher tax liability depending on the length of ownership and tax brackets of the investor.
The housing market has dramatically improved in the last year. If you have a gain in a home that has been your principal residence and it has been rented less than three years, you might want to consider selling it while you qualify for the exclusion.
If you are considering a sale on your principal residence that has been rented, consult with your tax professional for advice on your specific situation. For additional information, see IRS Publication 523.