Real Estate is divided into three asset types:
1. Personal Residence
2. Productive (including REITs and rental property), and
3. Non-Productive (such as vacant land, second homes and passive limited partnerships).
The unique functions of real estate include personal use and enjoyment and the opportunity to leverage by mortgaging the property. Positive financial leverage through a home mortgage provides Americans with the most advantageous after-tax investment vehicle in the world.
Principles for being a savvy real estate investor:
1. Do not own too much of it. For most people, the Fair Market Value of your real estate should range between 25-40% of your total marketable assets. For real estate professionals it can be 30-60%. You incur opportunity costs or uncompensated risk when you have too much or too little invested in real estate.
2. Lay a solid foundation by owning real estate in the proper order. After purchasing your home, the next best real estate asset is income producing property such as a rental or Real Estate Investment Trusts (REITS). Most middle Americans should not own speculative property such as vacant land, second home or time shares until they have owned a personal residence or business real estate.
3. Manage your risk by hedging your leverage with increased interest earning assets. Remember that real estate has also caused more bankruptcies than any other investment. Most people incur opportunity costs and the cost of financial distress when they have too much leverage.
Safety/Tax Advantages of owning real estate:
Nine ways to invest in real estate (in order of preference)
1. Personal Residence
2. Business Real Estate
3. Shared Equity Arrangement
4. Rental Property (Get Real Estate Professional license to deduct losses, 750 hours)
5. REITS
6. Vacation homes (If at least 13 weeks or more use per year)
7. Vacant Land within 25 miles of home area (Not productive, carrying costs, speculative)
8. Time shares (Overpriced, Price x 52 weeks = Value of Condo)
9. Limited Partnerships (Inheritance problems, 20% of return goes to costs)
In summary, there are several reasons to own rental property. It can provide residual monthly income, equity can be used for a variety of reasons, it adds diversity to an investment portfolio, and it provides great tax advantages (with tax deductions on mortgage interest, property maintenance, etc).
If you have questions about financial planning or the benefits of owning rental property, please visit www.planandact.com and start by taking your free financial assessment today.
The way to build wealth varies during your life. It depends on your age and your overall financial situation. During most of our working years we should accumulate wealth and in principle should be smart about growing it as much as possible. At the very beginning you should be relatively conservative and save enough for a down payment on a home. Homeowners are wealthier than non homeowners because they leverage the investment (i.e., mortgage) and enjoy significant tax benefits and inflation protection. All along your working years you should maximize contributions to Qualified Retirement Plans. They are great places to grow wealth tax free, faster.
Look here for additional guidelines based on life circumstances - http://www.planandact.com/Public/Info_LifeCircumstances.aspx.
Have a look here at an example of plan that was developed for a specific client like you - http://www.planandact.com/PaaPublicFiles/Docs/PlanAndActFinancialPlanExample.pdf
Goals are a “destination”. A financial plan is a “roadmap”. Planning a trip requires you to identify your current location as well as your destination. Plan and Act calculates financial position by using a unique map called the Cambridge Financial Life Cycle©. (Click here to see this map on page 7 of the sample Financial Plan).
Current financial position is measured in two ways: 1) by age and 2) by wealth. If you are on track, the two positions will match and will be colored green. If your wealth is ahead of your age, you will have “two” positions and your wealth position will be coded green. If your wealth position is behind, it will be colored yellow or red depending on how far it is behind.
The best case scenario is when your wealth position matches or surpasses your calendar age position. When you view the Life Cycle, it will help you visualize your financial position (calendar age position compared to wealth position). The most variable factor on the Financial Life Cycle is the length of time people spend in any particular financial stage. A divorce, serious illness or extended unemployment can set people back very quickly. People can spend 50 years stuck in a stage and then jump through three stages with an inheritance. At Plan & Act, we've seen clients implement our financial plan and move through two stages in 5 years.
The Cambridge Financial Life Cycle is a benchmark which divides your life into ten typical financial stages. There are specific wealth building strategies for each stage and financial ratios that mark the transition from one stage to the next. To track progress through these stages Plan & Act measures the ratio of our net worth to our gross income. Because people have different standards of living, using the ratio of our net worth to income is much more useful than comparing the size of our financial portfolios.
If you have questions about financial planning or finding out your current financial position, please visit www.planandact.com and start by taking your free financial assessment today.