Interesting Take on Rising Interest Rates

Interesting read on interest rates on businessweek

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North Charleston Investment Opportunity

Great investment opportunity in North Charleston – off Ashley Phosphate – contact me if you want information on rent projections, etc

http://www.zillow.com/homedetails/103-Cedar-Grove-Dr-Charleston-SC-29420/10967265_zpid/

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Are home prices rising?

Looks like the answer is yes, but not quite as much as we may be thinking.  Interesting article on what is skewing the Case-Shiller index.  He is projecting 4% increase over next year for real estate prices.

http://www.calculatedriskblog.com/2013/06/zillow-case-shiller-house-price-index.html?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29

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Tax advantages of real estate properties – depreciation

Many people talk about tax advantages of real estate investing.  One important one is depreciation.  Basically the IRS allows you to take a deduction for a building wearing out over time and this is called depreciation.  The reason it is important from a tax standpoint is there is no money actually coming out of your pocket, yet it can offset earnings you may have or make a cash-flowing property look like it is a loss and even reduce your taxable income.  Here is a quick example of how it can work.  Let’s say you purchase an investment property for 100,000 and we will say that the land cost is 20,000.  This means 80,000 is to be depreciated – I believe the current rule is 27.5 years which would mean your depreciation expense is about $3,000 a year.  So if your net income on this property is $250 a month and you earn $3,000 in cash that year – you in fact have earned nothing according to the IRS and will pay no taxes on that $3,000 in earnings.  This is why wealthy people especially like real estate investing – their tax rates are higher and so adding to their income in a tax-neutral way is very appealing.  This is not intended to be a complete guide on the subject – just a quick note as to why real estate investing can be more beneficial than some other types of investing.  I hope it helps!

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What will happen with home prices?

This is an obvious questions to any potential buyer and is especially pertinent considering the last few years.  I have read an article on Zillow and then another on businessweek where the writers are concerned about another bubble starting.  Here is a link to the article – http://www.businessweek.com/articles/2013-04-10/cheap-mortgages-are-hiding-the-truth-about-home-prices#r=hpt-fs

The quick summary is they are concerned that historically low interest rates are causing homes to appear cheaper than they really are and once these rates begin to rise that it will cause demand for houses to fall and thus home prices to fall again.  This could certainly happen and as the economist says Ceteris paribus it would be true.  However, the article doesn’t account for what would cause interest rates to rise.  Typically the Fed would do this once they start to see inflation.  Houses like all other assets would be affected by this inflation.  So while I agree that rising rates would put downward pressure on nominal prices it is not as clear that rising rates to combat inflation would result in lower nominal house prices.  If inflation was a stronger force then you could still see house prices increase in this environment.  Now this would not be a “real” increase or an increase when adjusted for inflation, but an increase none the less and keep you from coming to the closing with a large check in your hand assuming you have to move in 2 years.

So what will happen with housing prices – your guess is as good as mine.  Just know that an increase in interest rates doesn’t necessarily mean that nominal house prices will fall.  Like most things it is just a lot more complicated than a quick article online is capable of addressing.

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Housing Bubble redo?

I am not all surprised that the government wanted to jump back in.  But only a couple years after a crash is a real wow – I thought we would at least be 10 years removed or so from this type of government meddling – http://danieljmitchell.wordpress.com/2013/04/03/apparently-learning-nothing-from-the-fannie-mae-freddie-mac-disaster-the-obama-administration-wants-to-subsidize-banks-to-make-more-dodgy-loans/

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How to protect yourself from your real estate investment?

The first rule of just about anything is make sure you don’t cost yourself everything with your move.  So how can you do that – there are a couple very simple things I would always recommend.  One is to make sure the title is in only one name.  Many time real estate agents will just put both names of the married couple on the forms which means both names are on the deed.  This means that if a member of the married couple were to be sued now they could go after your properties.  If that name were left off the deed that property should be insulated from the suit.  The other is to get an LLC – this protects your personal property from lawsuits that may come out of the property (think fire, etc).  It is really easy to do and in SC now is $110 – http://www.sos.sc.gov/forms/LLC/Domestic/ArticlesofOrganization.pdf

If you are looking at properties and want to know more about this just let me know!  If it gets complicated, though, you always need to get in touch with a lawyer and I can recommend one for you that is familiar with investment properties.

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