Summer Time Project

Ahhh, summer time!
If you have been missing some of my regular blogs, it is because I have been working on my new waterfront vacation house. Internet service is yet to be connected.

But here is a photo of the current major project: building safer wooden steps that lead from the house down a steep trail to the waterfront on little Lake Walker, a non-motorized 12-acre lake at the foot of Mt Enumclaw in King County, WA.

New drop ceiling panels will be going in; the overgrown yard has been tamed, revealing a large fire pit and access to 48' of lakefront with a dock (also needing repair); roof maintenance, which includes resealing paint on top; sealing up any places for rodents to enter; and some cosmetic painting.

So thankful to have some financial partners who really know construction!

Happy Investing!

Conventional vs. Portfolio

Are you a full-time real estate professional? Do you have income from multiple sources or multiple businesses? Do you do non-traditional leasing, for example month-to-month rather than 12-months?

If you answered yes, then you may have a difficult time getting conventional financing to purchase new property or to refinance an existing property - even one that cash flows over $2500/month. Ask me how I know.

Here are the comments from a conventional mortgage lender regarding my personal situation:

there are so many different aspects to your loan file, that it’s going to take a really long time to process and underwrite your loan file.  We can do it, but I want you to know that’s going to be no easy task.  As far as I know right now, we need to document two businesses, self-employment income, 3 rental properties, pension income, 10+ lease agreements, unconventional private mortgage, and misc odds and ends...I cannot guarantee anything at this point since your income has so many determining factors now that only when an underwriter is able to fully process your loan will we even know what we can work with. 

 And here are the comments from the portfolio lender to whom he referred me:

If you want to submit your application(s) for purchase and refinance, I will need to have your completed loans application(s), signed disclosures (2 sets if you apply for 2 loans), and application deposit of $32.33 (only 1) as requested last week.  I would also want to see a letter from you summarizing your business plan of month-to-month room rentals, including how your Oklahoma rentals are managed, etc.  This is a complex request, and while I am happy to take it on, I need your full commitment to  the process if you want a decision.  There are just too many facets and our UW will want to see the full picture. This isn't a 'quick' let me run this by you question.  We are a portfolio lender, which allows us to review requests that are out of conforming guidelines, but that sometimes means borrowers have to provide more information to support their request to help our UW's  understand their business or situation in order to take on additional/different risks.

While [your previous conventional lender] provided me with information, I cannot move forward until I have completed information from you.  We have 'lost' 5 days since I sent our application, disclosures, etc. to you. I spent part of my weekend reviewing your information and determined that this is not one that I can just 'run by' underwriting.  If you want my full attention, you will have to commit to providing everything needed to move forward.  I will be happy to do my part with a complete sense of urgency, but I need your help.

Keep asking around for other lenders. I have found a great portfolio lender at Sound Credit Bank who is happy to do my loans for me, without the hassle described above. And I am sure there are others out there. So dear readers, if you have a Seattle-area lender who has worked miracles for you, be sure to leave a comment and recommend them here.

Happy Investing!

Grit to Great

As a volunteer for the Real Estate Association of Puget Sound (REAPS), I have been given many tokens of appreciation - which I enjoy! One of them recently was to select a few books from the stack distributed to top volunteers. One of the books that I selected was Grit to Great: How perseverance, passion and pluck take you from ordinary to extraordinary by authors Linda Kaplan Thaler and Robin Koval.

Often the only thing that separates winners from losers is this thing called "grit." The authors give numerous examples of people who have become successful against all odds. An example is the lesson summed up by Michael Jordan about what it takes to become the best player in basketball history:

"I've missed more than nine thousand shots in my career. I've lost almost three hundred games. Twenty-six times, I've been entrusted to take the game-winning shot and missed. I've failed over and over and over again in my life, and that's why I succeed."

Most people are surprised to learn that hard work can be the key to personal happiness, as well as its own reward.

Those who succeed work hard, they have a vision for their life, and they do not give up, even when the odds are stacked against them.

At the same time, those who succeed are often the ones giving back to society the most. The authors quoted a study from JAMA Pediatrics which claims that "even completing five small acts of kindness...one day a week for six weeks created a significant boost in overall feelings of well-being. And the effects are cumulative. Imagine the benefits of working full-time for decades helping others."

Real estate entrepreneurs will find great lessons and motivation in this book about the importance of vision, hard work, ethical work habits, consistency, persistence, and belief in helping others. This book is an easy read, and a reminder to keep on keeping on - even when the going gets tough!

The next book I will be reviewing is Richard Branson's The Virgin Way. Keep reading this blog to catch it soon!

Happy Investing!

Bellingham Investor Training

I have been asked to facilitate the Bellingham satellite meeting for the Real Estate Investors Association of Puget Sound (REAPS) on Wednesday, March 23, 2016.

I would like to focus on "Doing Your First Deal," getting started in real estate investing for the novice investor. I have been meeting for coffee with some of the newbies coming to the REAPS orientation at our main meeting, and many of them simply do not know how to get started. They assume they start with wholesaling or bird dogging, but they don't even know where to begin.

I would like to make the class very interactive and participatory, getting attendees to open up about where they are in their real estate investing, and hurdles they are having getting started. For many of them, it is even deciding WHAT they want to do; for some, it is the idea of buying their first primary residence, or finding more affordable housing, or generating quick cash. Some want to know about getting or using their real estate license.

For others who know what to do, it is simply taking action. Some fear or belief is holding them back from taking that first step. Plus, real estate investing IS NOT EASY, and I would want to focus on the realities of perseverance through frustration and rejection.

The class would also focus on REAPS membership tools designed to help them move forward in their real estate investment efforts, and we would identify audience members who might be able to partner or participate on a new investor's real estate team.

I would be using a very interactive Q&A format, developing some specific questionnaires, and giving each participant an opportunity to identify their own next steps in the next 30 days, possibly with an accountability partner.

If you are new to real estate investing, you may attend your first REAPS meeting for free. For more information on registering for this specific meeting, please go to www.REAPSweb.com

Happy Investing!

Selling a Business?

Under the installment method, the seller recognizes a portion of each payment received as gain and the remaining portion as nontaxable recovery of basis, based on various formulas.

This can be a wonderful strategy when selling property or a business. We generally want to see our clients ‘spread out’ their tax bill over time, rather than pay all the tax up front, however, there are actually several advantages when using the installment method:

1. It provides a method of deferring taxes associated with gains from the sale of property.

2. A seller may structure an installment sale to defer payments and associated gains until a tax-advantaged year.

3. The installment method can be attractive to a buyer, because it provides a buyer with a full stepped-up basis in the purchased property in an amount equal to the agreed-upon purchase price, even though the buyer may have given only an installment note debt to the seller.

4. Thus, if the buyer buys depreciable property from a seller on the installment method, the buyer can take depreciation deductions based on the fully agreed-upon purchase price of the property, without having paid for the property beyond giving the seller an installment note debt.

Happy New Year and make this the best year for your business yet!! 

Happy Investing!

Today's blog courtesy of Mark Kohler,
www.markjkohler.com.

Mortgage Forgiveness

CONGRESS NEARING PASSAGE OF THE EXTENSION OF THE MORTGAGE FORGIVENESS TAX RELIEF ACT

Christmas is coming early to Washington D.C. this year. The Congress is again busy trying to again pass a budget. Politicians are all packing in their favorite items into that new budget bill and it appears its passage is inevitable and will become law soon.

For many who read our updates, this will appear like a reenactment of everything that occurred last year right at this time.  Last year at this time, the Mortgage Forgiveness Tax Relief Act, that eliminated forgiveness of debt tax for most homeowners, had actually previously expired on December 31, 2013.

Most were surprised to see promises of its extension, but were disappointed when the extension ended on December 31, 2014, which was too little too late for most of our clients, as they had already made decisions based upon other criteria.  It was frosting on the cake for many clients, but it was no help for the future as it expired about eight (8) days later on December 31, 2014. Back to ground zero. No longer did we have this favorable tax treatment going into 2015.

So we spent 2015, again in a quandary, not knowing if this favorable tax law for short sale sellers would be extended or not.  Frankly, in many articles I wrote, I did not expect Congress to further extend this favorable tax benefit for short sellers.  All of our attorneys, being conservative in our consultations, advised clients not to expect any further extensions. So here we are again back in Congress with a big budget bill and a tax package contained within those overall budget negotiations.

As part of the overall budget bill, a group of tax benefit items are pretty much coming in as part of the overall budget package.  Some affect us positively in Washington State, such as extending the sales tax deduction, allowing a deduction for mortgage insurance premiums and, most importantly the extension of the Mortgage Forgiveness Tax Relief Act.

This positively affects those of you dealing with short sale sellers. It is a wonderful Congressional Christmas present of a further extension of the Mortgage Forgiveness Tax Relief Act, not only retroactively starting January 1, 2015, but extending to December 31, 2016 !!!!

This is wonderful news as it allows us another year in which we can give all our customers good, strong and current advice knowing that they can plan and not be hesitant as to whether they should sell or not. Planning opportunities now abound for us in 2015.

Tax considerations are an integral part of every consultation we have with our clients.  This extension pretty dramatically changes our consultations as we have only had the insolvency exception available up to now to assist clients down this tax path.

WHAT EXACTLY IS THIS SPECIAL TAX EXCEPTION THAT IS BEING FORGIVEN?

This was a special exemption that originally came into existence in 2006/2007 and was extended literally until 2014. It allows homeowners, who have lived in their property as a primary residence two out of the last five years, to in most instances, be able to avoid any forgiveness of debt tax that would be payable except for the exemption. It is not as simple as that and we always go over this statute in detail with clients in consultations. There are exceptions.

The forgiveness of debt creates income subject to ordinary income tax that, in many instances, could create a tax cost of upwards of $30K or $40K or more for a short sale seller.

Happy Holidays! Happy Investing!

Today's blog courtesy of Ed McFerran, McFerran Law

Kiyosaki Live!

Robert Kyosaki, the number 1 best selling personal finance author of all time, was our speaker at the national convention for my travel business this past weekend. He is as dynamic a speaker as he is an author. (Note to my wrtier sister Vicky: Kiyosaki was turned down by all the NYC publishers before he decided to self-publish).

He was blown away by our company and its leadership, our business model, and by the "best reception anywhere in the world" given to him by our enthusiastic 11,000 convention attendees.

His path towards financial literacy began in Hilo, HI in 4th grade when he asked his teacher, "when are you going to teach us about money?" The teacher responded that they would not be teaching this, as money is the root of all evil. Dissatisfied with that answer, he went on his own seach.

His first book, written in 1992, was originally titled "if you want to be rich and happy, do not go to school."

Make no mistake about it, Kiyosaki considers himself an educator on financial literacy, and owns a very profitable education business. "Education is more important than ever," says Kiyosaki, "but not the garbage they teach you in school."

He believes strongly that the way to success is many fold, but most importantly includes good mentors.

His mentor taught him that the wealthy do not want a paycheck. "If I pay you, you will think like an employee."

His mentor taught him many things, and they played a lot of Monopoly as he was growing up.

He asked a lot of questions. "If you want something in your life, you have to ask."

Today he owns 10,000 rental units, 4 hotels, and several golf courses, in addition to very successful publishing and conslting businesses.

The reason he was so enthusiastic about speaking to a bunch of travel entrepreneurs is because all he wanted to do after high school was travel. That is why he joined the military, and he has never stopped traveling since!

He has solid investment advice - and it does not include leading a debt-free life or playing the stock market. His advice: Invest in real estate!!!!

I couldn't agree more! For more on Kiyosaki's remarks, read my blog tomorrow.

Happy Investing!

Capital Gains Exemption

THIS HOMEOWNER EXEMPTION IS BETTER THAN SLICED BREAD…

The exclusion of up to $500,000.00 of capital gains tax as a result of the sale of one’s primary residence can be a great tax benefit to home owners especially since they only use the exemption a few times during their lives.

We, as real estate professionals, ALWAYS need to encourage all of our customers to seek legal or tax advice as all areas of taxation are complicated and there can be traps for the unwary. The goal of this article is to address some of those traps.


LET’S TALK ABOUT THOSE WHO INVEST IN REAL ESTATE…IS THAT POSSSIBLY YOU?

For those who invest in real estate, this special tax code creates potentially wonderful tax planning opportunities. Imagine if you will, your customer (or you) wants to convert their rental property into a primary residence in an attempt to take advance of the primary residence tax exclusion and preclude, not only the capital gains as the property was held as an investment, but to tack on along the time period of the primary residence holding. When combined with the fact that this exemption can be used every two (2) years, this could be wonderful for a property investor.

Sorry. You weren’t the first to look at this opportunity. In fact, this whole scenario goes back as far as about 15 years ago when this whole exemption came into being. However, there are still opportunities, but read on. The Congress has made some changes:


A.      They in the past did preclude depreciation recapture from being eligible for favorable home owner exemption treatment.

B.      They required a longer holding period (5 years) in a Section 1031 tax deferred exchange for those parties who converted the use of their investment property.

C.      More recently (2008), the Congress has forced gains to be allocated between periods of “qualifying” use and periods of “non-qualifying” use of the property.


THE NUTS AND BOLTS OF THE HOMEOWNER EXEMPTION…(SECTION 121 OF THE TAX CODE)…

I think most of my readers have a pretty good understanding of the basic rules. It was created in 1997 by our Congress. No longer do we have to buy a new property [That was an old law]. No longer do we have a once in a life-time $125K exemption [That is also old law]. Our current law is called: “The Taxpayer Relief Act of 1997” and has been modified ever since then.

There are lots of special rules within it and the devil can be in the details. The Publication from the IRS for layman is not a walk in the park, but PUBLICATION 523 can be a great help to understand some of the nuances. Just Google Publication 523 and you can download and print it out. Again, this short article does NOT replace a good consultation with your tax attorney.

That Act allows a homeowner (individual) to exclude up to $250K of capital gain on the sale of a primary residence ($500K for a married couple) so long as the property was owned and the party used the property as their primary residence for at least two (2) of the last five (5) years.

PRACTICE POINTER: Keep in mind that BOTH SPOUSES don’t have to own the house even though this is a community property state. One of the two can own, but BOTH must live at that property to qualify for the $500K exclusion. Isn’t that cool?

One does not have to occupy the property at the time of sale. It is just 2 of the last 5 years. In other words, the time does not need to be even continuous. We just need 720 days in the last 5 years to qualify. If one moves out after qualifying for the initial two (2) years, then one has three (3) years to then sell the property and take advantage of the exclusion rule. Make sure you understand this clearly as it creates many misunderstandings among professionals and homeowners alike.

PRACTICE POINTER: If a seller does not meet the two (2) year rule, still have them talk with their tax counsel as they can get a partial prorated exemption if a change in place of employment, change in health, or “unforeseen circumstances” all of which require a tax attorney or tax counsel to review and advise. As the economy improves folks, sellers will soon again be experiencing this type of issue.


LIMITATION ON USE OF THE EXEMPTION…ONCE EVERY TWO YEARS…

This exemption can be used once every two (2) years.  Remember, so long as the requirement is met there is no limit to the number of times an individual can use that exemption during his or her life. I wonder how many of our customers out there want to move every two years?


VARIATION ON THE THEME…WHAT ABOUT RENTAL PROPERTY?

Most of our customers are not real estate investors. They use this tax savings tool as they move through their life growing a family and later getting smaller as their families mature and move on. During the “good times of rapid appreciation” prior to the recession, many of my clients would “buy up” over time and take advantage of this exemption over and over again. Remember that this is an EMEMPTION and not a deferral. You don’t have to account for that accrued gain afterward like you do in a tax deferred exchange.

Those same people would many times also own rental property and would creatively attempt to move into their rental property taking advantage of the holding period and then excluding ALL of the gain (not only the gain while they lived in the property as well as the gain while it was used as an investment property).  Pretty great ideas!!!! In addition, because of depreciation the gains in the investment part would generally accrue faster and thus a pretty good bang for their tax savings buck if they could pull it off!


WHAT IS TOO GOOD TO BE TRUE IS GENERALLY TOO GOOD TO BE TRUE…ALONG COMES CONGRESS…

Over a period of time, the Congress modified Section 121 (the residence exemption rule) to limit those strategies. The initial rule eliminated the exemption to apply to any gains attributable to depreciation taken on the property when it wasn’t being used as a primary residence. This came into effect on May 6th, 1997 when the original exclusion rule came into effect. So even if you have a blended property and you meet the two year residence rule, that portion of the capital gains that is attributable to depreciation taken will be subject to recapture at generally 25% rates. However, one must read on.


IN 2008, CONGRESS PASSED FURTHER LIMITATIONS…HOUSING ASSISTANCE TAX ACT OF 2008...

So we have to read what happened above and understand that in 2008 Congress further limited the use of this wonderful exemption (in Section 121(b)(4)) specified that the exemption is only available when we have the property ACTUALLY used as a primary residence. The date of that Act is January 1st, 2009.

So this is interesting. The Congress deemed all gains are occurring pro-rata during the whole period of ownership whether owner occupied or not. Periods when the property is owner occupied are “qualifying”. Periods when used for investment are “non-qualifying”. Non-qualifying gains are not exempt!

This is where it can get complicated and this is where it is best to consult with your local attorney.

Happy Investing!

Today's blog courtesy of Ed McFerran, McFerran & Burns

Real Estate Negotiation

A successful negotiation is considered to be a win-win for all involved. A win-win negotiation is a deal that satisfies both sides. In order to achieve a win-win, the following guidelines are helpful:

Some Do's in Negotiating:

·         Determine goals. Decide on your objectives. Know your bottom line.

·         Anticipate the desires of your opponent. Think collegially – envision the person as your partner in the deal.

·         Analyze the assets. What do both of you bring to the table?

·         Evaluate options. That means for both of you.

·         Assess the power you bring into the discussion, and that of the other person.

·         Anticipate the obvious consequences, the corollaries.

·         Pay attention to detail. Try to put the other person’s needs first. In that way, the person feels as though you’re listening. Show empathy to the other person’s concerns and problems.

·         Stay calm, no matter what. You’ll keep the emotional advantage. Focus on issues, not personalities.

Some Don'ts in Negotiating

·         Don’t signal the person that you’re done negotiating by using the phrase, “I think we’re close.” You’ll be giving away your power – the person will believe you’re exhausted and that you put a higher priority on getting an agreement instead of achieving your actual goals.

·         Don’t get into a bidding war. Brand yourself so that you’re the only party the person should deal with. Don’t negotiate against yourself. If you make an offer, wait for the response. Be careful in using the phrase, “Why don’t you throw out a number?” Usually, the first amount mentioned by a seller is the amount that’s ultimately agreed upon.

·         Don’t establish at the beginning that you’re the final decision-maker.  If you need time to think you'll get more wiggle room if you indicate there’s another person with whom you must speak.  Always defer to a higher power.

·         Don’t be afraid to ask what you want – be specific about what you want and don’t want.

Happy Investing!

Today's blog courtesy of Bernita McKinnion.