home – John W. Tanner, J.D., M.S.

Buying a Home for Your Growing Business

Posted on August 4, 2021 by John W. Tanner, J.D.|M.S.

Guest Post by Marcus Lansky

Entrepreneurs who operate from their homes can find themselves quickly outgrowing the confines of their home office. While this is great news for your business, it might necessitate moving to a larger home to accommodate both the expansion and the needs of your family. While you may be looking at resale homes, a new home is another great option and will ensure everything is warrantied. These tips from Coleman Tanner Realty can help make buying a house a little less overwhelming.

Assess Your Finances

As an entrepreneur, you likely manage your finances and your income a little differently than you do your personal finances, even if you’re working as an independent contractor or sole proprietor. This can be a bit of a challenge when it comes time to finance a major purchase like a house. Rather than showing a mortgage lender your pay stubs and tax returns, you’ll probably be asked to provide a profit-and-loss statement and several years’ worth of business and personal tax returns. You may also be asked to provide proof of income via bank statements or other transactional documents. Lenders will want to see you have the financial resources to pay a mortgage in a timely fashion. Your credit history will also factor into what kind of financing you qualify for.

Consider a Co-Signer

Many self-employed individuals find it easier to qualify for a mortgage when they apply with a co-applicant, like a spouse or family member, who works a regular salaried position and can easily verify their income. This can be especially beneficial if, as a small business owner, you maximize deductions related to business operations, if you’ve been in business for a short period of time, or if you don’t have a significant revenue stream to demonstrate a steady income. If you happen to carry a significant amount of debt as a business owner, it can also impact how you’re viewed from a financial perspective, so it’s wise to check your credit and your debt-to-income ratio before moving forward in the home search process.

Choosing a Mortgage

You have a number of options for mortgages, all of which have different terms and conditions. A conventional loan requires a 5–20 percent down payment — putting down at least 20 percent allows you to forego mortgage insurance. A variable or hybrid loan has a fluctuating interest rate, while portable and assumable mortgages allow you to transfer an existing mortgage to another home or to take over someone else’s mortgage, respectively. With an open mortgage, you can make additional payments to pay down the balance faster, though it typically carries a higher interest rate. A closed mortgage restricts extra payments, but interest rates are generally lower. Also, consider the best amortization period or the time it takes to pay back the debt. Longer periods mean smaller payments, but you’ll be paying more interest in the process. When choosing a loan, it’s important to remember you will have to renegotiate the terms of your mortgage when the agreement ends.

Buying As-Is

When searching through the local housing market, you may see “as-is” listings that pique your interest. Buying a house “as-is” means you are accepting it in its existing condition and are not requiring the owner to make any changes or repairs as part of the sales process. This can be a good way to save money and get a deal on a fixer-upper home, but you will want to get a full inspection in advance to ensure there are no major structural problems that will be pricey to fix down the road. Consider retaining an attorney and consulting a general contractor, as well as conducting a title search to ensure there are no red flags. Also, think about the time and money you will need to invest in the home to get it into a good living condition, and weigh that against the cost-savings you’ll realize with this type of purchase.

Whether you’re building a new home, fixing up a resale property, or retrofitting your home to meet the needs of an expanding home-based business, Coleman Tanner Realty can help achieve your vision.

Book an appointment today.

Real Estate Sales Tips

To Build (New Construction) or Not to Build, That is the Question!

Posted on October 3, 2020 by John W. Tanner, J.D.|M.S.

Buying “new construction” is an exciting undertaking. Unlike buying an existing home, you’ll get to make it your own before turning the key for the first time. Here are ten tips to keep in mind as you begin your home building journey.

Establish a Set Budget. When it comes to establishing a budget for your new home, being a prudent homeowner is highly recommended. Therefore, you should plan on paying a 20% down payment on your new home and your monthly housing expense (principal, interest, tax, insurance, and association fee) at 25% of your income.
Get Everything in Writing. Having a lawyer review your initial contract and any subsequent amendments is highly recommended. Here are a few items to look for in the contract: (i) a “cooling off” period; (ii) payment schedule; (iii) timeframe for completion; (iv) included plans and specifications, warranties and insurance protection; and no blank spaces. Be clear about what changes are allowed once you “sign off” on the final plans. Two addendums you should include are (a) “all changes must be clearly documented & mutually agreed upon” and “time is of the essence.”
Stay Informed. Ask the builder for regular updates. Have somebody take pictures of the progress so you have evidence of any issues that may arise.
Be Patient. Delays will happen. This is a marathon, not a sprint.
Prepare for Hidden Costs. Does the developer’s estimate include “Finishing Costs”? How about zoning or CDD fees? Does your estimate include utility hookups, such a electric and gas meters? What about internet service wiring and installation? Are there estimates for your exterior, such as landscaping, concrete decks or brick pavers, fences and entries, or a mailbox? Try to think of every expense associated with your new home so that your estimate is as close to perfect as possible and that you have adequate financing in place to cover every expense. Ask about closing costs and developer contributions, if any.
Choose the Right Builder. It’s always a good idea to read online reviews, talk to residents in the new community about their experience, and see if any complaints are filed against them on USA.gov – consumer complaints, the Federal Trade Commission, and the Better Business Bureau. Also check to see if they are registered with the National Association of Home Builders. Lastly, are they good at communication? The last thing you want is to feel in the dark whilst waiting on your new home to be built.
Hire a Private Home Inspector (HI). Look for a home inspector with a current or prior Residential Contractor or General Contractor license. This type of person will know all the building materials and methods used in the construction industry. Their job is to ensure the structure is built up to code and complies with the municipal and HOA regulations and CC&Rs. Having the new home inspected by a 3rd party will help you rest easy at night while you wait. There are four stages of construction which warrant an updated inspection: (i) Foundations & Footings: the HI will check the slabs, foundations, drains and form work; (ii) Framing: the HI will check that the walls are straight & level, verify room dimensions, and ceiling height and roof lines all conforming to the plans & specs; (iii) Lock Up: This is the stage where the windows and doors have been installed. The HI will check the frames, seals, window flashing, brick and mortar work, and electric and plumbing; (iv) Final Inspection (Pre-Handover): At this point your home should be ready for a Certificate of Occupancy. Your HI will check for final interior/exterior finishings, paint, tile, carpet, wood flooring, cabinetry, windows & doors, and hardware, as well as inspect the site to ensure it is clear of any remaining materials or debris.
Create an Image File. You will be looking at plenty of options for creating your new home just the way you want it, and trying to convey a mental image of the vision for what you want each room to look like is quite tricky. So, why not save images that demonstrate what you want? This will help you communicate your requests to the builder and other 3rd parties more succinctly.
Think About the Little Things. Having electrical, telephone and internet outlets installed after drywall & insulation are installed is practically impossible to have done, so be sure to think about where you want your TVs mounted and cable boxes set prior to the electrical installation date. Do you plan on enjoying afternoon on the patio in the shade? The direction of your new home and where the sun sets will impact whether or not this happens. Keep shady sunsets in mind when you are looking at available lots. Location is important! By the way, corner lots are usually bigger and offer more privacy (one neighbor instead of two), so you’ll likely be charged a premium for it.
Lastly, Begin With the End in Mind. Will this be your “forever” home or your “retirement retreat”? Whether you plan to grow a family in a home that you’ll spend the rest of your life in, or one you will approach your golden years in, take time to envision the lifestyle you want for yourself (and your growing family, perhaps) before you select a new home development.

In closing, buying a new home is fun when you think of the construction details with a business-like approach, and the community lifestyle & interior design with your heart. We wish you a successful journey in pursuit of your “forever” home!

Coleman Tanner Realty – Your Home for Real Estate Solutions!

To schedule a Home Buyer Consultation, we can be reached at (786) 258-8877 or by e-mail at sales@colemantanner.com.

http://www.colemantanner.com

Coleman Tanner Realty is an Equal Opportunity Housing provider.

Real Estate Investing

How To Calculate True ROI for a SFR Rental Investment

Posted on August 24, 2020August 24, 2020 by John W. Tanner, J.D.|M.S.

Are you thinking about getting into the real life game of Monopoly? If so, you probably have a few questions you want answered before committing yourself to your first investment purchase, such as:

What is the property worth?
How do you calculate return on investment? (ROI)?
How much equity will I earn through appreciation?
What are my tax burdens going to be?

The answers to these questions vary with every property as no two transactions are ever identical. That notwithstanding, let’s take a look at the basics and figure out how to analyze a property to determine whether or not it is a good deal for you.

Q1. What is the Property Worth?

The answer to this question depends on whether the property is a single-family residence, a 2 to 4 unit property, or a 5+ unit multi-family property. Generally speaking, the market dictates the value of 1 to 4 unit residences using a valuation model called the sales comparison approach. The sales price/rent price of comparable properties that recently closed within the immediate area of the subject property are analyzed to determine an opinion of value.

For commercial real estate, 2 to 4 unit properties, or 5+ multi-family properties, the income approach to valuation is widely used by real estate agents, appraisers and lenders. This approach requires determining an annual market capitalization rate (based on the income of comparable sales) and a property-specific cap rate, based on projected annual income of the subject property (a pro forma statement of rents), using a gross rent multiplier, divided by the current value of the property.

Example: If a 1 unit condo costs $120,000 to purchase and the expected rental income is $1,200 per month, then the expected annual income is: $14,400 divided by $120,000 (cost to purchase), equals a cap rate of 12%.

The cap rate Is helpful for comparison purposes, but for a closer look at your potential investment, you’ll need to consider inflation and deduct for it using a discounted cash flow model. You’ll also need to factor in the costs of a mortgage, known as annual debt service, property taxes, property insurance, and other miscellaneous expenses such as water, electricity, landscaping, security, reserves for replacement, preventative maintenance, etc.

Q2. How Do You Calculate ROI?

When comparing investment options, properties with a higher ROI will help you make the best choice with regard to the greatest return on investment. To calculate your ROI, divide your profits by your investment cost. For ROI to be meaningful, you must input the most realistic expenses that can be expected for the subject property. Otherwise, any costs that are manipulated or omitted, which would reduce the ROI, will paint a picture that is unrealistic, increasing your opportunity cost (that is, The cost of not investing in other investment options), and may burden you with additional operating costs every month during the holding period.

You should also consider the option of using a mortgage to acquire the property, versus paying cash, and consider the annual debt service, which are the mortgage payments, and how they impact your monthly and annual cash flows. Additionally, the upside of leverage (buying an asset using other peoples money, or OPM), may significantly increase your ROI.

Note: Don’t forget to factor in your closing costs, real estate commissions, etc. into your purchase price and sale price of the subject property; these are acquisition and disposition costs.

Before we examine ROI on a financed property let’s look at the ROI for a subject property purchased as a cash transaction.

As you can see in the case study the overall rate and a five year period for rental ROI is 8.8%. The overall rate (OAR) on value appreciation is 29.6% for the five-year period or 5.92% per year. Added with the rental income the total annual ROI per year is 14.72%!

Now, let’s take a look at the same investment property but, in this case, let’s use a mortgage to purchase a property.

As you can see in the second example the ROI on rental income is an overall rate of 16.9%! Wow! the ROI on the appreciation is 134%! Combined together, this property produces an annual ROI of 43.7% per year!

Q3. How Much Equity Will I Earn Through Appreciation?

It depends. The market dictates the sales price, and, as we all know, that fluctuates based on a variety of variables, such as political, social, cultural, “acts of God,” (such as hurricanes and tornadoes), and economical and business changes in the immediate environment (such as the installation of an Amazon distribution center or an Apple research park coming to Your Town, USA. That said, on average, real estate doubles in value every 10 years. Put another way, a property owner can estimate a 10% per year appreciation in a healthy market in the growth stage of its economic life.

The Four Stages of the Economic Life of a New Home Development: Growth, Stability, Decline, and Revitalization.

Given the science behind the economic life of a property and its community, the best time to purchase a home is when it is first built. Thus, the best time to sell would be at the end of the first 15 years of its growth or shortly into the stability phase. As a rule of thumb, a rental investment is less risky when the property was built within the last 10 years and the holding period should be no more than 10 years. Buying an investment property within these parameters will give you the best opportunity, external factors aside, to realize a 10% per year gain of appreciation in value.

Q4. What Are My Tax Burdens Going To Be?

That’s a tough question to answer because no two investors are examining their tax situation from the same position. If you lived in the home to out of the past five years prior to the sale, then you could be exempt from capital gains tax on the sale of the property buy up to $250,000 for a single person or up to $500,000 for a married couple. However, assuming the property was rented for all five years of the holding period, then you would report your profit as capital gains, which that amount would depend on adjustments such as depreciation and other taxable income which would shift your tax bracket up or down.

Note, however, that a 1031 exchange Allows the seller to roll over the profit into another investment property of equal or higher value without incurring any capital gains taxes. Another note worth mentioning is that if the owner sells the property due to divorce or death and unmarried widow or divorce may count any time that their former spouse lived in the subject property under the exceptions to the “time and use” test. If that sounds like your situation, you should consult a real estate attorney in your market with expertise in real estate law.

Disclaimer: The author of this article is a non-licensed attorney. The information provided herein is for educational purposes only and is not intended to be used as legal advice.

Key Takeaways:

Return on investment (ROI) Can be used to calculate the value of an investment based on its monthly cash flow’s, as well as during the entire holding period.
To see the true ROI, consider the return with appreciation over an extended holding period, such as five years.
ROI tends to be much higher when buying an investment using other peoples money, or OPM, with a five year holding.