When Real Estate’s in Trouble, Spruce up Your Home and Finances
As the subprime lending mess sorts itself out, there will be plenty of conflicting signals in weeks ahead on what you should do with real estate and your investment picture as a whole. Most of the advice will come from the financial media, who are notorious for their extreme short-term view.
However, if you’ve been working with a fee-only financial advisor you trust, you should already have a financial plan in place as your guide. With real estate, those with great credit scores, available cash and well kept properties are in the best position to ride out the storm.
If that doesn’t describe you, you should consider doing some spruce-up work around the house, strengthening your credit report, and taking a hard look at your long-term plans. Some ideas:
Should you sell? Your primary residence is a home, not an investment. Sure, it should appreciate over time, but tough markets like this have little importance for those who plan to stay in their home for a long time.
However, what if you have a job opportunity in another city or country you can’t refuse? It’s probably unavoidable that you need to sell. Of course, that job opportunity should pay you well enough or give you a moving allowance to offset your selling expenses.
But, if it’s just a matter of wanting to take advantage of a relatively good price on another piece of property and you need to put your current home on the market, think twice. In many markets, homes prices have begun to fall.
Should you buy? Although many think this downturn will only last a short time, it could last for a while. The enormous price increases of the last few years went unmatched by increases in personal income and were fueled by rampant speculation, historically low interest rates and lenient lending standards. If you plan to live in the new house for at least 4-5 years and have established a solid financial foundation then you’re probably in the best position to buy.
Is your property in good shape? If you know you want to move in the within the next five years, consider making improvements. When the market does recover, it will probably not revert back to 2004, when people would buy a property in any condition at any price. Buyers will want a property in clean, move-in condition when you decide to put it on the market. It will pay to make sensible investments in landscaping and cosmetic repairs inside and outside the house.
Should you renovate? People always expect renovations to increase the value of their home substantially, but rarely does that happen – it may take years to recoup your money, much less show a profit. For a reality check, go to Remodeling magazine’s annual Cost vs. Value report online and check 2006 project cost averages for your region of the country. In any event, never believe that in a good or bad market a renovation is going to buy you immediate profits on a home.
Know how you’re going to handle capital gains: When you sell, remember that married couples can exclude from their taxable income up to $500,000 of gain and individuals filing separately can exclude up to $250,000. Of course, you must have owned and used your home as your principal residence for two out of five years before the sale. The exclusion is applicable once every two years. However, if you are unable to meet the two-year ownership and use requirements because of a change in employment, health reasons or unforeseen circumstances, then your exclusion may be prorated.
Clean up your credit report: If you’re not planning to borrow now, make sure you’re in good shape to borrow later. Start with your credit report -- you have the right to get all three of your credit reports – from Experian, TransUnion and Equifax – once a year for free. You can do so by ordering them at www.annualcreditreport.com, but do so at staggered times throughout the year so you can catch potential errors in your report as they happen. Also, if you need to clean up any bad behavior – late bills, heavy credit card debt, clean it up before you wander back into the real estate market. A bad credit score can raise the total cost of your mortgage.
Although it seemed like the good times would never end with real estate, they have. But, just as stocks recovered from the 2000-2002 bear market, real estate will too…we just don’t know when!
However, if you’ve been working with a fee-only financial advisor you trust, you should already have a financial plan in place as your guide. With real estate, those with great credit scores, available cash and well kept properties are in the best position to ride out the storm.
If that doesn’t describe you, you should consider doing some spruce-up work around the house, strengthening your credit report, and taking a hard look at your long-term plans. Some ideas:
Should you sell? Your primary residence is a home, not an investment. Sure, it should appreciate over time, but tough markets like this have little importance for those who plan to stay in their home for a long time.
However, what if you have a job opportunity in another city or country you can’t refuse? It’s probably unavoidable that you need to sell. Of course, that job opportunity should pay you well enough or give you a moving allowance to offset your selling expenses.
But, if it’s just a matter of wanting to take advantage of a relatively good price on another piece of property and you need to put your current home on the market, think twice. In many markets, homes prices have begun to fall.
Should you buy? Although many think this downturn will only last a short time, it could last for a while. The enormous price increases of the last few years went unmatched by increases in personal income and were fueled by rampant speculation, historically low interest rates and lenient lending standards. If you plan to live in the new house for at least 4-5 years and have established a solid financial foundation then you’re probably in the best position to buy.
Is your property in good shape? If you know you want to move in the within the next five years, consider making improvements. When the market does recover, it will probably not revert back to 2004, when people would buy a property in any condition at any price. Buyers will want a property in clean, move-in condition when you decide to put it on the market. It will pay to make sensible investments in landscaping and cosmetic repairs inside and outside the house.
Should you renovate? People always expect renovations to increase the value of their home substantially, but rarely does that happen – it may take years to recoup your money, much less show a profit. For a reality check, go to Remodeling magazine’s annual Cost vs. Value report online and check 2006 project cost averages for your region of the country. In any event, never believe that in a good or bad market a renovation is going to buy you immediate profits on a home.
Know how you’re going to handle capital gains: When you sell, remember that married couples can exclude from their taxable income up to $500,000 of gain and individuals filing separately can exclude up to $250,000. Of course, you must have owned and used your home as your principal residence for two out of five years before the sale. The exclusion is applicable once every two years. However, if you are unable to meet the two-year ownership and use requirements because of a change in employment, health reasons or unforeseen circumstances, then your exclusion may be prorated.
Clean up your credit report: If you’re not planning to borrow now, make sure you’re in good shape to borrow later. Start with your credit report -- you have the right to get all three of your credit reports – from Experian, TransUnion and Equifax – once a year for free. You can do so by ordering them at www.annualcreditreport.com, but do so at staggered times throughout the year so you can catch potential errors in your report as they happen. Also, if you need to clean up any bad behavior – late bills, heavy credit card debt, clean it up before you wander back into the real estate market. A bad credit score can raise the total cost of your mortgage.
Although it seemed like the good times would never end with real estate, they have. But, just as stocks recovered from the 2000-2002 bear market, real estate will too…we just don’t know when!
posted by Triton Wealth Management at
3:05 PM
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