Financing

How the Fiscal Cliff Affects Homeowners

January 7, 2013 by Michael Borger

Aloha, friends. Apologies for the time away, but holidays call and yours truly got engaged(!). But time waits for no one and there’s much to discuss. The biggest news upon us now has been the dreaded fiscal cliff that we narrowly avoided. President Obama was in and out of Hawaii, alternating between vacationing with the First Family in Kailua and presiding over some of the most delicate negotiations to hit Washington in quite some time. And when it appeared that we were all about to go over the cliff like Thelma and Louise, the elephants and donkeys of Congress cut a deal.

But where does the Fiscal Cliff deal leave Hawaii’s homeowners?

Great question. The biggest advantage that many people are talking about is the one-year extension of the 2007 Mortgage Forgiveness Debt Relief Act, which was set to expire December 31 2012. To recap: when a house is sold as a short sale, the difference between the sale price and the mortgage balance is called the deficiency. The banks will normally waive the deficiency to help facilitate the short sale (and avoid a costly foreclosure). However, the IRS considers debt forgiveness to be income, so while the homeowner will largely be off the hook for the deficiency, they would still owe taxes on that amount according to their tax bracket. The 2007 Act allowed the short selling homeowner to waive that tax liability as well, essentially making a short sale free.

The looming fiscal cliff threatened to let that policy expire and, with it, the hopes of many homeowners with underwater mortgages who weren’t able to close a short sale before the end of the calendar year. Now, with the extension through 2013, anyone closing a short sale this year will still be able to take advantage of the tax waiver on their deficiency. That’s THOUSANDS OF DOLLARS in savings when you look at the average deficiency of a mortgage for a short sale in Hawaii! I’ve personally spoken with owners who have been underwater over $500,000. Do the math on the tax savings, even at the lowest bracket, and you’ll see the impact of extending the policy another year.

However, it’s not just about over-leveraged mortgages. The fiscal cliff deal did not really address the nation’s growing debt load which continues to steadily rise. Nor did it help from another tax angle — payroll taxes. You may have noticed this already. Furthermore, the deal postponed any discussion on spending cuts for another two months.

So while a crisis may have been averted, it’s safe to say that there’s more work yet to be done.

2012 Predictions – What to Watch Out For

January 4, 2012 by Michael Borger

Aloha, friends. I hope everyone enjoyed a safe and happy holiday season as we bounce into 2012. I’ll spare you all the recap everyone else is giving you of the 2011 calendar year, which is old news, and jump right into what I see happening in the next 12 months.

Flipping Houses Just Got Easier

If you didn’t notice, the FHA just extended its anti-flipping waiver. That means it doesn’t matter how long the current owner has held the property if a buyer is using FHA financing. Those 90-day seasoning periods are gone for at least another year, so house flipping investors with capital should step up the plate because you just increased your buyers pool and reduced your holding costs. With the economy of the last few years, not everyone is a Cash Buyer (if you are, then get on this list!). Marketing to FHA buyers not only helps people get a new home but should also help the banks plow through their backlog of REO inventory.

The Hawaii Foreclosure Moratorium Backfires

I’m not saying I want this to happen, but I fear the intended objectives may not be attainable. I still get calls from people in foreclosure asking about their options because they’re getting taken through the judicial foreclosure process. Keeping someone in a pay-option ARM mortgage isn’t always the best decision for anyone, especially the homeowner. I know it’s a process that needs to take its course, but I’m skeptical. I’m wary that people in trouble before will be put right back in a situation of not being able to make their monthly payments and need foreclosure help all over again. Another downside to this is that it will clog up the banks’ property pipeline, likely delaying a Hawaii housing market rebound.

Landlords Line Up

There’s been a lot of talk lately about the “Nation of Renters” that’s headed our way and I think there’s a lot of truth to that. Investors are getting creative again in how they purchase and sell properties, and this includes the Lease Option. It’s no secret that Hawaii has some of the highest housing prices in the nation. As such, many people who’d like to buy simply can’t do so the conventional way, but a lease option gives them a way to get their foot in the door. What does that mean? It means landlords and cash flow investors should reach out to this group of buyers who will take better care of their place because they see themselves as the future owner and will pay a rent premium for that right. Until the economy comes around, it’s a specialized yet profitable niche.

Investors Will Step Back From Stocks

Ok, this may not be housing related, per se, but there’s a correlation, of course, between real estate prices and the stock market. The S&P 500 reportedly finished right where it started twelve months ago. Let me repeat that another way — the market gave out DIDDLY SQUAT for the entire year. When you consider that most people are taught that stocks and bonds are the only way to grow your portfolio, it’s outright depressing. A year wasted.

My friends over at New Direction IRA just reported phenomenal growth for another consecutive year in their Self-Directed IRA business (SDIRA). These financial instruments allow people to invest in much, much more than the stock market. You can invest in gold, silver, startups, and, yes, real estate. Flip houses, earn cash flow or grow at 12% or more as a private lender for real estate investors — all inside your IRA. With the growth reported, I predict that more and more people will step out from behind the tightly-controlled veil of commodities brokers and embrace the freedom of a Self-Directed IRA. Education is empowering.

Need another reason to watch out for the market? The next country in Europe to go belly up or Arab country to get overthrown or natural disaster in who-knows-what corner of the globe affects your return on investment. Scary, isn’t it? I agree.

One Giant Leap for Mike…

I also predict that my wonderful girlfriend Nanae will move here in early April from San Diego and start a very successful career as a Honolulu piano teacher (here’s her current site in SD). Know any kids needing lessons? Let me know!

That’s all I have on this Wednesday afternoon before I head over to the FAMES Hawaii monthly event at Dave and Buster’s. Let’s all keep a watch out in this first month for some signs of where the new year is taking us.

Tax Tips for Home Sellers

August 16, 2011 by Michael Borger

I’m not an accountant, so when it comes time for taxes, there are two places to go to: a real accountant and the IRS. Every now and then, the IRS releases a quick sheet of tax tips. Last week they published one for home sellers. Check out this page HERE.

Summer activity is one of the times when home sales volume tends to tick upward, although the spike is smaller here than on the mainland when many people don’t want to sell their home in sub-zero winter temperatures. While the local real estate market is still in a rut by most people’s opinions and won’t be clawing its way out for quite some time according to the latest projections, there are still plenty of people who want to sell their home for one reason or another. If that’s you, then make sure you have a look at that list and speak with your accountant so you don’t waste tens of thousands of dollars — or accidentally skip paying what the government says you actually owe.

Click this link if you you need to sell your house. If you need an accountant referral, just let me know.

Investing in Hawaii Real Estate With My Retirement?

April 15, 2011 by Michael Borger

“I didn’t know I could do that!”

I’ve heard that line a bit lately from folks when hearing about how they can use their very own retirement money to invest in Hawaii real estate. It’s as if all of a sudden they have money they didn’t know they had and can start becoming a true Hawaii real estate investor. To explain how this is possible, I’ve brought back Dan Falardeau of New Direction IRA, a custodian for Self-Directed IRAs.

MIKE: Aloha, Dan. Thanks for contributing again to HawaiiHousingNews.com. Let’s get right to it. In your last post you basically described how a Self-Directed IRA works. I think that itself was news to many people. We recently turned the page on 2010 and are already a full quarter into of 2011. What was the big news or overall picture for Self-Directed IRAs in 2010, what do you see for 2011?

DAN: The up and down of the stock market roller coaster is crazy. You’re happy one day, sad the next. You have no control over what makes the values of your mutual funds change. Self-Directed IRAs, on the other hand, give you the control you want. It’s a buying opportunity out there for anyone with money in their retirement accounts. The unfortunate situation with the housing market across the country has prices down, but investors with Self-Directed IRAs can pickup great deals on investment properties.

MIKE: It’s my understanding that Self-Directed IRAs can be invested in anything from your typical stock and bond mutual funds to precious metals, start-ups and more, including real estate. Is this right?

DAN: Yes, there are many investment options with Self-Directed IRAs. We have clients that buy investment Real Estate, loan their funds in the forms of Notes, buy businesses such as franchises; foreign currencies and precious metals are very popular these days. With the price of gold in uncharted territory, many people are looking at diversifying part of their retirement portfolio into the precious metals market.

MIKE: What percentage of assets in Self-Directed IRAs nationwide would you guess are invested in real estate and what about here in Hawaii?

DAN: I would say that it is 1/3 – 1/2 of the Self-Directed IRAs are invested in Real Estate. Many people own rental properties with their personal funds and they are comfortable with that business, so it is an easy fit for them to do the same thing with their Self-Directed IRA. I would say the main difference between the Mainland and Hawaii accounts are the size of the accounts. Hawaii accounts tend to be larger and our clients are more interested in Real Estate than clients on the Mainland.

MIKE: I remember you saying on more than one occasion that Self-Directed IRAs are not for everyone. What kind of person is this for and is this NOT for?

DAN: That’s right, Mike. Self-Directed IRAs are not for everyone. It takes someone who is willing to think outside of the box a bit to invest their retirement funds in more than mutual funds. There will always be people who don’t know or even want to know what their IRAs and 401ks are invested in. They don’t have an interest and just want someone else to handle those decisions for them. Our clients believe that by taking control of their investment choices they can increase their returns and lower their stress because they understand where their funds are invested and specifically chose those investments.

MIKE: Following up on that question, can you give me your top 3 “dos” and “don’ts” for using Self-Directed IRAs as it applies to real estate investments?

DAN: I think the top 3 don’ts are:

1. Don’t have your IRA buy a rental home to put your mother or college age child in. These are tempting, but not allowed under IRS law.

2. Don’t comingle your personal money with an IRA investment. If your IRA owns a rental property and the refrigerator goes out, you need to have the IRA buy the new fridge. You cannot personally make improvements to the property. The costs and benefits of the investment need to go to and from the IRA.

3. Don’t buy a ski condo in Colorado with your Self-Directed IRA and expect to go and stay there. No personal use of the retirement investment until you are retired.

IRS says not my mother, but can I put my mother-in-law in this house?

1. Do your due diligence. This is your decision as to what to invest your IRA in and you need to be comfortable with the risk levels. That is why many people like Real Estate in their Self-Directed IRAs. They can drive by the rental property and see the house and that there are tenants in there sending money to their IRA every month. That is comforting to investors. There are no Wall Street guys running away with their retirement accounts. It’s in a property down the street and they can see their investment.

2. Do use the same people you have always used. If you have a Realtor that you trust, use that Realtor. If the Realtor isn’t familiar with Self-Directed IRAs, that’s fine. Have them call us. We teach Realtors about Self-Directed IRAs all the time.

3. Do take action!

MIKE: This is great stuff and I’m sure our readers are going to love it. Continuing with the real estate theme, how would a house flipper use their Self-Directed IRA differently than, let’s say, a rental income cash flow investor? The timelines are obviously very different and I’m assuming the process is as well.

DAN: Actually, they can be different or exactly the same. The main difference is that the funds to pay for the house and flip expenses come from the IRA instead of from their personal funds. The outcome is their decision, either hold it and get a tenant or sell it and find another investment. The IRA does not have an issue with property gains taxes, since the IRA already is a tax deferred vehicle. It can buy and sell on any timeline. It’s up to the IRA owner.

MIKE: What about lending funds to other investors? If someone has funds in a Self-Directed IRA, they can basically act as a private lender to other investors for their own real estate deals, right? It seems like a great way to passively keep growing your account. How does that process work?

DAN: These investments are “Notes”. The terms, such as interest rate, length of the loan, collateral to secure the Note can all be negotiated between the two parties and then the Self-Directed IRA lends the money and gets the payments growing the account with the interest.

MIKE: Great. I think we’ll wrap this up here today, Dan. Thanks again for joining us here and sharing your knowledge. If someone is interested in learning more about using Self-Directed IRAs for real estate or other investment types, how can they get a hold of you?

DAN: It’s my pleasure, Mike. Thank you for the opportunity today. Our office is in downtown Honolulu at Restaurant Row, upstairs from Ruth’s Chris Steakhouse. The fastest way, of course, to get more information about opening a Self-Directed IRA is on our website. Here is my contact information.

Dan Falardeau, principal
New Direction IRA Inc.
Hawaii Division
7 Waterfront Plaza
500 Ala Moana Blvd Suite 400
Honolulu, HI 96813
http://newdirectionira.com/hawaii/
toll free 1-888-694-7244
fax 808-521-1005
local 808-521-4472

Disclosure: I have a New Direction Self-Directed IRA myself and am actively using it for real estate investment right here in Hawaii. I highly recommend it.