Rent or Buy?

It’s been a rough few years. 

I’ve dealt with more clients in bankruptcy and foreclosure since 2008 than I have during my entire professional career prior to that.  I’ve had clients with multiple foreclosures, with the financial consequences dragging out for years.  So it should come as no surprise that many people are wondering if owning a home is such a good idea these days.

The case against ownership is based on what you see going on around you every day.  As of last fall, the total value of residential real estate had fallen by (wait for it) SIX TRILLION DOLLARS.  That’s a staggering amount of lost equity, and if you’re a homeowner, some of those losses belong to you.

Owning a home can also be problematic in another way.  The modern economy is based on mobility – the tradition of a recent college graduate working for the same company for thirty years and then retiring is deader than disco.  According to the Bureau of Labor Statistics, the average worker is going to change jobs ten times during his or her lifetime – and sometimes that’s going to require a change of address, as well.

But when you own a home, you’re financially tied to the community where you live – even when that community has been devastated by layoffs.  You’re stuck trying to find a job where no similar-paying jobs may exist.

Not Surprising Fact Department:  The cities with the highest rates of home ownership (prior to 2006) are also the cities hardest hit by unemployment.  Workers in these cities (think Detroit) are less nimble with regard to where they live – they can’t just move to where the new jobs are.

All that being said, the depressed real estate market and extremely low interest rates make a compelling case to invest in a home.  The laws of supply and demand would indicate that real estate values are likely to increase long term, and inflation is likely to rise as the economy recovers, but a fixed rate mortgage at today’s lower rate will protect you from that (a little).

But there’s more.  As people have been foreclosed upon, they’ve become renters rather than homeowners, and so in some markets we’re starting to see a shortage of quality rental properties.  What happens when a commodity becomes scarce? You got it – in some markets the price of rent has gone up by double digits during the past two years.

So should you rent or buy?

I’m not here to answer that question for you, but I can give you a couple of things to think about as you make the decision.

Are you dug in?  If you were born and raised in Metropolis and that’s where all your family and friends live, you may have decided that you’re in for the long haul.  If that’s the case, then making a long-term commitment might be right for you.

But if you’re committed to moving up in your company or your profession, and moving up might require relocating to a different market, you might want to think twice about owning a home.  The rule of thumb is that, all things be otherwise equal, it takes about five years for owning a home to start paying off. 

Is buying a good deal?  As I said in my first blog post, run the numbers on your mortgage and then run them again.  Now is the time to snatch up some incredible bargains on real estate – but don’t be a fool and decide to buy more house than you could have afforded otherwise, and then lock yourself into a bigger mortgage than you need. 

The rule of thumb here is that your mortgage and escrow payments should not be more than 28% of your monthly income.  This is all about cash flow – your mortgage payments should be low enough that you’re still able to be making your other obligations AND…AND…AND still be saving for retirement.

Let me say that once more, because while your home is an investment, it should NEVER be your only investment.  Don’t swap mortgage payments for contributions to your 401(k) or your IRA.

My last bit of advice is to simply know yourself.  Buying vs. Renting is as much about lifestyle choices as it is about finances.   If you really hate yard work, for goodness sake don’t go out and buy yourself a yard to work in.  Makes sense, right?

Thanks for reading.

Follow me on Twitter!  http://twitter.com/#!/MilwaukeeTaxPro

It's Never Too Early...

Here’s the problem with tax planning. 

For the first three months of the year, people are so stressed out by reading instruction booklets and looking for those lost receipts and then filling out their tax forms for the previous year that they want to go at least two months without EVEN THINKING ABOUT TAXES after the filing deadline.

Then before you know it, summertime is here.  Family vacations, baseball games, cookouts on the patio and a long snooze in the hammock – and really – who can think about taxes with all that fun stuff going on?

Well I sure can, gosh darn it.  And so before this year is more than half over – and by then you’ve already missed out on some good opportunities to save on your taxes – we’re going to talk about tax tips and strategies for 2011.

The tax legislation passed last December (which effects income earned in 2011) was not much more than a placeholder.  The leadership in both parties was simply not willing to engage in the knock-down, drag-out partisan brawl that some members of their respective parties wanted, and so there wasn’t a lot of change from 2010 to 2011. 

But there are some changes, and you need to know about them.

Big Thing #1 is that the lower capital gains tax rates are still in place.  So if your income is relatively low this year – either because you changed jobs, just graduated from college or just retired – you might want to consider cashing in some of those capital gains this year.  No promises as to what’s going to happen in 2012.

If you’re in the 15% tax bracket or lower, you don’t have to pay ANY capital gains on assets held long term.  What does this mean?  Let’s say you were laid off this year and your income has taken a significant hit.  If you’re married and your combined income for 2011 is less than $69,000, then you might want to cash in the Apple stock you bought back in 1983 because you won’t have to pay any taxes on the capital gain.

It’s free money. 

Big Thing #2 is the Residential Energy Tax Credit.  Despite some speculation that this credit would be dropped at the end of 2010, it has lived on to give taxpayers credit for home energy efficiency for another year.  But there are two big warning flags with regard to this credit.

The first is that while the credit survived, it’s been significantly scaled back from previous years.  In 2009 and 2010, you could receive 30% of the installed cost of certain energy efficient home improvements back as a tax credit, up to a total of $1,500.  The new credit is much smaller.

For improvements like replacement windows, the credit it limited to 10% of the cost and is limited to just $200.  The credit for installing a high efficiency gas furnace is just $150 – I had several clients who received the entire $1,500 credit for just a furnace alone.

The second thing is that the new credit has a total lifetime limit of $500, so if you have already received $500 or more from the previous energy credit, you’re completely out of the running to take advantage of the new credit.

Keep this in mind when you’re pricing home improvements, because the odds are that the guy at Home Depot isn’t a tax expert and he’s going to tell you all sorts of incorrect things about your potential tax savings.  The fact is, you’re going to save money on your energy costs (no small thing these days) but you’re NOT going to save a lot on your taxes.

For more information on the energy credit, go to www.energystar.gov.

Big Thing #3 is the American Opportunities Credit.  I don’t know why this isn’t getting more attention because it’s a whopping huge credit that probably won’t last forever, so you really should take advantage of it.  Simply put, it provides a $2,500 year tax credit for every child that you’re putting through college. 

Every year.  For four years. 

Let me do the math – That’s $10,000 in assistance to pay your kid’s tuition.  You say you have twins?  Make that $20,000. And if you don’t have a tax liability large enough to need your annual tax credit, the American Opportunities Credit will actually create a refund where none had existed before.

Sweet!

We’ll take more about ways to save on your taxes in 2011 as the year goes on, but these three can provide some big savings if you’re able to take advantage of them.

Thanks for reading.

Follow me on Twitter!  http://twitter.com/#!/MilwaukeeTaxPro