What Is Real Estate Due Diligence?

There isn’t an Easy Button for doing your due diligence. It’s really a time-consuming process, and few people have any idea what to do.

Purchasing and owning real estate is always high risk — whether it’s a single family home that you’ll occupy or a 50-unit apartment building for income. You’ll hear experts say to make sure to “do your due diligence” when buying property, but what does that actually mean? What is due diligence?

The truth is, there isn’t an “easy button” for doing your due diligence. It’s really a time-consuming process, and few people have any idea what to do. So here is what it means and some of the steps you should consider and perform.

Do your homework

Due diligence means taking caution, performing calculations, reviewing documents, procuring insurance, walking the property, etc. — essentially doing your homework for the property BEFORE you actually make the purchase. If there are too many issues with the property — and that means too much potential risk and cost — then you can cancel your purchase agreement and look for a better property.

Here are just a few of the steps that apply to both personal residences and investment properties, although some may only apply to one.

Shop the marketplace

Make sure you know what the market has to offer. Too many people look at just a few properties, put in an offer and purchase. You should spend several months looking at properties before you buy.

Mortgage financing

Make sure the mortgage deal you get is fair and in line with competitors. Probably less than 20 percent of people get two bids for their financing, so they don’t know whether they’ve received a fair deal.

Pencil out your investment

If you’re buying an investment property, it’s vital to pencil out your deal. How do you know whether it’s a good deal if you haven’t done the math and compared it to other opportunities?

Property inspection

You probably had an inspection, but did you go to it? Did you review the inspector’s remarks on all the work that needs to be done? Then did you call a contractor or go to a home repair store to see how much it will cost to put the property in the shape you desire? Renovating properties is hugely expensive and high risk, so make sure you get estimates for the work before you decide to move forward with a purchase.

Insurance

Did you check to see whether an insurance policy can be written for the property? How much will it cost? Some areas, such as fire-prone or hurricane-prone areas, might not even be able to get a policy. And even if they do, it might be prohibitively expensive. Get some bids before you’re too far along in your purchasing process.

Homeowners association

Do you know how to review the HOA documents to avoid communities that are in disastrous shape, out of money or have significant construction issues? This is actually a pretty complicated task, but you don’t want to buy into a total mess of an HOA. If you do, you will feel some discomfort as the years go by and you have to deal with the issues and special assessments that you will be required to pay.

Title insurance & plat

Did you look at the title abstract and insurance policy? This will help you see if there are some issues that should concern you. Talk to the title insurance company agent and lawyer to help you review the documents. Also look at the plat of the property, have the easements plotted by title and walk the property for encumbrances.

Those are just a few of the many items that make up due diligence when buying real estate. Remember, you have to do these before you close escrow on the property. If you fail to do the proper tasks, problems might arise that were preventable, and might make your real estate experience less than palatable, or downright life changing! Or they might cause you to lose all the money you’ve put into the property.

Leonard Baron is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches potential real estate buyers how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Source: zillow.com

What Is a Security – Definition & Types That You Can Invest In

Securities are one of the most important assets to understand when you’re starting to invest. Almost every investment you can make involves securities, so knowing about the different types of securities and how they fit in your portfolio can help you design a portfolio that fits with your investing goals.

What Is a Security?

A security is a financial instrument investors can easily buy and sell. The precise definition varies with where you live, but in the United States, it refers to any kind of tradable financial asset.

Securities may be represented by a physical item, such as a certificate. Securities can also be purely electronic, with no physical representation of their ownership. The owner of a security, whether it is physical or digital, receives certain rights based on that ownership.

For example, the owner of a bond is entitled to receive interest payments from the issuer of that bond.


Types of Securities

There are many different types of securities, each with unique characteristics and a different role to play in your portfolio.

Stock

A stock is a security that represents ownership of a company.

When a business wants to raise money — for example, to invest in expanding the business — it can issue stock to investors. Investors give the business money and receive an ownership interest in the company in exchange.

The number of shares that exist in a company determine how much ownership each individual share confers. For example, someone who owns one share in a company with 100 shares outstanding owns 1% of the company. If that business instead had 100,000 shares outstanding, a single share would represent ownership of just 0.001% of the business.

Investors can easily buy and sell shares in publicly traded companies through the stock market. Shares regularly change in value, letting investors buy them and sell them for either a loss or a profit. Owning stock also entitles the shareholder to a share of the company’s earnings in the form of dividends if the company chooses to pay them, and the right to vote in certain decisions the company must make.

Bonds

A bond is a type of debt security that represents an investor’s loan to a company, organization, or government.

When a business or other group wants to raise money but doesn’t want to give away ownership, it can instead borrow money. Individuals typically borrow money from a bank, but companies and larger organizations often borrow money by issuing bonds.

When an organization needs to borrow money, it chooses an interest rate and the amount that it wants to borrow. It then offers to sell bonds to investors until it sells enough bonds to get the amount of money it wishes to borrow.

For example, a company may decide to issue $10 million worth of bonds at an interest rate of 5%. It will sell bonds in varying amounts, usually with a minimum purchase requirement, until it raises $10 million. Then, the company stops selling the bonds.

With most bonds, the issuing organization will make regular interest payments to the person who owns the bond. The payments are based on the interest rate and the value of the bond purchased. For a $1,000 bond at an interest rate of 5%, the issuer might make two annual payments of $25.

The bonds also come with a maturity date. Once the maturity date arrives, the bond issuer returns the money it raised to the bondholders and stops making interest payments. For example, when it matures, the holder of the $1,000 bond might receive a final interest payment of $25 plus the $1,000 they initially paid to buy the bond.

Interest payments and returned principal go to the person who holds a bond on the payment date, not necessarily the original purchaser. This means that people who own bonds can sell them to other investors who want to receive interest payments. The value of a bond will depend on how much time is left until it matures, the bond’s interest rate, the current interest rate market, and the bond’s principal value.

Money Market Securities

Money market securities are incredibly short-term debt securities. These types of securities are similar to bonds, but their maturities are generally measured in weeks instead of years.

Because of their short maturities and their safety, investors often see money market securities and investments in money market funds as equivalent to cash.

Mutual Funds and ETFs

Mutual funds and exchange-traded funds (ETFs) are both securities that purchase and hold other securities. They make it easier for investors to diversify their portfolios and offer hands-off management for investors.

For example, a mutual fund may purchase shares in many different companies. Investors can purchase shares in that mutual fund, which gives them an ownership stake in the different shares that the fund holds. By buying shares in one security — the mutual fund — the investor gets exposure to many securities at once.

The primary difference between mutual funds and ETFs is how investors buy and sell them. With mutual funds, investors place orders that settle at the end of the trading day. That makes mutual funds best for long-term, passive investment. ETFs are traded on the open market, so investors can buy them from or sell them to other investors whenever the market is open. This means ETFs can be used as part of an active trading strategy.

There are many different types of mutual funds and ETFs, each with its own investing strategy. Some mutual funds aim to track a specific index of stocks. Others actively trade securities to try to beat the market. Some funds hold a mix of stocks and bonds.

Mutual funds and ETFs are not free to invest in. Most charge fees, called expense ratios, that investors pay each year. For example, a fund with an expense ratio of 0.25% charges 0.25% of the investor’s assets each year. Fees vary depending on the fund provider and the fund strategy.

Preferred Shares

Preferred shares or preferred stock are a special kind of shares in a company, which have different characteristics than shares of common stock.

Compared to common stock, preferred shares typically:

  • Have priority for dividends over common stock
  • Receive compensation before common shares if a company is liquidated
  • Can be converted to common stock
  • Do not have voting rights

Derivatives

Derivatives are securities that derive their value from other securities rather than any value inherent to themselves.

One of the most common types of derivatives is an option, which gives the holder the right — but not the requirement — to buy or sell shares in a specific company at a set price. Derivatives are more complex financial instruments than generally aren’t suitable for beginners because they can be confusing and come with elevated risk.


How Securities Fit in Your Portfolio

Most investors use securities to build the majority of their investment portfolios. While some people may choose to invest solely in assets like real estate rather than securities like stocks and bonds, securities are highly popular because they make it easy for people to build diversified portfolios.

The mix of investments you choose is called asset allocation. Each type of security fits into an investment portfolio in different ways.

The Role of Stocks

For example, stocks generally offer high volatility and some risk, but higher rewards than fixed-income securities like bonds. People with long-term investing plans and the risk tolerance to weather some volatility may want to invest in stocks.

Within stocks, investors often hold a mixture of large-cap (large, well-known companies) and small-caps (smaller, newer businesses). Typically, larger companies are more stable but offer lower returns. Small-caps can be risky but offer greater rewards.

Large-caps often pay dividends, which are regular payments to shareholders. This makes them popular for people who want to produce an income from their portfolio but who don’t want to shift too heavily into safer, but less lucrative investments like bonds.

Pro tip: Earn a $30 bonus when you open and fund a new trading account from M1 Finance. With M1 Finance, you can customize your portfolio with stocks and ETFs, plus you can invest in fractional shares.

The Role of Bonds

By contrast, bonds are good for people who want to reduce volatility in their portfolios. A retiree or someone who wants to preserve their portfolio’s value instead of growing it might use bonds.

Bonds experience much less volatility than stocks, with their values changing primarily with changes in interest rates. If rates rise, bond values fall. If rates fall, bond values rise.

If you hold individual bonds and don’t sell them, you can only lose value from the bonds if the issuer defaults and stops making payments. That means that bonds can provide a predictable return, assuming you can hold them to maturity.

Bonds also make regular interest payments, often twice annually, making them very popular for income-focused investors.

The Role of Mutual Funds

A huge number of everyday investors opt to invest in mutual funds and ETFs instead of buying individual stocks and bonds. These funds hold dozens or hundreds of different stocks and bonds, making it easy for investors to diversify their portfolios. There are also many different funds that follow different investing strategies, meaning that almost everyone can find a mutual fund that meets their needs.

One of the most popular types of mutual funds is the target-date fund. These funds reduce their stock holdings and increase their bond holdings as time passes and gets closer to the target date. This makes them an easy way for investors to reduce risk and volatility in their portfolio as they get closer to needing the money,

For example, someone who wants to retire in 2062 might invest their money in a target date 2060 or 2065 fund. In 2020, the fund might hold a 90/10 or 80/20 split of stocks and bonds. By 2060, the fund will have reduced its stock holdings and increased its bond holdings so that its portfolio is a 40/60 split between stocks and bonds.

The Role of Derivatives

Derivatives are designed for advanced investors who want to use more complex strategies, such as using options to hedge their portfolio’s risk or to leverage their capital to produce greater gains.

For example, a trader could use options to short a stock. Shorting a stock is like betting against it, meaning the trader earns a profit if the share price falls. On the other hand, if the share price increases, the trader will lose money.

These are best used by advanced investors who know what they’re doing. Derivatives can be more volatile than even the riskiest stocks and can make it easy to lose a lot of money. However, if they’re used properly, they can be a safe way to produce income from a portfolio or a hedge to reduce risk.


Final Word

A security is the basic building block of an investment portfolio. Most assets that people invest in — like stocks, bonds, and mutual funds — are securities. Each type of security has different features and plays a different role in an investor’s portfolio.

Many investors succeed by investing in mutual funds or ETFs, which give them exposure to a variety of securities at once. If you want an even more hands-off investing experience, working with a robo-advisor or financial advisor can help you choose the best securities to invest in.

Source: moneycrashers.com

What Is a Mortgagee? Hint: It’s Not a Typo

Are You a Mortgagee or Mortgagor?

It’s mortgage Q&A time! Today’s question: “What is a mortgagee?”

No, it’s not a typo. I didn’t leave an extra “e” on the word mortgage by mistake, though it may appear that way.

Despite its striking appearance, it’s actually a completely different word, somehow, simply with the mere addition of the letter E.

Don’t ask me how or why, I don’t claim to be an expert in word origins.

Seems like a good way to confuse a lot of people though, and it has probably been successful in that department for years now.

You can blame the British English language for that, or maybe American English.

Anyway, let’s stop beating up on the English language and define the darn thing, shall we.

A “mortgagee” is the entity that originates (makes) and sometimes holds the mortgage, otherwise known as the bank or the mortgage lender.

They lend money so individuals like you and I can purchase real estate without draining our bank accounts.

It could also be your loan servicer, the entity that sends you a mortgage bill each month, and perhaps an escrow analysis each year if your loan has impounds.

The mortgagee extends financing to the “mortgagor,” who is the homeowner or borrower in the transaction.

So if you’re reading this and you aren’t a bank, you are the mortgagor. It’s as simple as that.

Another way to remember this rather confusing word jumble; Who is the mortgagee? Not me!!

Mortgagor Rhymes with Borrower, Kind Of

mortgagor

  • Here’s a handy way to remember the word mortgagor
  • It kind of rhymes with the word borrower…
  • Or even the word homeowner, which is also accurate if you hold a mortgage on your property

I was trying to think of a good association so homeowners can remember which one they are, instead of having to look it up every time they come across the word.

I believe I came up with a semi-decent, not great one. Mortgagor rhymes with borrower, kind of. Right? Not really, but they look and end similar, no?

Anyway, the real property (real estate) acts as collateral for the mortgage, and the mortgagee obtains a security interest in exchange for providing financing (a home loan) to the mortgagor.

If the mortgagor doesn’t make their mortgage payments as agreed, the mortgagee has the right to take possession of the property in question, typically through a process we’ve all at least heard of called foreclosure.

Assuming that happens, the property can eventually be sold by the mortgage lender to a third party to pay off any attached liens, or mortgages.

So if you’re still not sure, you are probably the mortgagor, also known as the homeowner with a mortgage. And your lender is the mortgagee. Yippee!

What makes this particular issue even more confusing is that it’s the other way around when it comes to related words like renters and landlords.

Yep, for some reason a landlord is known as a “lessor,” whereas the renter/tenant is known as the “lessee.” In other words, it’s the exact opposite for renters than it is for homeowners.

But I suppose it makes sense that both landlord and mortgage borrower are property owners.

What About a Mortgagee Clause?

mortgagee clause

  • An important document you may come across when dealing with homeowners insurance
  • Stipulates who the lender (mortgagee) is in the event there is damage to the subject property
  • Protects the lender’s interest if/when an insurance claim is filed
  • Since they are often the majority owner of the property

You may have also heard the term “mortgagee clause” when going through the home loan process.

It refers to a document that protects the lender’s interest in the property in the event of any damage or loss.

It contains important information about the mortgagee/lender, including name, address, etc. so the homeowners insurance company knows exactly who has ownership in the event of a claim.

Remember, while you are technically the homeowner, the bank probably still has quite a bit of exposure to your property if you put down a small down payment.

For example, if you come in with just a 3% down payment, and the bank grants you a mortgage for 97% of the home’s value, they are a lot more exposed than you are.

This is why hazard insurance is required when you take out a mortgage, to protect the lender if something bad happens to the property.

Conversely, if you buy a home with cash, as opposed to taking advantage of the low mortgage rates on offer, it’s your choice to insure it or not.

But more than likely, you’ll want insurance coverage on your property regardless.

In summary:

Mortgagee: Bank or mortgage lender
Mortgagor: Borrower/homeowner (probably you!)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

The evolution of the good faith estimate

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

A good faith estimate (GFE) is a comparison of mortgage offers provided by lenders or brokers to a consumer. It was recently replaced by the loan estimate—a similar concept with a few small differences. 

What Is a Good Faith Estimate Designed to Do?

The GFE’s purpose was to present mortgage shoppers with all the details they need to know about their mortgage options to help them make well-informed decisions. This transparency ensures consumers are aware of all the costs associated with the mortgage—including fees, APR and other expenses.

Borrowers would receive a GFE three business days after submitting their mortgage application, and after thorough review, would then select which mortgage option they would like to move forward with. 

Are Good Faith Estimates Still Used?

The term “good faith estimate” is not used by lenders anymore, but the concept remains prevalent. In 2015, the GFE was replaced by the loan estimate. Anyone who purchased a home after October 3, 2015, received a loan estimate rather than a GFE. 

In October of 2015, the good faith estimate was replaced by the loan estimate.

If you applied for a reverse mortgage, HELOC, a mortgage through an assistance program or a manufactured loan not secured by real estate, you will not receive a loan estimate. Instead, you will receive a Truth-in-Lending disclosure. 

The purposes of a GFE, a loan estimate and a Truth-in-Lending disclosure are largely the same: providing transparency to borrowers. The main difference—and benefit—of a loan estimate is that there’s more regulation by the Consumer Financial Protection Bureau (CFPB). Since the GFE was not standardized through regulations, they were sometimes difficult to decipher, especially for first-time homebuyers. Conversely, each loan estimate must contain the exact same information in a standardized way, which we’ll cover below. 

What Appears on a Loan Estimate?

According to the CFPB, a complete, compliant loan estimate should include the length of the loan term, the purpose of the loan, the product (fixed versus adjustable interest rate, for example), the loan type (conventional, FHA, VA or other), the loan ID number and indication of an interest rate lock. Additionally, the loan estimate will include the following:

  • Loan terms: A summary of the total loan amount, interest rate, monthly principal and interest and penalties, and whether these amounts can increase after closing.
  • Projected payments: A summary of monthly principal, interest, mortgage insurance, taxes and insurance. Broken down by years 1–7 and 8–30 for a 30-year mortgage.
  • Costs at closing: Estimated closing costs and the total estimated cash needed to close, which includes the down payment and any credits.
  • Loan costs: Origination charges—which is broken down by 0.25% of the loan amount, application fees and underwriting fees—and other fees.
  • Other costs: Taxes, government fees, prepaid homeowners insurance, interest and prepaid property, escrow payment at closing and title policy.
  • Comparisons: Metrics you can use to compare your loan to others. Includes the total principal, interest, mortgage insurance and loan costs you will have paid after five years.
  • Other considerations: Information about appraisal, assumption, homeowner’s insurance, late payment fees, refinancing and servicing.
  • Confirmation of receipt: A line at the end of the statement that confirms you have received the form. This does not legally bind you to accept the loan.

Your loan estimate will also include your personal information, including your full name, income, address and Social Security number. Make sure to double-check all of this information for errors, as they could cause potential problems later in the process.

To better understand your loan estimate, explore the CFPB’s interactive guide.

Closing Disclosure

For first-time homebuyers in particular, it’s important to understand the timeline of events so that you can be prepared for your home buying process and have all the information and necessary documents at hand.

Closing Disclosure Timeline

Lenders are required to send you a loan estimate form no more than three business days after receiving your application. Finally, at least three business days prior to loan consummation—when you are contractually obligated to the loan—you will receive a closing disclosure.

Lenders are required to send you a loan estimate no more than three days after receiving your application and a closing disclosure at least three days prior to loan consummation.

What Is the Purpose of a Closing Disclosure?

The purpose of a closing disclosure is to assign “tolerance levels” to fees listed in the loan estimate form. This means that fees cannot increase over their tolerance level unless a specific triggering event occurs. There are three different tolerance levels:

  • Zero percent tolerance: Fees in this category cannot increase from what is listed on the loan estimate. These fees are typically those paid to a creditor, broker or affiliate, such as origination fees.
  • 10 percent cumulative tolerance: Fees in this category are added together, and the sum of these fees are not to increase by more than 10 percent of the amount listed in the loan estimate. Fees include recording fees and third-party service fees.
  • No tolerance or unlimited tolerance: Fees in this category have no limits at all, and can increase by any amount, as long as they are disclosed “in good faith,” using the best information available. These are usually fees lenders have little to no control over.

Remember not to confuse “zero percent tolerance” with “no tolerance,” as they are quite different. Zero percent tolerance fees cannot increase, while no tolerance fees can increase by any amount as long as it is considered “in good faith.”

Does a Loan Estimate Affect My Credit?

The act of applying for a mortgage may temporarily cause your credit score to dip, as it requires a hard inquiry by lenders. However, you may shop around for different mortgages from different lenders to get multiple preapprovals and loan estimates. As long as you do this all within a 45-day window, these separate credit checks will be recorded on your credit report as one single hard inquiry.

This is because lenders realize that you are only going to buy one home, so they categorize all of the actions you take under one umbrella of applying for a mortgage. Note that you may want to consider the 45-day rule loosely. Prioritize finding the best mortgage deal possible. Even if this means processing a hard inquiry outside of the 45-day window for a better deal, you’ll likely end up saving more money in the long run.

To learn more about what affects your credit and how to work toward improving your credit profile, contact our team at Lexington Law.


Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

Why Today’s Retirees Need to Pursue Tax-Minimization Strategies

Today’s retirees face many obstacles, from an unpredictable market to a lack of guaranteed income in retirement. While these are important challenges to address, they would be remiss to ignore their future tax burdens. We’ll likely see increased taxes in the future, and this will affect today’s retirees more than tax increases have affected retirees in the past.

Retirement Then vs. Now

Today’s retirees are the first IRA generation: Whereas previous generations could primarily rely on Social Security benefits and pensions to cover their retirement expenses, many of today’s retirees find themselves having to fund a much larger portion of their retirement through their own pre-tax retirement accounts. And while retirement accounts such as 401(k)s and IRAs have significant benefits, they also come with downsides, namely that all of the withdrawals in retirement are taxable as ordinary income at the current tax rates in our country.

This means that if tax rates were to rise, the retiree living off of IRAs will have to pay more in taxes and therefore live off of less after-tax income. Previous generations saved their money in after-tax accounts, meaning if tax rates were to rise, it would not affect them the same way it will for this IRA generation. When we look at the history of taxes and the Biden administration’s tax-increasing proposals, it’s clear that retirees need to have a tax-minimization plan.

Could We See Taxes Increase?

We need to plan for the tax rates of the future, not the present. Previously, tax increases primarily affected wage earners. The Social Security payroll tax and income tax increases had little effect on Social Security beneficiaries and retirees who saved in after-tax accounts. However, those who take distributions from a tax-deferred retirement account and who invest in the market are affected by both income tax increases and new taxes.

These could include:

  • The possible elimination of the favorable long-term capital gains taxes rates for the wealthiest investors. This could mean those with incomes of $1 million or more might pay up to 39.5% on their gains, rather than the current top rate of 20%.
  • Lowering of the current standard deduction. Many retirees don’t itemize their deductions and rely on the standard deduction.  Therefore, if the current standard deduction is lowered, people’s taxes could go up.
  • Imposing the Social Security payroll tax on workers or households earning over $400,000 annually. This tax — in which employers and employees each pay 6.2% and the self-employed pay the full 12.4% — helps pay for Social Security benefits.
  • Lowering the federal estate tax exemption amount, which could affect estates above about $5 million.

Retirees should note that we may be experiencing tax rates at 100-year lows now, and that this could end in light of recent increased government spending. Our already large national debt increased during the pandemic, with the CARES Act of 2020 costing $2.2 trillion and the American Rescue Plan Act of 2021 costing $1.9 trillion. We will have to pay for this eventually, and retirees with large tax-deferred IRAs could be the ones to do it.

When we look at history, we see that after a period of increased government spending during World War II, income tax rates in the following decades were much higher than they are now. In 1944, the top rate peaked at 94%, and by 1964 it had only gone down to 70%. This doesn’t mean that an individual’s tax bracket will go from 22% to 70%, but there is a lot of room in between where retirees could feel the effects.

When running a financial plan, retirees need to calculate how much taxable income they will have and how much of that will be left after taxes. If tax rates rise, retirees could need to withdraw more from their taxable retirement accounts to be left with the same amount of income, ultimately drawing down their savings faster.

RMDs

Taxes on retirement income can become more burdensome starting at age 72. Most retirees must take RMDs (required minimum distributions) from their traditional retirement accounts starting at age 72, and the amount they must withdraw is based on their age and account balance.

RMDs could force someone to withdraw more than they normally would from their tax-deferred retirement account, causing them to jump into a higher tax bracket. Retirees under the age 72 should look to do careful planning that may minimize this effect by the time they reach this age.  (Keep reading for an idea on how to help do that below.)

Taxes and Your Legacy Goals

RMDs can also potentially increase a beneficiary’s tax burden due to the SECURE Act passed in 2019. It ended the “stretch IRA,” which allowed beneficiaries to stretch out distributions from an inherited retirement account over their lifetimes. Now, most non-spouse beneficiaries must empty traditional accounts within 10 years of the original owner’s death.

Those who want to pass on their retirement accounts should consider tax minimization strategies when creating an estate plan. One possibility is a charitable remainder trust.

What Can Retirees Do Now to Prepare for Higher Taxes Later?

Those who will draw a significant portion of their retirement income from taxable retirement account should take note, and work to minimize their overall tax burden. There are many strategies they can employ, including converting part or all of their traditional 401(k) or IRA to a Roth IRA. This involves paying tax on the amount converted and eventually withdrawing it from the Roth tax-free. If we see taxes increase in the future, a Roth conversion at today’s rates could potentially be a good strategy for those whose tax burden won’t substantially decrease in retirement.

In addition to providing tax-free income, a Roth is also exempt from RMDs. This means that the money in a Roth IRA can continue to grow throughout the owner’s lifetime tax-free. When it’s inherited, the beneficiary will have to drain the account in 10 years, as with a traditional IRA. However, distributions from traditional IRAs, distributions from Roth IRAs are not taxable and will not incur an early withdrawal penalty as long as the account is at least five years old.

The Bottom Line for Retirees

Retirees who have both traditional and Roth IRAs can strategically withdraw from each to avoid going into a higher tax bracket, continue to reap the tax-advantage benefits of a retirement account after age 72, and pass on potentially tax-free wealth to their beneficiaries. Those who think tax hikes are on the horizon and who don’t plan to live on significantly less income in retirement should consider tax-minimization strategies such as a Roth conversion.

Investment Advisory Services offered through Epstein and White Financial LLC, an SEC Registered Investment Advisor.  Epstein & White Retirement Income Solutions, LLC is a licensed insurance agency with the state of California Department of Insurance (#0K53785).  As of March 31, 2021, Epstein and White is now a part of Mercer Global Advisors Inc. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an Investment Adviser with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. The information, suggestions and recommendations included in this material is for informational purposes only and cannot be relied upon for any financial, legal, tax, accounting, or insurance purposes.  Epstein and White Financial is not a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. Please consult with your own accountant and financial planning professional to determine how tax changes affect your unique financial situation. A copy of Epstein & White Financial LLC’s current written disclosure statement discussing advisory services and fees is available for review upon request or at www.adviserinfo.sec.gov.

Founder and CEO, Epstein and White Retirement Income Solutions

Bradley White is founder and CEO of Epstein and White. He’s a Certified Financial Planner™ and has a bachelor’s degree in finance from San Diego State University. He’s an Investment Advisor Representative (IAR) and an insurance professional.

Source: kiplinger.com

How to Make a Retirement Budget So You Don’t Outlive Your Savings

You’ve spent decades in the workforce earning a living, your schedule dictated by the demands of the job. All the while, you’ve been steadily adding to your savings so that one day you could get to this point. Retirement.

Now, there’s no alarm to wake you up in the mornings and no boss to answer to. You can finally get around to crossing items off your bucket list — or simply have the opportunity to catch a midweek matinee movie.

The world is your oyster.

Life may feel more relaxed and carefree, but that doesn’t mean you no longer have financial responsibilities. In fact, now’s the time you might need to be even more diligent about budgeting your money.

Living on What You Have Saved

When you say goodbye to your 9-to-5, you also say goodbye to your regular paycheck. You’ll rely on Social Security benefits, the money in your retirement accounts and any additional income, like a pension, to cover your expenses.

Sticking to a budget is vital so your retirement savings last. That money you’ve squirreled away in your working years has to stretch for decades. Remember, life on a fixed income means there are no bonuses, overtime or promotions to increase your cash flow.

How Much Should You Have Saved?

If you’re already retired or nearing retirement age, hopefully you’ve done the math to determine whether you’ll have enough money to keep you afloat.

One popular rule of thumb is to have 25 times your average annual expenses saved up. But how much money you need in retirement depends on many factors, like your age, where you live and the type of retirement you want to enjoy.

If you want to retire at 60, rent a highrise in New York City and travel every couple of months, you’ll need considerably more money than a retiree who leaves the workforce at 70, lives in a paid-off home in rural North Dakota and just stays home and knits.

There are also a lot of unknowns in retirement — like what medical conditions you could develop and exactly how many years you’ll need your money to stretch.

That’s why it’s important to have robust retirement savings and be cognizant of your spending in your golden years.

How to Make the Most of Your Nest Egg

To make your savings last, you’ve got to be prudent about how much you withdraw each year.

“The gold standard has always been 4%, but new research has revealed a different number,” said Chuck Czajka, a certified estate planner and owner of Macro Money Concepts in Stuart, Florida.

He said withdrawing 3% a year instead gives you a 90% success rate to last through a 25-year retirement.

Keep in mind, once you’ve determined how much you can withdraw per year, you’ll want to divide that amount by 12 to come up with how much to withdraw each month. Czajka recommends withdrawing money from your retirement accounts on a monthly basis rather than taking out all you’d need for a whole year.

Meeting with a financial adviser can help you come up with a personalized plan to fit your individual situation.

“As people approach retirement, they should work with a retirement professional to determine their expected retirement income,” said Lisa Bamburg, a registered investment adviser and owner of Insurance Advantage in Jacksonville, Arkansas.

Two grandmothers dress in funky classes and brightly colored shirts.
Getty Images

Factoring in Income Beyond Your Savings

In addition to the money you’ve saved in your 401(k), individual retirement account (IRA) or other investment accounts, a portion of your retirement income will come from Social Security benefits.

You can start collecting Social Security benefits as early as age 62, but you’ll receive less money per month than if you waited until full retirement age — 66 or 67, depending on when you were born.

If you delay claiming Social Security benefits past your full retirement age, you’ll receive even more each month. However, there’s no additional increase once you’ve reached age 70.

Pro Tip

This calculator from the Social Security Administration gives you a rough idea of your retirement benefits. This retirement estimator is more accurate but requires plugging in your personal info.

In addition to Social Security, you might have other sources of retirement income, like money from a pension plan or an annuity.

A report from the National Institute on Retirement Security found that many retirees don’t have a great diversity in their retirement income, though more income sources provide for a more secure retirement.

The report found less than 7% of older Americans have retirement income that’s made up of a combination of Social Security, a pension plan and a retirement contribution plan like a 401(k). About 40% rely on Social Security alone.

“Social Security benefits typically are not the equivalent of what it takes for most people to maintain their standard of living,” Bamburg said.

The Social Security Administration states its retirement benefits only replace about 40% of earnings for people with average wages — more for low-income workers and less for those in higher income brackets.

How to Create a Retirement Budget

Once you determine what your retirement income will be, it’s time to make your retirement budget.

If you’ve already been budgeting, you’re off to a great start, though your new budget will likely differ from that of your working days.

Take Stock of Your Essential Expenses

First you’ve got to get an overall look at your current spending. If you don’t already have a budget or track your spending, pull out the past several months of bank or credit card statements. Dig up old receipts if you tend to pay in cash.

Reviewing the past three months will help you find what you spend on average, but an even deeper dive — looking at the last six to 12 months — will give you a more accurate picture and will reveal things like your annual car insurance bill and holiday spending.

Group your spending into categories to get a good picture of where your money’s going. You’ll have fixed expenses, like your mortgage, where the cost stays the same each month. Other expenses, like groceries or utilities, will vary. For those, you should calculate your average monthly spend.

Account for Changes

After leaving the workforce, you’ll probably notice some differences in your spending. You’ll no longer have to pay for downtown parking near the office, dry cleaning your suits or pricey lunches with coworkers. Your monthly retirement contributions will be a thing of the past.

However, not everything will be budget cuts. You’ll have to account for new retirement expenses, like health care premiums your employer previously covered. If you’re 65, you can get health insurance through Medicare, but it’s likely you’ll have increased out-of-pocket medical costs as you age.

And of course, now that you have an influx in free time, you can pursue the things you’ve always wanted to do — which means more new expenses.

A group of retired women have fun.
Getty Images

Make Room for Fun in Your Retirement Budget

A big part of retirement planning is determining what type of lifestyle you want to have when you’re no longer at work 40 hours a week.

Do you want to travel? Spend more time with your grandkids? Explore a new hobby? After you’ve covered your essential expenses, how you spend what’s left in your budget is totally up to you.

Don’t forget to include run-of-the-mill discretionary expenses, like cable, magazine subscriptions and dining out. It won’t all be cruise ships and Broadway plays.

If you’re married, be sure to share your vision for retirement with your partner, so you’re both on the same page about how you’ll spend your time and money.

Adjusting Expectations to Reality

As you create your monthly budget, you may discover you don’t have nearly as much money as you thought you’d have in retirement. That doesn’t mean you have to live out the rest of your life kicking yourself for not saving more. You have a few options to get by.

Take another look at your living expenses. Are there any ways you can cut costs? Slash your food spending with these tips to save money on groceries. Consider downsizing to a smaller home.

When it comes to your discretionary spending, look for ways to enjoy a more frugal retirement. Take advantage of senior discounts. Check out free activities at your local community center. Find ways to save money on traveling.

Although retirement means leaving your working days behind, you may find it necessary to pick up a side gig or part-time job to supplement your income. Seek out opportunities that match your interests so it doesn’t feel like work.

Don’t forget to enjoy this new stage of life. You worked hard — you deserve it.

Nicole Dow is a senior writer at The Penny Hoarder.

Related Posts

<!–

–>



Source: thepennyhoarder.com

5 Tips for Approaching the Open House

In this article:

For decades, sellers and their agents have been using open houses to help generate interest in their listings. Open houses give the general public the chance to view a home without scheduling a private showing. While open houses do get a lot of curious neighbors and casual browsers, they can be a good opportunity for serious buyers to decide if a home is worth pursuing further, or a way to get a better grasp on neighborhood home values. 

In fact, 59% of home buyers attended an open house during their shopping process last year and 43% of buyers said attending the open house was very or extremely important to determining if the home was right for them.* On average, home buyers attended 2.6 open houses before buying.

Whether you’re a sincere buyer or simply curious about the inside of a home, you should know how open houses work and understand how you can be a good open house attendee. 

Note: If open houses are restricted or unavailable due to public health concerns, work with your agent to arrange a private tour or video tour. All Zillow-owned homes include a self-tour option — just use our app to unlock the door and tour at your convenience.

What is an open house?

An open house is an event during which potential buyers can tour a home that’s on the market. It’s usually hosted by the seller’s listing agent, or by the seller themselves, in case of a for-sale-by-owner (FSBO) listing. Open houses usually take place on weekends, during a set range of hours typically midday.

Open house benefits for buyers

No scheduling required: Unlike a private showing, you don’t need to set up a specific appointment to see a home. Simply show up during the open house hours and view the home at your own pace. 

Scope out the competition: If you’re interested in a home, attending the open house can help you gauge interest from other buyers. This can be helpful when determining how quickly you need to submit an offer and how much you should offer. 

Understand current home values: Seeing what homes are selling for in your area and what you can buy at a particular price point can be helpful if you’re just starting your search. 

Redefine your nonnegotiable home features: Checking out homes in person can help you redefine your list of must-haves: Do you really need that extra bedroom? What does a backyard of this size really look like?

How do open houses work?

Not every seller or listing agent will hold one, but here’s the typical process for sellers setting up an open house:

  1. The seller and their agent determine a day and time for the open house.
  2. The agent lists the open house on the local MLS.
  3. The agent advertises the open house on social media, online and with print ads or flyers. 
  4. The agent prepares for the open house — purchasing refreshments, printing flyers, setting up signs and adding little touches to make the home feel welcoming to buyers. (Yes, as a shopper, you can eat the cookies.)
  5. The agent hosts the event, greeting buyers and answering questions about the property and community.
  6. Buyers remove their shoes, tour the home, take pictures and video (if allowed) and jot down important notes. 
  7. Any buyer who liked the house will contact their own agent. They’ll then set up a private showing to see the home again or they’ll submit an offer right away — the latter is common in fast-moving real estate markets.

Who hosts an open house?

The person hosting an open house could be any one of the following: 

  • Listing agent: As the person hired to sell the home, the listing agent should be an expert on the property. 
  • Listing agent’s team member or associate: A busy listing agent may also send another agent in their place — either someone on their team or another agent in their office. They should be experts in the local market, but may not be as familiar with the individual home. 
  • Homeowner: If a home is for sale by owner (FSBO), the homeowner will be hosting their own open house. They’re undoubtedly the expert on the home, but their local market expertise may be limited. 

How to prepare for an open house

There are times when you might just stumble upon an open house while you’re on a walk or running errands. But if you’re intentionally looking for open houses as part of your home-buying strategy, try these tips.

Seek out relevant open houses

If you plan to visit multiple open houses in one day, make sure you’re focusing on listings that fit your criteria for budget and location. It’s not worth wasting time looking at homes outside your budget or those that are too far from your work or school. 

Tip: With Zillow’s home search tool, buyers can filter by homes with upcoming open houses (this filter can be applied in addition to other search filters like price, bedrooms, bathrooms, square footage and location). When you use the open houses filter in conjunction with filters for your other criteria, you can easily find the right open houses for your search.

A map of home listings on Zillow.

You can also tour most Zillow-owned homes any time between 6 a.m. to 8 p.m., any day of the week — just select the tour option on the listing. Although the listing agent will not be present, you can avoid a busy open house and rest assured the property is in move-in ready condition.

Do research on the market beforehand

With help from your agent or on your own, find out how each home you’re planning to visit stacks up against others nearby. Is the price in line with similar listings in the area? Are there any defects? Has it gone under contract recently and then returned to the market? Are there a lot of other interested buyers? Has it been sitting on the market for a long time? (“Days on market” is an indicator of a stale listing, but the standard number of days on market can vary based on where you live.)

Stay open-minded

If you’re searching on a tight budget in a hot neighborhood, there’s a good chance that the home that fits the bill will need some TLC. Fortunately, attending an open house can give you a better idea of the home’s condition and potential, while also giving you the opportunity to ask renovation-related questions — e.g., the location of load bearing walls and the details of local regulations. 

How to attend an open house

Now that you’ve done your research and are prepared to add some open houses to your home search, here’s what you should do once the day arrives. 

Ask questions

An open house is your best opportunity to ask the listing agent (or their associate) your questions — don’t be shy. Ask questions that you wouldn’t be able to answer just by reading a home’s listing description, such as:

  • What are the HOA restrictions?
  • Has the seller done a property tax appeal?
  • Have there been any recent renovations or repairs?

Tip: If you’re not currently working with an agent and you ultimately decide you aren’t interested in a particular home you tour, the open house could help you see if the listing agent might be the right person to represent you — many agents represent both buyers and sellers. 

Be honest

If anyone other than the listing agent or the homeowner is hosting the open house, they’re likely an agent hoping to find potential buyer clients. If you’re already working with an agent (or if you have no real interest in buying), be honest.

Check for damage and disrepair

Professional or edited photos can make a home look a lot better online than it is in person. At an open house, take the opportunity to closely evaluate a home’s condition and take note of any potential defects that would factor into your offer price. 

Assess the windows: Look for flaking paint, misaligned sashes and condensation due to air leaks. These could be signs of windows that need replacement. 

Check for water damage: Look for warped baseboards, ceiling stains and musty smells. 

Make note of cracks: Noticeable cracks in the ceiling or drywall could indicate foundation issues. 

Test functions: Open cabinets, doors and drawers. Run the faucets. Check the water pressure. An open house is a good opportunity to make sure every part of the home is in good working order. 

Gauge potential renovation needs: Home improvements can really add up. As you walk through a home, keep an eye out for urgent renovation needs like floors, fixtures or large repainting projects.

Open house tips for buyers

Whenever you attend an open house, put yourself in the seller’s shoes — you’re letting a bunch of strangers walk through your home while you’re not there. While every seller wants their open house to net a buyer, they also want to keep their home safe and their furnishings free of damage.

Do

  • Take off your shoes or wear booties if requested.
  • Greet the host and provide your name.
  • Sign in if necessary or requested (this is a safety issue for the seller and their agent).
  • Take notes on your phone about your likes, dislikes and follow-up questions.
  • Ask if you can capture a video (if the listing doesn’t already include a video).
  • Respect other buyers and guests. 
  • Wait for others to exit a room before you enter.
  • Provide feedback if requested.
  • Thank the person hosting the event.

Don’t

  • Refuse to comply with an agent or homeowner’s house rules.
  • Criticize the home or the owner’s style.
  • Listen in on other visitors’ conversations.
  • Touch the owner’s belongings.
  • Let kids run around without supervision.
  • Bring food or beverages in (except water).
  • Reveal information that would compromise your negotiating power, like your budget or level of interest in the home.
  • Bring pets.

*Zillow Group Consumer Housing Trends Report 2019 survey data

Source: zillow.com

Do You Own the Land Under Your Home?

Do your due diligence to ensure you know about liens, easements or land grants made on property you’re thinking about purchasing.

When you buy a home, you probably assume that you own everything in and around it within the property lines. But in some parts of the country, homeowners are discovering the property they’re buying does not fully include the land beneath it.

For example, in Tampa Bay, FL a family realized at closing that their home builder had already signed away the rights to the land underneath their home to its own energy company. The “mineral rights” grant gave the energy company the freedom to drill, mine or explore for precious minerals beneath the home.

How is this even possible, and how can it be avoided? Who really owns the land beneath your home? Here’s what you need to know.

You probably own the land

Generally speaking, it’s likely that you own the property underneath and around your house. Most property ownership law is based on the Latin doctrine, “For whoever owns the soil, it is theirs up to heaven and down to hell.”

There can be exceptions, though. On occasion, a buyer will uncover an easement for a driveway or walkway that goes through their property. This is why it’s important to carefully review contracts and disclosures.

Contract and disclosures

A seller, be it a home builder or a homeowner, can’t claim any sort of rights to the property without first disclosing those rights in the real estate contract or in some sort of disclosure statement.

Each state is different with regard to how things are disclosed. Many disclosure statements require the seller to tell the buyer whether or not someone else has laid claim to the property or if the buyer is limited to claims in the future. If the seller is unaware, or the home you’re purchasing is in a state that doesn’t require the seller to disclose, then you should carefully review the property’s title report before signing off.

Preliminary title report

There can be a situation in which a seller doesn’t know that someone else has laid claim to the property. For example, this could happen in the case of a resale in a newer subdivision where the current owner bought from a homebuilder directly.

Throughout the years, there have been instances when an easement, encroachment or even a small mechanic’s lien sits on a title unbeknownst to the current seller. When this happens, all parties must work together to determine the best course of action. Access to the land below your home would have to be granted via a deed and, as such, it would show up on the preliminary title report.

The title report provides ownership information and acknowledges loans, deeds or trusts, easements, encroachments, unpaid property taxes or anything else that has been recorded against the property. If a homebuilder deeded mineral rights to themselves, for instance, they would have had to record that deed. If so, it stays on the title report until they and the current owner agree to take it off.

How to avoid last-minute disclosures

In Tampa Bay, unsuspecting homeowners signed over to the builder’s holding company the “eternal rights to practically anything of value (found) buried underground, including gold, groundwater and gemstones,” according to the Tampa Bay Times. If that weren’t enough, homeowners who didn’t realize they had signed over the mineral rights, or who did so at the last minute under duress, could have trouble selling their home later to wary buyers.

With any home purchase, you should give yourself enough time so that you can do your due diligence, either as a contingency to the contract or in the period leading up to the contract before you sign it.

When buyers think about due diligence, they immediately think “property inspection.” And in the case of new construction, it’s uncommon to do an inspection. But there is so much more to due diligence than a simple property inspection.

Never wait until the closing to discover such a big disclosure, as the unfortunate buyers in Tampa Bay experienced. It’s common practice for a good listing agent or seller, in states where disclosure is required, to raise something like mineral rights as a red flag to all buyers from the get-go.

Deeding access to the land below your home isn’t simply some “fine print” buried in the closing papers that could be easily overlooked. Such a disclosure would require paragraphs, if not pages, of documentation.

Best course of action: Review all documentation, disclosures and title paperwork prior to signing a real estate contract or during a due diligence period. If you’re uncertain, ask your agent for help reviewing the documents or hire a real estate attorney to pore through the paperwork on your behalf.

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Source: zillow.com

Is Land a Good Investment?

Most knowledgeable real estate investors will agree that buying land is not a good idea. There’s just way too much risk.

If you bought land in California in the 1970s, you’d probably opine that land is a good investment. If you bought it in 2006, and now it’s worth a fraction of what you paid, your opinion would probably differ. Most knowledgeable real estate investors will agree that buying land is not a good idea, and this includes buying small parcels of land and/or potentially investing in a large land deal. There’s just way too much risk.

Land is speculative

Here is the issue with land: It’s a 100 percent speculative investment. You are 100 percent hoping that the value will go up to provide you a fair rate of return. And it might. But will it go up enough to provide you a fair rate of return for the extreme risk that you are taking holding that land?

Here’s the risk

Let’s say you buy $100,000 worth of land, and you pay cash. It’s still going to cost you money each month to cover property taxes and insurance. And, here’s the kicker: It’s also costing you the opportunity cost of capital.

You probably took $100,000 out of your mutual fund account, or other financial asset, to buy the land. And when that money was in the financial account, it was probably earning interest — let’s say 5 percent — but now it’s not earning anything because you took it out of your account to buy some dirt. So you’re really effectively losing 5 percent in wealth each year because you’re not earning that return. Unless, of course, the land goes up that much in value plus compensating for property taxes, insurance and other annual costs.

As an example, if you have $100,000 and put it into a mutual fund, you’d earn 5 percent, or $5,000, per year. That’s cash in the bank that you can reinvest to earn even more money. After 10 years you’d have your original $100,000, plus $50,000 to $70,000 additional cash/financial asset earnings.

On the other hand, if you bought land, you’d earn no interest or dividends, and after 10 years you’d have a piece of dirt that you’ve been paying taxes on. Will your land have gone up enough in value to match the returns you would have earned on a financial asset?

In addition to those significant financial issues, land also can be contaminated, undevelopable or have significant development restrictions, among other issues.

Who might consider land?

Land may be a good investment for home building companies and long-term corporate land investors with extensive development and entitlement skills and experience, and significantly diversified portfolios of land to reduce their overall risk. But for small investors, it’s a high-risk gamble with little chance of earning a fair rate of return. There are much better investment opportunities, such as stocks, bonds, mutual funds, rental properties or, quite frankly, heading to Las Vegas for the weekend (where, by the way, many an investor has learned some tough land investment lessons in the past decade!).

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Source: zillow.com