First house = duplex?

Ki Gray, broker in Austin, Texas, has a great idea about buying a duplex as your first home.

There is a lot of talk about getting your first house. It is part of the American Dream to get a house and maybe get a dog named Rover. But maybe that first home should instead be a duplex. Why would I propose such a thing? Is it possible I am a secret Russian spy that hates American pie? No, there are simply too many advantages to buying a duplex first.

Buying a duplex has a number of financial advantages over buying a house. A lot of people assume duplexes would sell for about twice of what a house sells for in the same neighborhood. This is rarely the case. Duplexes are more frequently about 1.5 times the price of a house in a given area. So to pick an easy number if a house is selling for $100,000 then a duplex should be selling for $150,000.

So let's compare buying a house to a duplex. To keep things the same let's assume we have $20,000 to put down and we are looking in the Austin real estate market so that the taxes are 2.5 percent of the purchase price and insurance is 0.4 percent of the purchase price.

1. Lower Monthly Payment
To start off with let's look at the house. For the house we are going to have a 6.5 percent interest rate. We can use this mortgage calculation:

$100,000 house price
$20,000 down payment

Monthly Payment = $747.32

Moving on to the duplex. Because duplexes usually have higher interest rates we are going to assume a 7 percent interest rate. We are also going to assume that the other side of the duplex is being rented for $650.

$150,000 duplex price
$20,000 down payment

Monthly Payment = $1,184.18
Rent Payment minus 5 percent vacancy = $617.50
Monthly Payment minus rent = $566.68

The monthly payment on the duplex comes out to be 31.8 percent less than on a house. You might get different numbers based on your area. In most areas, a duplex leads to a lower monthly payment but there are a few real estate markets where the opposite is true, so always run the numbers.

2. Increasing Your Future Real Estate Purchasing Power
Besides the advantages of a lower mortgage payment, buying a duplex first allows you to make additional purchases while buying a house first can negate your ability to buy additional properties.

To understand why this is the case, we need to understand a few rules about how banks determine whether or not to provide loans. When you are purchasing your first investment property, banks will usually not count the rent as income unless you have owned investment properties for more than two years.

So, if a buyer first buys a house and then wants to buy a fully rented duplex, they will need to be able to qualify for the full price of the house and the duplex combined. This can be difficult for someone in the beginning stages of their career. If a buyer purchases a duplex first, in two years when they are looking for a house, they can count the rent from the duplex as income—which can help them qualify for the bigger house purchase.

3. Faster Pay off
Here is another interesting way to look at it. If instead of simply spending the saving you incurred by owning a duplex, you could pay off your mortgage faster. If you applied $747.32 to your house it would take 30 years to pay off. But, if you paid your duplex of $566.68 and then took the additional $180.64 and applied it to your mortgage you could pay off your duplex in 18.5 years. So in 18.5 years you would have a $150,000 duplex paid off instead of a $100,000 house partially paid off.

4. Greater Benefits of Mortgage Pay Off
Not only will you pay off your duplex faster, but once you have paid if off you will be in a better position. Once you pay off your house, you are living mortgage free—but not payment free. Based on the original assumptions (Austin Texas 2.5 percent tax rate and 0.4 percent insurance rate) you are still making a payment of 241.66 a month for taxes and insurance. In contrast once the duplex is paid off you are not only living in your duplex for free you are actually getting a profit of $255 a month.

Buying a duplex is not for everyone. Some people do not want the hassle of managing a property. And this article is not proposing that everyone should buy a duplex. But there are financial benefits to buying a duplex, so take it into consideration.

6:08 PM - Jan. 16, 2008 - comments {2} - post comment

How to pick a financial planner

The folks at Kiplinger's offer the following steps to make sure your financial planner will do the best job for you:

Financial and investment planning often consists of creating a comprehensive overview of your current financial condition along with recommendations for achieving your future financial goals. Depending on its complexity, such a plan can cost you anywhere from several hundred to several thousand dollars.

People are also likely to turn to a financial planner for help with less sweeping challenges. What to do with a lump sum received from an inheritance is a common problem, teeming with tax and investment decisions that need to be made in a hurry.

A good planner will see to it that your investments are diversified and appropriate for your goals and stage in life: growth funds for an IRA, for example, or municipal bonds to generate tax-free income. A good planner can also help you anticipate the tax consequences of your investment decisions.

Even if your planner is going to make your investment decisions, keep informed about what's happening to your account, and don't hesitate to disagree if you become uneasy about what's being done with your money. It is up to you to make sure that the planner stays in tune with your goals and risk tolerance.

A planner's credentials are the most obvious clue to his or her preparation for the job. The best-known credential is the Certified Financial Planner (CFP) designation. In addition to the CFP, other leading planning credentials indicating extensive training include the ChFC (Chartered Financial Consultant), and the CPA/PFS (Certified Public Accountant, Personal Financial Specialist).

The Yellow Pages are full of the names of planners, but start your search with a reference of some kind, from friends, family, or co-workers. Lawyers, accountants, mortgage professionals, and insurance agents are also good people to ask. Once you've got a list of planners with recognized credentials, call or visit two or three, comparing their fee structures and their competence as investment advisors.

Fee Structure
Planners earn their keep in one (or more) of three ways. Some work on a fee-only basis, charging you by the hour or by the specific task. Others collect commissions on the products they sell you, such as stocks, bonds, mutual funds, and insurance policies. Many charge a mixture of fees and commissions.

An advisor's fee structure is no indicator of competence. Just because a commission-based advisor is likely to pick a fund with a sales load and a fee-only advisor would probably choose a no-load fund, it doesn't mean that the commission-based planner isn't acting in your best interest. However, in the end, while you might not pay the commissioned planner any more than you pay the fee-based advisor in the case of that fund load, the sales load is coming out of your investment, leaving less working for you in the market.

Investment Record
A planner you're considering should be willing to give you information on how other clients' portfolios have performed. Compare those records with one another and the performance of the markets as a whole before making a choice. Often the advisor will provide you with comparable performance benchmarks to give you an idea where to look on your own. Pay special attention to how well the planner has done in achieving the objective you'll be pursuing, whether it's for growth, income, or a combination. Ask the planner to sketch out how he or she would deploy your financial resources, and decide whether you like the result.

12:51 PM - Aug. 18, 2007 - comments {0} - post comment

Get ready for the tax man

It's that time again...time to start gathering all of that dreaded documentation for your tax preparer to send to good old Uncle Sam! And even though this may seem like a very painful process, taking just a few simple steps right now will make your tax planning far less painful than you think.

STEP ONE: Start by reviewing a copy of last year's tax return, and make a quick list of all the documents or statements that were needed to complete the return. Examples would be W2 forms from employers, 1099 forms for income earned but with no withholding for taxes, 1098 forms documenting all interest paid on a mortgage, interest and dividend income from banks and other financial institutions, a statement for stocks and bonds that were sold during the year, donations that were made to charities, and property tax statements. Many tax accountants will provide a checklist for you, but if you do not have access to one, simply hit this hotlink: TAX PREP CHECKLIST and use this generic checklist as a guide.

STEP TWO: In the coming weeks, you'll be receiving tax documents in the mail. Some will be easy to identify, as many institutions use envelopes marked "Important Tax Document", but others do not - so check all your incoming mail very carefully. When a tax document arrives, grab your checklist, mark the item as received, and keep it all in one place like a file or large envelope marked "2006 TAXES". That way, when it is time to meet with your accountant, all documents will be stored in one location.

NOTE: the IRS rules require that most tax documentation like W2's be mailed out to you by January 31st. If you do not receive all needed tax documentation by February 15th, contact the company that was supposed to send it out, and request the documentation be mailed immediately. If the company fails to comply, contact the IRS at 1-800-829-1040 for help. Additionally, if a statement is received and the amount reported appears to be incorrect, contact the company who sent it to you right away, and ask that the form be corrected. Within a few days a new form should be mailed, and when received it will be marked "Corrected".

With the tax laws constantly changing and the complexity of filing taxes increasing every day...having a great tax accountant will save you time and money. In fact, most tax accountants find enough missed deductions or changes to more than cover their nominal fees. And, working with a professional can help ensure that your return is as accurate as possible, and may help avoid a painful audit. During 2006, audits for individuals increased by 6% across the board. Business owners need to be on their toes too, as audits for Partnerships increased by 15%, and S-Corporations by 34%!

1:51 PM - Jan. 24, 2007 - comments {0} - post comment

Watch out for those Mutual Funds!

'Tis the season for giving, and this is also a good time to give to yourself by putting away some year-end savings.

But if you invest in a Mutual Fund that is about to pay a distribution before the end of the year, you could get caught in a tax trap...a trap that many innocent investors fall victim to.

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