Category Archives: Millennial Talk

April 4, 2017

Rental property owners save big money with this Scooby Snack

By ericdunstan

I spoke this week to a long time friend I made when I worked at Excite.com. Remember that early Internet portal?! Those were fun times. We share a common interest in real estate investing and in fix-flip projects. Both of us managed to work insane hours during the day and then spent weekends remodeling houses. There is a certain joy in that…but it takes its toll on the physical and mental health for sure! My parents worried that I’d never find someone and get married. I ended up marrying someone who also shares this interest in real estate.

Like many of us in the San Francisco Bay Area, my friend, Darlene, was able to cash out her Non-Qual stock options and use the proceeds to invest in real estate. She found some great opportunities in the Desert Hot Springs area and acquired several properties that she has renovated and is now renting. Score. What a great way to use her stock proceeds to generate more wealth.

IMG_5026

Darlene shared that she recently sold two rental properties and is looking to reinvest in more properties in that area. This is where my heart sank and my ears perked up…at the same time…which is interesting from a purely biological perspective. I have a very active body it seems. My biological reaction was a cringe from the heavy taxation Darlene had to pay and the resulting loss of wealth that could have potentially been avoided.

When Darlene sold her stock options she paid short-term capital gains tax which is very common. She took those proceeds and bought properties. Now, depending how long she owned those properties, she paid capital gains taxes when she sold those properties. She will also pay income tax on the monthly rent she collected. Like wow, Scoob, that’s a lot of Scooby Snacks to give Uncle Sam. Yes, it is….and some of it can be avoided. Step into the Mystery Machine and let me tell you how.

The taxable event of selling stock is totally unavoidable and is a right of passage for success in the Silicon Valley. Paying taxes on rental income is also unavoidable. However, taxes on real estate investments can possibly be avoided…or at least deferred… through a little trick called the 1031 Exchange. The 1031 Exchange is a tool designed to help real estate investors buy “better” and more lucrative properties with the added benefit of not paying taxes on financial gains from properties sold.

 

Here’s how it works…and it’s totes legal. Let’s say I own 5 single-family home properties that I paid $100K each for a total investment of $500K. I hold these properties over 10 years and each has appreciated by $100K for a total gain in value of $500K. Let’s say I decided to sell all 5 properties and take the gain of $500K. Partaaaaaaay! That’s solid money. But wait, Scoob, if I take the $500K gain and run, I will pay long term capital gains tax….and that amount will hurt. Not so partaaaaaaaay!

IMG_5028

Or, I can play this sale more strategically and use the 1031 Exchange to protect that $500K gain by buying an income property (up to 3 separate properties) of an equal or greater value…and not pay capital gains tax. Keep in mind that the purchased asset must be another investment property…and NOT a primary residence. For this example, I’d sell the 5 single-family homes and then possibly exchange them for a small apartment complex. Do this exchange several times, and there are opportunities to own big time real estate assets…and to defer having to pay capital gains.

The kicker on this type of transaction is that once the 5 properties are sold (or closed), I must identify the “better” property I want to exchange to within 45 days and close on the sale within 180 days. This can be tricky if inventory is low like in the San Francisco Bay Area. Be sure to work with a real estate agent who is well connected to other agents within your local area.

Ok…watch your step out of the Mystery Machine. There are lots of other games that can be played here that are well defined within our lovely, and I mean lovely, tax code and by the SEC. I’ll be share more in future posts….like should real estate be a part of a retirement portfolio. The short answer is, heck yeah!!!

Please leave a question or response directly on this post or Tweet me a question @ericdunstan.

Leave a comment   |  tags: , , , , , , , , , , | posted in Millennial, Millennial Talk, Real Estate, Real Estate Investment, Real Estate Technology, Rental Property

August 22, 2016

Tips for First Time Millennial Home Buyers

By ericdunstan

ChelseaKrost08-12-16

Last month I was invited by Millennial thought leader, television and radio talk-show host, Chelsea Krost to participate in her weekly Twitter Chat, #MillennialTalk. She invited me to share my thoughts on what Millennials need to consider as they work towards buying their first home. What a fun event. We had a very active and engaged audience who asked several great questions. Buying the first home is overwhelming.  I hope my responses helped alleviate some anxiety and support the confidence of first time home buyers.

I’ve included the scripted Q&A transcript below from the chat session that took place on July 12, 2016 on Tweet Chat. I blew up my Facebook page that afternoon not realizing I had connected my Twitter feed. I got several texts from friends saying “Do you realize you made 1M + posts on Facebook?!” He he…sorry guys! I will be sure to disconnect Twitter from Facebook for the next #MillennialTalk event.

Enjoy and I hope you find the questions and responses informative! Please tweet me additional questions @ericdunstan. Tweet questions to Chelsea as well @ChelseaKrost if you’d like. She’s just great.

***

Transcript from #MillennialTalk with Eric Dunstan on July 12, 2016

Q1 @EricDunstan I don’t want to settle down…why would I buy a home? #MillennialTalk

A1a. There are many benefits to owning a home vs #renting. #MillennialTalk

A1b. Sometimes owning a home can be cheaper and more beneficial than renting. #MillennialTalk

A1c. Having your own house means you can do what you want #MillennialTalk

A1d. Loan programs make it easier to buy a home #MillennialTalk

A1e. Depending on home, monthly maintenance can be limited…giving you free time #MillennialTalk

A1f. Each month your payment builds #equity in the home…giving you power to sell and buy a bigger home #MillennialTalk

A1g It also allows you to borrow against the equity to remodel (called a home equity line of credit) #MillennialTalk

A1h. There are many tax benefits in owning your own on. Talk to a financial advisor or CPA #MillennialTalk

Q2. @EricDunstan OK…what do I need to do to even consider buying a home? #MillennialTalk
A2a. Meet w/advisor & build #financial plan – there are several online services that help w/ this including LearnVest.com #Millennialtalk

A2b. Very important to understand money needed 2 buy a home & how long it will take 2 save enough money to make #downpayment #MillennialTalk

A2c. Think about your 5 yr plan for career, savings etc. If you plan to live in the area for 5+ years it makes sense to buy. #MillennialTalk

A2d #Realestate follows a 5-7 year cycle.  If not, consider renting to avoid being caught in a downturn. #MillennialTalk

A2e. Think through life style…what area to live fits your style?  Can you afford that area? #MillennialTalk

A2f  Sometimes 1st time homebuyers need to break into market in area that may not be perfect fit, #MillennialTalk

A2g They can eventually upgrade to target neighborhood once their current home #equity increases. #realestate #MillennialTalk

A2h. If buying home is a big stretch, consider renting a room to someone as a revenue source. #homebuyer #MillennialTalk

Q3. @EricDunstan I want to buy a home…now what? #MillennialTalk
A3a Get prequalified for a loan, understand how much of a house you can afford. #homebuyer #MillennialTalk

A3b Look at all the loan options; conventional/gov insured, fixed rate, adj rate, 30 yr or 15 yr. There are a ton of options. #MillennialTalk

A3c Sometimes seller financing is an option. The seller acts like the bank u make mo payments to them.#MillenialTalk

A3d. Interview at least 3 real estate agents and talk to 3 lenders #MillennialTalk

A3e. Start touring around neighborhoods, going to open houses, use online search tools- @Zillow #MillennialTalk

A3f Get to know your #neighborhoods..and the kind of house that fits you. #MillennialTalk

A3g Determine what kind of house you want. Single family?  Townhouse or condo? #MillennialTalk

A3h When you think through what you want up front…finding the right home is easier! #MillennialTalk

Q4. @EricDunstan How much do I need to put down as a downpayment for my home purchase and how do I calculate closing costs? #MillennialTalk

A4a   It all depends on your financial situation, income level and credit score. #MillennialTalk

A4b To get the best rate possible plan on putting down roughly 20% of the home purchase price. #MillennialTalk

A4c Putting 20% down can be a lot of $$. There are other options but you may pay a hire loan rate #MillennialTalk

A4d. For example, some government secured loan programs require just a 5% down payment #MillennialTalk

A4e Talk to a mortgage officer at a bank or a mortgage broker to understand what is best for u #MillennialTalk

A4e. Closing costs are tricky and vary by state/county. Plan on paying around 2-5% of home purchase price #MillennialTalk

A4f. Mortgage providers and title companies will provide estimated closing costs on home u buy #MillennialTalk

A4g. Don’t worry! You won’t be surprised with BIG costs in the end. #MillennialTalk

Q5 @EricDunstan Do banks have flexibility with interest rates and do you recommend any online mortgage services? #MillennialTalk

A5a Yes! Banks offer different interest rates based on type of loan…#MillennialTalk

A5b. …and on credit score, down payment and savings of applicant #MillennialTalk

A5c As far as online lenders, I’ve been hearing great things about #QuickenLoans and #LendingTree. #MillennialTalk

A5d #BankRate is another great source to compare mortgage rates #MillennialTalk

Q6 @EricDunstan How do I determine if I’m getting a good deal when purchasing my home? #MillennialTalk

A6a He he. That can be tricky. Work closely with a listing agent who knows the area you are buying in #MillennialTalk

A6b Agent should run analysis of sales price of homes sold over past 3 months #MillennialTalk

A6c Analysis reveals average sales price for home of similar square feet and lot size in local area #MillennialTalk

A6d Agent needs to bring local market knowledge and recommend offer price range…#MillennialTalk

A6e based on condition/location of property you want to buy compared to average price in area #MillennialTalk

A6f The best way to lock in a great deal is to buy the worst looking house in the best neighborhood #MillennialTalk

A6g The more opportunity for u to make your own repairs and add $$ value the better #MillennialTalk

A6h You want to avoid paying the highest price for a home in the area #MillennialTalk

Q7. @EricDunstan What suggestions do you have for negotiating the sale price when purchasing a home? #MillennialTalk

A7a This is all market specific. A great real estate agent can guide you based on location and market conditions #MillennialTalk

A7b Your real estate agent needs to learn motivations for why the home is sold by talking to seller agent #MillennialTalk

A7c Maybe home needs to be sold quickly because seller has a job transfer. If so, offer a quick escrow close #MillennialTalk

A7d Or maybe offer to buy home “as is” without asking seller to make repairs. This is risky so ask your agent for guidance #MillennialTalk

A7e Another option is to offer seller a free rent back which means seller has more time to move out once home sold #MillennialTalk

A7f The more you learn about what helps the seller the more impact on sale price. It also shows you want to create deal that works for everyone #MillennialTalk

A7g Of course cash is king. If u offer to buy home all cash with no loan the seller will be VERY interested in working with u on price J #MillennialTalk

A7h I see a lot of all cash offers in the San Francisco Bay Area #MillennialTalk

Q8@EricDunstan Is it better to buy a new or existing home? Which is normally the better deal? #MillennialTalk

A8a Great question. I just made an offer on a new home for a buyer and there are benefits and risks #MillennialTalk

A8b Again, it all depends on the market conditions, location of home and needs of the buyer #MillennialTalk

A8c Some people prefer buying a new home for everything is..well…new! Nothing needs to be repaired. #MillennialTalk

A8d Amenities tend to be the latest standards and technology #MillennialTalk

A8e. New home developments also have units reserved for gov sponsored affordable housing programs if buyer is qualified #MillennialTalk

A8f Typically new homes tend to be in planned communities with home owner associations which define what can/can’t be done to home. #MillennialTalk

A8g Understand these requirements. #MillennialTalk

A8h Be sure to understand any additional fees associated with these associations as well. #MillennialTalk

A8i One potential downside is on sales price. Developers have a price needed to recoup costs in building new development. #MillennialTalk

A8j This price may not reflect market conditions. #MillennialTalk

A8k Existing homes have been on the market a while and may be more influenced by market conditions and seller motivation. #MillennialTalk

Q9. @EricDunstan What kind of expenses can I expect with #homeownership? #MillennialTalk

A9a Build a home ownership budget #MillennialTalk

A9b. Understand fixed expenses of owning home – #mortgage, insurance, taxes, water, electricity, taxes, etc #MillennialTalk

A9c. Understand tax rate for your state; safe for your #taxes each month #homebuyer #MillennialTalk

Q10 @EricDunstan What do I need to keep in mind after buying my home? #Millennialtalk

A10a Don’t buy your home and forget!! #MillennialTalk

A10c. Keep an eye on monthly expenses…track over 6 months are adjust spending #MillennialTalk

A10d.  Look at #interestrates…if a rate is .5 less than your rate, consider #refinancing #MillennialTalk

A10e. Why should you #refinance?  The difference in rates can mean saving $200+ a month #MillennialTalk

A10f  Homes require regular upkeep – create a maintenance schedule #MillennialTalk

A10g.  Create a plan and #budget to make home improvements. #MillennialTalk

A10h The money to #remodel the home may be in the house…consider a home equity line of credit. #MillennialTalk

Q11. @EricDunstan What parts of the home to #remodel to gain the most equity? #MillennialTalk

A11a. Generally speaking, a remodeled #kitchen and #bathrooms always generate greater value in a home #MillennialTalk

A11b. Expanding a master bedroom/bathroom also increases value #MillennialTalk

A11c. If you are up to the challenge, adding a bedroom and/or bath adds value…but there are implications to consider. #MillennialTalk

A11d Taxes tend to increase when the home size is increased. #MillennialTalk

A11e. As you #remodel, consider how appealing the rooms, amenities, etc will be to a potential buyer. #MillennialTalk

A11f This is a hard one for many people who want to create a home the way they want. #MillennialTalk

A11g  However, in the event the home must be sold, it’s important to have a house buyers want to receive the highest purchase price. #MillennialTalk

Q12 @EricDunstan Where can we find more of your great info on #realestate and #homeownership? #MillennialTalk

A12a Thank you. I love sharing what I’ve learned. Please send me further questions through Twitter @ericdunstan or visit my blog at http://ericdunstan.com #MillennialTalk

A12b. Of course I will continue to post regular updates to your Twitter feed and blog #MillennialTalk

Leave a comment   |  tags: , , , , , , , , , , , , | posted in Millennial, Millennial Talk, Real Estate, Real Estate Technology

August 5, 2016

Owning a home requires Top Ramen and a budget

By ericdunstan

Eric DunstanOver the past few months I’ve been working with a first time homebuyer who is searching for a single-family home in the heart of the Silicon Valley. Yikes, I had to help him overcome the sticker shock of San Francisco Bay Area real estate prices in comparison to prices in his hometown in Alabama! What is most exciting about this buyer is that he clearly sees the value of owning his own home and put a financial plan together to make it happen. He is currently renting an apartment at a rate equal to the monthly mortgage payment he will pay. The big “#winning” for him are the tax benefits of owning a home and the option of controlling his own space. Apparently his next-door apartment neighbor has an affinity for pungent cuisine in the early morning. “There are certain smells that I just can’t deal with in the morning.” I totally get that.

This buyer is the quintessential engineer who thrives on process and data. The search process has been very methodical replete with weighted ranking system across buyer needs. I love it. So cool. I applaud the zeal he brings to the search and the questions he asks. “Can you help me understand the various expenses I should plan for after I buy my home?” Great question.

Getting your financial house in order to buy a home is a first critical step. Understanding the cash flow needed to own and maintain a home is the second. Saving to buy a home shows great financial discipline. Owning a home requires a commitment to maintaining the discipline.

I helped my buyer understand the financial requirements by helping him build a monthly budget that breaks out costs by fixed home ownership costs and variable costs. I am defining fixed costs as expenses that are required to own a home. For example, costs include:

Mortgage Payment: Paid monthly.

Home Owner Association Dues (if applicable): Paid monthly.

Property Tax: Paid 2x a year, but good to budget for each month.

Property tax is an important cost to examine closely for it can be a substantial amount depending on the state you live in. For example, in the San Francisco Bay Area where the average home price is above $1M, the tax rate requires budgeting at least $1K a month to pay the annual amount. I know, YIKES! That’s more than a car payment. A mortgage lender and/or a financial advisor will help you understand the tax implications in your local area and how best to budget for them. For example, tax payments can be included in an impound account to be part of your monthly mortgage payment. Think through how best to budget for tax payments. Trust me, you don’t want to be surprised by the tax bill.

Home Insurance: Various payment schedules are available depending on provider, but good to budget monthly.

Other Fixed Costs: Costs include electricity/gas, water and garbage. Unfortunately there are no work arounds to having these services. Having your own landfill is not a good idea.

Once the fixed costs are defined, an understanding of the money available for the variable costs, or everything else, will become clear. I know…not much is left of your monthly paycheck!!! Now it’s time to prioritize and budget for what variable costs are important and not important including…

Medical/Dental Insurance: What are the best and lowest cost plans available to you? Does your employer provide or do you need to pay for some or all of these policies yourself?

Transportation:  Car payments, car insurance, gas, etc. What’s the cheapest way to get to work? Maybe walk more?

Food: Do you want to eat? If so, do you want to shop at a grocery store or grow your own? J He he. Remember eating Top Ramen in college? Top Ramen is a food staple for homeowners too!

Services: Netflix, cell phone, cable, Internet, dry cleaning, home cleaning, etc. Maybe it’s no longer a “want to come over for a Netflix and chill?” and now a “want to just come over?”

Entertainment: Going out to eat, movies, concerts. I had to cut my Entertainment budget BIG TIME once I bought my first home. Free concerts in the park always work for a date night.

Vacation: Do you take an annual trip home or go on a vacation? Maybe take the train home instead of fly? Maybe it’s Europe in hostels or cashing in the hotel rewards points to save on hotels?

I know, I know. This gets a little overwhelming. However, it’s SUPER IMPORTANT that these costs are identified and a budget is built. Understanding the monthly finances gives you power to control what to spend and not spend on. Knowledge is power. Unfortunately, I know people who own homes who don’t know what their monthly mortgage payment is. They set it up once on automatic bill pay and forget. HOW SCARY IS THAT? The big consumer learning from the mortgage crisis in 2008 is don’t buy a home that you can’t afford…no matter how affordable it seems on paper! If budgeting gets tedious, always keep your mind on why you are being so budget conscious. YOU OWN YOUR OWN HOME. That’s cool.

My goal is to share with others the great opportunities, benefits and risks of home ownership to empower them to make their own decisions for what works best.

Please feel free to Tweet me with questions about this post @ericdunstan .

Leave a comment   |  tags: , , , , , , | posted in Financial Technology, Millennial Talk, Real Estate, Real Estate Technology