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5 Tax Advantages of Owning Real Estate

4/25/2023

 

Summary

There are many pros and cons of owning real estate that we discuss on Better Life + Finance. Some of our favorite pros to investing in real estate are the tax advantages! We were amazed in our first year of owning our first multifamily property how much our taxes were positively impacted just by owning our home. This article discusses 5 advantages to owning real estate.


Owning real estate can provide several tax advantages, including:
  1. Mortgage Interest Deduction: If you have a mortgage on your property, you can deduct the interest paid on the mortgage from your taxable income. This deduction can be significant, especially in the early years of the mortgage when most of the payment goes towards interest.


  2. Property Tax Deduction: Property owners can also deduct property taxes paid on their real estate from their taxable income. This deduction can also be substantial, especially in areas with high property taxes.


  3. Depreciation Deduction: Another tax advantage of owning real estate is the ability to take a depreciation deduction for the building and improvements on the property. Depreciation is a non-cash expense that reduces your taxable income and can provide significant tax savings over time. This only applies to income producing properties, you cannot depreciate your primary residence. Residential properties are depreciated over 27.5 years - which means that your total basis - or investment - in the building (not the land) gets divided by 27.5 and that amount is deducted from your taxable income each year. For commercial real estate, the timeline is 39 years. 


  4. Capital Gains Tax Exclusion: If you sell your primary residence, you may be eligible for a capital gains tax exclusion of up to $250,000 for an individual or $500,000 for a married couple. This exclusion can be used once every two years, and can provide substantial tax savings.


  5. 1031 Exchange: A 1031 exchange allows real estate investors to defer paying capital gains taxes on the sale of one property if the proceeds are reinvested in a similar property within a specific timeframe. This can provide significant tax savings and allow investors to grow their real estate portfolios without incurring large tax liabilities.


Overall, owning real estate can provide significant tax advantages, but it is essential to consult with a tax professional to understand how these tax benefits apply to your specific situation.

+ Better Tip
When we purchased our first multifamily home, we were referred to a local accountant who works with many real estate investors and owns real estate themselves. We have been working with this CPA ever since and continue to refer our friends and clients to them. We learned that once you add real estate into the mix, personal taxes become a lot more complicated and the opportunities to miss crucial deductions greatly increase. We have peace of mind knowing that a professional is handling the annual documentation of our rental property activities and it is completely worth the cost of the tax service. We keep track of our expenses and income throughout the year and then hand that data off to our CPA and let them work their magic. Our Better Tip? Leave tax returns to the professionals and enjoy your day! 

The Pros and Cons of Renting vs. Buying a Home

4/24/2023

 

Summary

This article discusses the benefits and potential disadvantages of both renting a home and buying a home. ​Renting a home and buying a home each have their own advantages and disadvantages, and ultimately the decision between the two depends on your personal circumstances and priorities.


​Pros of Renting a Home:

  1. No Maintenance Costs: When you rent a home, you're not responsible for any maintenance costs or repairs. This can save you a significant amount of money over time.
  2. Lower Upfront Costs: Renting a home typically requires a lower upfront cost than buying a home. You generally only need to pay a security deposit and first month's rent to move in.
  3. Flexibility: Renting a home gives you more flexibility in terms of moving. If you need to move for work or personal reasons, you can do so relatively easily since you're not tied down to a specific property.

​Cons of Renting a Home:

  1. No Equity Building: When you rent a home, you're essentially paying someone else's mortgage. You don't build equity in the property and you're not building an asset that you can sell in the future.
  2. Lack of Control: When you rent a home, you don't have as much control over the property as you would if you owned it. You can't make major renovations or changes without the landlord's approval, and you may not be able to decorate or personalize the space as much as you would like.
  3. Rent Increases: Rent prices can increase at the end of each lease term, making it difficult to budget for the long term.

​Pros of Buying a Home:

  1. Equity Building: When you buy a home, you're building equity in the property as you pay off the mortgage. This means that you're investing in an asset that you can sell in the future or use to secure a loan.
  2. Control Over the Property: When you own a home, you have complete control over the property. You can make changes and renovations without needing anyone else's approval, and you can decorate and personalize the space to your liking.
  3. Tax Benefits: Owning a home can come with tax benefits, such as the ability to deduct mortgage interest and property taxes from your income taxes.

​​Cons of Buying a Home:

  1. High Upfront Costs: Buying a home typically requires a significant upfront cost, including a down payment, closing costs, and other fees. This can be a barrier to entry for some people.
  2. Maintenance Costs: When you own a home, you're responsible for all maintenance and repair costs. This can be expensive and time-consuming, particularly if something major needs to be fixed.
  3. Lack of Flexibility: When you own a home, it can be more difficult to move since you need to sell the property or rent it out before you can move on. This can be particularly challenging in a slow real estate market.

Overall, the decision to rent or buy a home depends on your financial situation, lifestyle, and priorities. It's important to carefully consider the pros and cons of each option before making a decision.

+ Better Tip
List out your personal and financial goals for the next 5 years. Analyze your current financial situation. See how your goals would either be supported or negatively impacted by the pros and cons of owning or renting. It doesn't hurt to talk to a mortgage loan officer to get a good idea of where you currently stand in terms of mortgage qualification, and certainly discuss if purchasing a multifamily is a possiblity if that would support your financial goals. 

5 Ways to Build Credit Without a Credit Card

4/15/2022

 

Summary

Navigating credit scores can be confusing and frustrating. Even if you have a low credit score or no credit history, there are ways to build your credit without obtaining a regular credit card. You should seriously consider these options if you have a history of late payments or your employment is not secure. It is too easy to get a credit card and quickly rack up a balance and fall behind on payments, which will only hurt you financially and emotionally. This article shares several ways you can build or improve your credit score without a traditional credit card. ​

​by Christian Scully

Credit reports are unfortunately a flawed and necessary evil we have to deal with. They are confusing, can change for no apparent reason, can go down when you think you've done something good and certainly cause a lot of stress for people in today's world. Because financial education is mostly not taught in school and the bulk of that education needs to come from parents and mentors, most kids don't understand the importance of a good credit score. I would argue that most kids don't even know what a credit score is. At least I like to think that because I certainly didn't! 

Like a lot of young people with no concept of personal finance, I destroyed my credit score in college, borrowing money to pay for living expenses without a thought of how I was going to back the money back. By the time I first started learning about personal finance and began working towards buying our first house, my credit was in the low 500's... not good. It took about 18 months to get the credit score to above a 620 to qualify for a decent interest rate on a government backed mortgage. 


A lot of people will be in this category and will need to commit to digging their way out of the bad credit hole. Another group of people, however, will have never opened a credit account and thus won't even have a credit score. I've had borrowers seeking my help with applying for a mortgage with no credit score. In this case, there are things you can do to get the credit bureaus to calculate a score for you and to start building a good credit history. The following are a few of the best ways you can either build credit from scratch without a credit card, or to start repairing bad credit. 

Remember that if you are recognizing that your credit score is less than ideal, and you are motivated to improve it, you are already ahead of the game! So many people never even think about it and just continue missing opportunities or struggling due to poor credit. It takes time to improve, but not as long as you may think! Stay focused on your goals, know why you are trying to improve your personal finances and credit rating, and you will keep doing better every day. 

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Common Borrower Mistake: Why you shouldn't trust online mortgage interest rate ads or attention grabbing rate news headlines.

6/3/2021

 

Summary

Interest rates are the subject for confusion, excitement, disappointment and panic. They truly touch on nearly every emotion. Online ads, sponsored-content articles and news headlines contribute to the confusion among borrowers. These publications and platforms don't make it clear that borrowers can't simply get the lowest possible rate. There are factors that impact their qualifying rate, and therefore borrowers should ignore the hype and learn from this article. We'll discuss what impacts a qualifying interest rate and how to be prepared for the application process.

​by Christian Scully

As we witnessed in 2020, news headlines and online advertising are enough to stir up excitement and send borrowers shopping and applying for refinances. 2020 even saw some interest rates under 2%! What those news headlines often forget to mention is the $10,000+ in discount points you'd be paying to get a rate under 2%. 

Sometimes borrowers will start a conversation with me by inquiring about the current interest rates. This is not a black and white question. Those advertised rates are generally the best rate you could possible qualify for under perfect conditions. However, in the process of applying for a mortgage, other details about the transaction are filled in. Those details can trigger a "loan level price adjustment" or LLPA. 

LLPA's can add or subtract a small amount to the interest rate for various reasons. The most recent newsworthy example of this would be the half-point (0.5%) fee that Fannie Mae and Freddie Mac added to all refinances after 9/1/20, named the "Adverse Market Refinance Fee". In most cases, this would cause the interest rate to increase simply for the fact that the loan purpose is a refinance. 

Other details that will affect a borrower's qualifying interest rate include their credit score. For example, if the borrower has a 580 credit score, their interest rate will increase more than if the borrower as a 660 credit score. If the borrower is applying for a mortgage on a primary residence, the interest rate will be lower than if it is a second home. Interest rates for investment properties are significantly higher. Interest rates for multifamily properties will be higher than for single family properties. Rates for 5% down payment will be higher than 20% down payment.


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11 Things You Should NOT Do When Applying For A Mortgage

5/1/2021

 

Summary

This article will provide you with a list of eleven common mistakes that borrowers often make when preparing to applying for a mortgage or when in the middle of the application process. We will discuss the potentially negative affects that can be caused by each mistake. 

by Christian Scully

Applying for a home loan can sometimes feel like a challenge, but the best thing you can do as a borrower is to be informed, prepared and to not make things harder for yourself. If you have already been prequalified for a mortgage, you are going to want to keep your current financial situation unchanged. Consider that you are building an image of yourself for your lender, you don't want to change that image before the lender can make the ultimate decision. If you are working towards getting prequalified for a mortgage, you want to avoid anything that will be detrimental to your credit history. If you are already under contract or in the middle of a refinance application, there are a few easy mistakes to avoid. No matter what point you are at in the mortgage process, make note of the following eleven things you should not do.
​

1. Don't open any new lines of credit or take out any loans.

Opening new credit accounts could have two potentially negative effects. First, if you open a new credit account you could be adding debt to your credit report. Additional debt could change the loan amount you qualify for. Second, opening new credit accounts will lower the average age of your credit accounts which could lower your credit score. 
​

2. Don't apply for credit with many different lenders.

If you have applied for a credit card and been denied, don't keep applying for more cards thinking eventually one will approve you. Every time you apply for credit there is a hard inquiry on your credit report, potentially lowering your score. Applying to a few different mortgage lenders in an attempt to shop around for the best rate and terms is okay. Typically if you have a few inquiries from mortgage lenders in the same month it will be clear that you are shopping around and your score likely won't be impacted too much.  However if you have 8 inquiries for credit card, 4 inquiries for auto loans and a few mortgage inquiries, it does not paint a very good picture of your financial situation, especially if those inquiries don't lead to actually opening a credit account. It shows lenders that you likely are not qualified for credit.

+ Better Note: Hard inquiries stay on your credit report for two years. If you are applying for a mortgage, your lender will likely ask for explanations if you have several recent hard inquiries on your credit report. They want to know that you don't have new debt obligations that have not yet been reported.


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Mortgages for First-Time Homebuyers 102: The Basic Steps in Getting Approved for a Home Loan.

4/30/2021

 

Summary

In this article we will break down the basic steps in the mortgage application process. Borrowers will deal with several people and so many documents. Read through these steps to have a good understanding of what to expect, and tips on how you can make the process efficient and what to do when you encounter any problems.

by Christian Scully

At this point you should have already been working with a loan officer, gone through the prequalification process, and been issued a prequalification letter that tells you, your realtor and any seller to whom you submit an offer how much you are qualified to borrow and what type of loan you will be applying for.

If you have not been through the prequalification process, then take a few minutes to start with the previous article on this topic here.

If you have been prequalified, congratulations! If you are still working towards prequalification, stay the path and keep working hard. The next step in the mortgage process is applying for the mortgage. If you are working with a good lender and they did a thorough prequalification, then you should already be in a good position to get through the application process almost effortlessly.
​
Let’s break down the mortgage application process so you know exactly what to expect and you can be prepared.


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Mortgages for First-Time Homebuyers 101: The Basic Steps in Getting Pre-Approved for a Home Loan.

4/29/2021

 

Summary

This article breaks down what first-time homebuyers can expect when starting the mortgage application process. The first step is getting pre-approved, and we will discuss the steps to pre-approval and how first-time homebuyers can be prepared, knowledgable and less stressed during this process. 

by Christian Scully

There are two types of first-time homebuyers that I meet a lot in my work as a mortgage loan originator:

Some buyers reach out seeking a mortgage for the first time, excited and motivated to start shopping for their first home and have an expectation that they can simple fill out a quick application and be handed a couple hundred thousand dollars to go pick out the home of their dreams. 

Others reach out absolutely terrified at the idea of applying for a mortgage, either based on bad experiences their friends have had, or general anxiety when it comes to finances or credit.

These two polar opposite attitudes when it comes to applying for a mortgage are both extremes. The problem with expecting the process to be super fast and easy is that they tend to be surprised at the need for some of the necessary steps in the mortgage process. This can cause frustration and even anger at times. And the issue with being frightened of the process and expecting a nightmare is that it causes unnecessary stress on the buyer and already begins the experience with negative attitude.

Let's take a very simple, quick overview of how to start the mortgage application process and hopefully help set your reasonable expectations and provide a clear path to your goal of purchasing a home. The first phase of the mortgage application process involves getting pre-approved for a home loan. This should be every first-time homebuyer's first step in the home buying process as well. Before you can start seriously shopping homes, you need to know if you are in a financial position to actually be approved for a mortgage, and know exactly the maximum price of a home you can afford, and what type of loans might be the best option for your needs and goals. 

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    Real Estate + Money

    Thoughts, ideas, lessons-learned, inspiration, how-tos and more from a journey in small business, to owning and investing in real estate, helping borrowers navigate the mortgage process as a licensed loan originator, in an ongoing pursuit to fund the life and retirement that is chosen, not accepted.

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​Christian Scully is a licensed mortgage loan originator (NMLS 1864693) in Rhode Island, Massachusetts, Maine and Connecticut and is available to help borrowers seeking to purchase or refinance a home.

Copyright © 2023 Better Life and Finance. All rights reserved. All content, including text, images and video are sole property of Better Life and Finance and it's creators. 

​Disclaimer: The creators of Better Life and Finance are not certified financial advisors and are not attempting to give general financial advice. The information is from personal experience and shared freely. Consult a professional financial advisor when making financial decisions. Christian Scully is a licensed mortgage loan originator and is qualified to answer your home loan questions.
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