Top Financial Tips for Property Investors

Top Financial Tips for Property Investors

 

For people who are just starting as property investors, investing in real estate can feel like a maze. They know where to enter as well as their desired exit point, but everything else is a puzzle.

Newbie investors can see that there is a lot of money to be made by investing in properties. They also know that all they need to get started as a property investor is to go out and buy an investment property. But as Windermere Management warns, the problem lies between buying the property and making it profitable.

Are there secrets to profitable real estate investing that new investors need to know? Yes, there are, and this post will help you get started on some of the most important ones. Here are the top tips for property investors.

 

1. Clarify your investment goal

Before you set out to look for a property to invest in, you should ask yourself what you want from the property. There are many options for what your investment goal for a property can be, and the particular goal you choose will define the best real estate investment strategy to pursue.

Your goal can be to save money on rent by investing in a property that you can live in and rent out at the same time. It can be a regular income and long-term value appreciation. It could also be that you want to make small to medium profits in a very short period. Clarifying your goal is the first step to defining your investment strategy.

 

2. Define your investment strategy and niche

There are several real estate investment strategies, and each one has its pros and cons. The best strategy for you depends on your particular circumstances and needs. Examples of real estate strategies include buy-and-hold, fix-and-flip, long-term rental property or vacation rental, and long-term rental property.

Apart from choosing your strategy, you should also decide your niche. This is the specific property type to which you want to apply your strategy. Examples of property niches include single-family houses, small apartment buildings, commercial retail, etc.

 

3. Understand what makes a location good

What factors make an area good or bad as a potential location for your investment properties? These are referred to as the area’s fundamentals. They include population demographics (age, income, education, etc.), good neighborhoods, a surplus of local shops and entertainment centers, good road networks and multiple modes of transportation, schools, hospitals, amenities, security, and employment opportunities. Gaining an understanding of the fundamentals will help you make a good decision about the best locations for your investments.

 

4. Find a mortgage broker who specializes in investment properties

Most mortgage brokers are familiar with residential mortgages, but the process for obtaining a buy-to-let mortgage is completely different from that of a residential mortgage. Using a broker who is familiar with investment property mortgages will help you get the best terms from lenders.

Who your broker is can mean the difference between an application that is rejected and one that is approved. And when buying houses below market value, the speed with which mortgage processes are completed can make or break a deal. This will depend on the experience and connections of your broker.

 

5. Use interest-only mortgage

When getting a mortgage for an investment property, you usually have a choice between interest-only payments or paying both the principal and interest. Choosing a mortgage that allows you to pay interest only is better.

It allows you to maximize cash flow and equity growth on the property while saving thousands in the mortgage payment. The money saved can be redirected into paying off the mortgage principal on your primary residence. Using interest-only mortgage also lets you take advantage of tax deductions for the interest payments on the investment property.

 

6. Avoid cross-securitization

This is when your investment loan is secured using more than one property. A common example is when an investor uses their home and the investment property as security for the investment loan.

The problem with this kind of loan structure is that it gives the bank control over properties that should normally not be connected to the investment loan. In the event that you default on the loan, the bank can sell your home. The better way to structure your loans is to split them up by using different banks for your investment property and your home. It costs more, but it is safer.

 

7. Understand the relevant tax laws

Getting a handle on the various tax laws as they relate to investment properties can be very difficult. Unless you are an accountant, it is highly unlikely that you will know all the small loopholes you can exploit to cut down on your tax expenses.

This is why you should not view the money spent on a good accountant as an expense. It is an investment that can help you make more money from your real estate business.

 

Written for Merriman.com by:
Tom Flanigan who is the owner of Windermere Property Management in Spokane, WA.
They manage rental properties in Spokane, Airway Heights, Liberty Valley, and Spokane Valley areas.

 

 

The SECURE Act: Important Estate Planning Considerations

The SECURE Act: Important Estate Planning Considerations

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation, which we recommend reading prior to this series.

We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries.  Here is our fifth of six installments on how the SECURE Act could impact you.

I set up a trust to protect this money for my children after I pass. What impact will the SECURE Act have on this?

If you have significant retirement plan assets, you may have considered naming a trust as the beneficiary of your IRA. Trusts can provide asset protection from creditors and ensure that beneficiaries cannot receive all inherited assets at once. This aspect of control is appealing to many parents or grandparents who want assurance their heirs won’t be able to quickly spend down an inheritance. Previously these trusts would have been set up as pass-through or conduit trusts that allowed Required Minimum Distributions (RMDs) to pass through to the beneficiary over the course of their lifetime.

Under the new rules of the SECURE Act, most non-spouse beneficiaries are no longer subject to yearly RMDs, but they are required to distribute all funds by the end of year 10. there are no RMDs for most non-spouse beneficiaries until year 10. Conduit trusts would now hold IRA assets within the trust for 10 years and then distribute the entire account balance at once at the end of the 10 year period. This means that trusts previously set up to protect children or grandchildren from having access to inherited IRA assets all at once no longer serve this purpose. There are also significant tax implications to all assets being paid out as income in one year.

If it is important to you that beneficiaries receive an inheritance over a longer period and not all at once, there are a couple of strategies you might consider:

  • A discretionary or accumulation trust can retain IRA funds, even after 10 years. The downside is that income retained within these types of trusts are taxed at high trust tax rates. However, this is a potential solution if control of assets is much more important than minimizing taxes.
  • Some are turning to life insurance products as a way to leave assets to a trust. Since there are no RMDs and the proceeds are tax-free, this option provides a lot more flexibility around how funds are distributed.

If you’ve named a trust as a beneficiary to an IRA, we recommend reviewing your estate plan with an attorney.

As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.

 

 

First Installment: I’m Planning to Leave Assets to Charity – How Does the SECURE Act Change That?

Second Installment: How to Optimize Your Accounts After the SECURE Act

Third Installment: Must-Know Changes for Your Estate Plan After the SECURE Act

Fourth Installment: How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

Sixth Installment:

 

Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.  Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.

Reason #10 Why Clients Hire Merriman: Someone Else to Blame

Reason #10 Why Clients Hire Merriman: Someone Else to Blame

Our work at Merriman is all about empowering our clients to live their lives fully. Having a financial plan in place and professional investment management provides peace of mind that allows people to focus on what they love to do most.

We conducted a survey to see why our clients chose Merriman and why they’ve continued to work with us throughout the years. We compiled their top ten reasons why—in their own words—and decided to showcase their responses in a ten-part blog series. This is part ten, our final installment. We hope you have enjoyed this series.

Reason #10 Why Clients Hire Merriman: “If something does go wrong, there’s someone I can blame.”

No matter their knowledge, years of expertise, or well-advised insight, there’s no advisor who can single-handedly control market movements. Markets fluctuate. They always will. If, or when, a market is down, it’s easier for you or your partner to blame an advisor than each other. What we’ve heard from our clients is that ability to lay blame on a third-party eases relationship tension that could surface during those stressful times. We find this “safeguard feature” means a lot to our clients. Not everything is predictable, but you can feel safe and confident with us.

Since this is still the start of a new decade, this is a great time to get organized and chart a new way forward. Working alongside an advisor takes the pressure off of having to know what to do first, how to be right about everything, and gives you a back-up opinion you can trust. If anything does go wrong, it’s not your fault. (Feels good, right?)

If you’d like to feel more confident about your financial future, leverage one of our financial advisors as a resource for your family. We’ll get to know you, your goals, and your values. There’s nothing we love more than helping people get back to living their lives fully. Contact us! We’re looking forward to hearing from you!

Check out the previous installment in the series.

Must-Know Changes for Your Estate Plan After the SECURE Act

Must-Know Changes for Your Estate Plan After the SECURE Act

 

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in late 2019, creating significant retirement and tax reforms with the goal of making retirement savings accessible to more Americans. We wrote a blog article detailing the major changes from this piece of legislation.

We’re going to dive deeper into some of the questions we’ve been receiving from our clients to shed more light on topics raised by the new legislation. We have divided these questions into six major themes; charitable giving, estate planning, Roth conversions, taxes, stretching IRA distributions, and trusts as beneficiaries.  Here is our third of six installments on the SECURE Act and how it could impact you.

 

Given the new rules for inherited IRAs, who should be considering changes to their estate plan?

IRA owners will need to evaluate how changes in the SECURE Act impact estate planning and beneficiaries. If you have a small Traditional IRA and plan to leave your assets to several beneficiaries, the accelerated income your beneficiaries will receive from distributing their share of your IRA within 10 years of your passing may not significantly affect their taxes. However, if you have a very large IRA balance or plan to leave your assets to only one or two people, distributions could push your beneficiaries into higher tax brackets. It will be important to evaluate your tax situation and potential taxes to your heirs to determine if it makes sense to accelerate IRA distributions or conversions during your lifetime.

 

Here are some strategies you might consider:

Leave IRAs to multiple beneficiaries: Here, each person receives income from a smaller portion of the account, which reduces the likelihood of pushing them into a higher tax bracket.

Make Roth conversions: IRA owners can evaluate their personal tax situation compared to their beneficiaries. For example, if large inherited IRA distributions would likely push beneficiaries into higher tax brackets like the 32% marginal rate, an account owner might have an opportunity to convert some assets to a Roth IRA now at a lower rate. Current owners may be able to convert at a lower tax rate if they have a more favorable tax situation (e.g. earning less ordinary income) or can spread out conversions. Planning Roth conversions throughout retirement at lower rates can reduce the taxable portion of future inherited IRAs.

Evaluate Trust structures: Many people name a trust as the beneficiary of their IRA, and they need to evaluate their trust structure following the implementation of the SECURE Act to make sure the trust is properly drafted to account for new provisions in the law. Commonly used trust structures like conduit and accumulation trusts, or those with “see-through” provisions, are affected by changes in the new law. Existing conduit trusts could face issues with how RMDs are distributed to beneficiaries, and accumulation trusts may need to include flexibility for discretionary distributions to allow tax-efficient planning. We can help facilitate a review with your estate attorney or recommend one of our trusted professionals to evaluate your plan.

As with all new legislation, we will continue to track the changes as they unfold and notify you of any pertinent developments that may affect your financial plan. If you have further questions, please reach out to us.

 

First Installment: I’m Planning to Leave Assets to Charity – How Does the SECURE Act Change That?

Second Installment: How to Optimize Your Accounts After the SECURE Act

Fourth Installment: How to Circumvent the Demise of the Stretch: Strategies to Provide for Beneficiaries Beyond the 10-year Rule

Fifth Installment: The SECURE ACT: Important Estate Planning Considerations

Sixth Installment:

 

 

Disclosure: The material provided is current as of the date presented, and is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.  Investors should consult with a financial professional to discuss the appropriateness of the strategies discussed.

 

Getting Creative with Financial Literacy

Getting Creative with Financial Literacy

As a dad and a financial advisor, I find myself constantly trying to explain how money works. In my opinion; budgeting, investing, and creating income are topics that should be equally important to my 8-year-old daughter as they are to a 50-year-old client. Unfortunately, for whatever reason, access to financial literacy tools for money management are not a mainstream part of our educational system. With more and more resources available at our fingertips, it is my hope that the next generation will grow up already knowing how to save and plan for retirement way before they get their first job.

Take my daughter for example. Last summer, my then 7-year-old asked me what I do for work (I’m a financial planner). It turns out, her friends were all talking about what their parents did for a living, so naturally my daughter wanted to join in on the conversation. Up until this point I had always told her that I helped people get ready for retirement, which I summed up as a “summer vacation that never ends”. She didn’t give it much thought until other kids started talking about how their parents owned a restaurant, helped people get better as a doctor, or worked on getting packages delivered faster as an engineer at Amazon. When my daughter told her friends that her dad helped people get ready for a never-ending summer break, she got a lot of “Huh?” faces.

I then decided to have a more in-depth dialogue with my daughter around what I actually did. The basics of how investing works seemed like a good place to start. So, using the tools we had at our disposal (crayons, blank paper and a 7-year-old’s imagination) I set out to explain what a financial advisor does. It started with a simplistic explanation of what the stock market is, and by the end of our first conversation, my daughter had learned the rhyme: “Stocks make you an owner, and bonds make you a loaner.”

This was progress! After a few more arts-and-crafts sessions, we had created a story explaining how investing in the stock market works, and it was starting to resemble a book. At this moment, I told my daughter we should try to publish our book so other children could learn about investing, and she turned to me and said, “Dad, you can’t just publish a book. Only authors can do that!”  Challenge accepted!

Fast-forward six months, and our rough draft was polished into a finished book. Today, you can find “Eddie and Hoppers Explain Investing in the Sock Market” on Amazon! As a dad and a co-author, I’m very proud of my daughter for helping me create this story and for helping me make the book a reality.

After the book came out, I figured my daughter would stay interested in financial literacy, but I should have known asset allocation and risk management weren’t exactly the most exciting topics for an 8-year-old. I had to find a way to introduce financial topics into everyday life.

Money management for a second-grader is pretty simple. My daughter’s main income sources are: A monthly allowance, gifts from relatives for birthdays/holidays, plus she had a lemonade stand last summer that netted a respectable profit. The problem wasn’t earning the money, the problem was keeping track of it and then remembering how much she had when she wanted to buy something.

So, as a dad/financial advisor, I did what comes natural… I created a spreadsheet to track everything. Turns out, spreadsheets are also pretty low on the list of things that my daughter finds interesting. This is when I had my a-ha moment. I did a quick internet search and found a lot of options for tracking how much a kid earns, spends and saves. Last summer when I was trying to teach my daughter what I did for a living, I did a similar search for children’s books that discuss financial topics and found very little. That’s what inspired me to write our book. Thankfully, this time I was able to find what I was looking for when searching for an app that could help me teach my daughter about budgeting.

Ultimately, I decided to use Guardian Savings with my daughter because it has the right balance of simplicity and effectiveness. Guardian Savings allows my wife and I to be ‘The Bank of Mom and Dad’. My daughter finally got organized, and she consolidated all her savings from the half-dozen wallets, piggy banks and secret hiding spots, so she could make her first deposit. More importantly, when we’re at the store or shopping online and my daughter finds something that she must have, we’re able to open the app and let her see the impact of making an impulsive purchase. Plus, as the parent, I get to decide what interest rate my daughter will earn in her account. Not only do I get to have a conversation about what interest is, but she gets to experience the power of compound interest by seeing her savings grow each month. Talk about a powerful motivational tool!

In this day and age, the idea of teaching your child how to balance a checkbook is outdated. The next generation will live in an entirely digital world. Apps are the new checkbook, and it may be a good idea to teach your children personal finance in the same environment they will be in as adults. Already a digital native, my daughter impressed me by how fast she learned how to use the app, not to mention the principals of saving and smart spending that are encouraged throughout the interface. In a few years, I’ll be able to discuss what asset allocation is and how a Roth IRA works, but for now I’m happy that my daughter can get practice making budgeting decisions and building a strong understanding of the basics.  Financial literacy has to start somewhere and the sooner that foundation can be made, the more confident a child will be when it comes to managing money as an adult.

What Pandemics Can Teach Us About Personal Finance

What Pandemics Can Teach Us About Personal Finance

Because economic markets are intrinsically linked across the globe, the impact of a global pandemic can be widely felt. Disturbances in supply chains can impact inflation rates, and an increase in unemployment is a viable risk. Due to this, low inflation rates can impact forex trading and force central banks to reduce country-wide interest rates, resulting in a weaker currency. Despite these changes, it’s vital to take an informed approach when it comes to managing your finances. Here are some ways you can re-strategize in the time of a pandemic:

How to rebalance your portfolio

During epidemics over the last 20 years, the S&P 500 Index tends to exhibit a pattern of dramatically falling then powerfully recovering over a period of approximately six months. A generally prudent strategy to follow is to seek expert advice in redistributing your investment portfolio. In general, selling US growth stocks and buying bonds is suitable for many clients. Selling partial or full positions in order to boost your tax savings is also good advice to follow in the long run. Keeping an eye on your portfolio and avoiding making panicked decisions is crucial in the event of a pandemic.

How to invest according to your current situation

Something else to keep in mind is to invest according to your age group and particular situation. This advice applies whether you’re experiencing the effects of a pandemic or not. If you’re a young investor, it is recommended to hold on to your existing investments and patiently waiting for your returns. If you’re nearing retirement age, you should consider delaying your retirement if possible and focus on building up your funds. Lastly, if you’re already retired, you should hang on to your investments if you can afford it, or attempt to reduce your expenses.

How to re-categorize your budget

During a pandemic, individuals and families are likely to juggle new financial challenges. At this time, it’s a good idea to rethink your priorities. For instance, figure out your new baseline income based on potential pay cuts or unemployment, as well as any benefits you may receive. After this, work on calculating how much you need to pay for the essentials, such as rent, utilities, and food. Finally, you should try eliminating or reducing unnecessary expenses where you can. Dining out, entertainment, clothing, and travel are some areas where you can cut costs during this time.

How to get refunds where you can

In order to limit the spread of illness, it’s common practice that major events, flights, and services like gym memberships will be canceled. Because of this, you’re usually entitled to some form of compensation. If a travel ban has been put into place, airlines are likely to give you a refund or some form of credit if your travel plans were made in advance. Concerts and sports events should have similar policies put into place, so check your spam folder for any emails and updates regarding your refund. If you haven’t received any communication from the relevant organization, reach out and contact them to see what can be done.

In the event of a pandemic, it might be tempting to give in to your emotions and worry about your finances. To prevent this, building up an emergency fund beforehand with approximately three to six months’ worth of expenses and maintaining a strict budget plan will help you maintain peace of mind.

Prepared exclusively for merriman.com
by Danielle Houston

Important Disclosure:
This article is for informational purposes only, and does not intend to address the financial objectives, situation, or specific needs of any individual investor.  The general suggestions provided are not intended to serve as personalized financial and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.  Investors are highly encouraged to work with a financial services professional to discuss their financial situation and suitable solutions.