Real estate can be a great investment, but if you don’t fully understand your numbers, it can be a disaster.

A couple that I met with recently, loved getting their monthly rental checks and keeping close tabs on the fluctuations of the housing market.

When the market started to rise, they began to sell off their rental properties, not thinking about the tax implications. The IRS greeted them with a tax bill for the depreciation they had taken over the last several years.

Their actual return ended up much smaller than they originally anticipated.

This is why having a financial plan is so important.

In order to reach your goals, you need to fully understand your numbers and the actual impact and risks.

If you don’t want to get burned by a short-sighted investment decision, here are 3 things you should do:

1. First, think logically. We all know how emotions can cloud judgment, so be careful with your investments. Look at the big picture to determine what is best for you and your family.
2. Secondly, know your numbers. Especially with real estate. In order for real estate to be a good investment, you need to understand tax implications and the actual returns your properties are producing.
3. And lastly, work with professionals. Don’t rely on your own expertise when investing in your future. Talk to a fiduciary financial advisor to get a second opinion and advice on big financial decisions.

My goal is to help all my clients nurture and grow their nest eggs thoughtfully, and with the big picture in mind.

Visit my website and schedule a short phone call with me.

I would love to join you on your financial journey.

The post Is Real Estate Actually a Good Investment? appeared first on AWM.

Which elevator would you choose if you were riding to the top of the Empire State Building? 

One with a single, thin cable?  Or one with several strong cables?

Obviously, we all want the safest option.

When it comes to investments though, many families latch their nest egg to a single cable.

It’s called real estate.

Real estate can be a great investment, but I have seen my clients’ retirement savings fail because they put all their eggs in one basket.

I had a recent conversation with one of my clients, who is now widowed. Years ago, she and her husband decided to invest all of their savings into real estate. When the husband passed, my client needed money to live on, but she wasn’t able to maintain a large home of her own in addition to rental properties.

As you can imagine, she lost a lot of money very quickly.

Could this happen to you?

If real estate is your main investment and you want to get back on the right track, these three recommendations can help get you started:

1. First, don’t let emotions override logic. People often forget that real estate prices go up and down; the value of your home is changing and you might not even know it. Some homeowners also forget how costly and time-consuming it can be to liquidate their real estate assets.
2. Secondly, understand your numbers. In order to make informed decisions, you need to know what your property is actually producing or costing.
3. And third, talk to a professional. A real estate agent can help you assess the market, however, a competent financial advisor can help you look at your family’s picture holistically.

I help my clients find multiple ways to nurture their nest egg and plan for their future. If you are overwhelmed with real estate and hold all of your assets in a single investment, I would love to help you.

Come visit our website and schedule a free consultation with me.

Let’s Talk

The post Do You Own Too Much Real Estate? appeared first on AWM.

However, we do not live in a perfect world.  Not everyone can afford to pay off this massive amount of debt.

According to Fannie Mae, only 1 in 2 homeowners entering their retirement years will pay off their mortgage—within the near future.[1] Of those with mortgage debt, half will not be able to pay off their debt within 8 years.[2] That means planning for retirement becomes even more important. When clients rely on fixed income and cash flow is limited, they will have to make some serious sacrifices to be able to maintain a financially healthy lifestyle.

When considering your options, it’s vital to look at your whole financial picture. Don’t mismanage your mortgage because you didn’t do your homework or misunderstood terms. Ask a lot of questions and get educated.

A client recently told us their mortgage payments were going up. Why? Property taxes skyrocketed as their house increased in value. This is another reason why we recommend not to carry a mortgage in your retirement—especially if you are/or will be living on fixed income.

When You Should Pay Off Your Mortgage Before Retirement:

• • You might be able to lower fixed expenses going forward if you have extra cash and can afford to pay off your mortgage without jeopardizing your future cash flow.
  • You should consider downsizing your home. Paying off your mortgage and moving into smaller space could free up more liquid assets for you to live on (and put less of a physical burden on you to care for and maintain your home). Let your freed-up cash work for you.
  • You might gain more peace of mind. You can sleep a little more restfully at night when you know there’s one less expense item to pay for with retirement income.  Whether it saves you on Social Security or reliance on the markets for investment income, this might be an attractive option for some.

Some people argue that keeping your mortgage can help tax deduction benefits on interest.  For the most part, we disagree.

Consider this example: a man makes $12,000 in mortgage interest payments a year (or $1,000 a month – in addition to whatever principal he still owes). Assuming a 25% tax bracket, he could claim a tax savings of $3,000 and pay a net of $9,000 to the mortgage bank.

That said, why pay the $9,000 at all?  Especially if you already have cash in the bank that earns interest below the rate on your mortgage?  Instead, we suggest paying off the mortgage entirely. The size of our bank account might decrease but think about saving $9,000 every year.

When You Should Hold onto Your Mortgage in Retirement

Some people simply do not have the money to pay off their mortgage as they near retirement.

Others might not want to pay off their mortgage right away. For instance, you might have a small mortgage (and/or mortgage payment) at a very low single-digit interest rate. Perhaps you might benefit from drawing out the mortgage for a little while.

Consider a person with a couple of years left until retirement. They are considering paying off a small mortgage (also with a few years remaining on the loan). However, the source of funds is their retirement account. What should they do?

Assuming these are the only relevant factors, we would answer, “No.”

Here are some reasons why:

• You will pay additional and unnecessary taxes.
  Spending retirement money before retirement can incur an additional tax penalty of 10% in addition to your tax rate if used before age 59 1/2.[3]
• You give up the opportunity for future growth in your retirement savings. Today, most mortgages carry low single-digit interest rates. For most of the last decade, returns on broad-based investments have been well in excess of that.  There might be major opportunity cost by selling out of a high-return asset to pay off a liability that only costs you modest expense.
• You might mismanage your balance sheet and endanger your financial health. Most responsible people pay off their mortgages through income generated while they are working.  Their retirement savings is a separate “line item” put away to support them in their golden years.  You should think twice about sacrificing your future retirement to meet a current obligation.

In fact, if you happen to fall into that category and find yourself very tight on money, you might even consider taking out a reverse mortgage. This is where a lender gives you cash for up to 60% of the appraised value of your home.  You must use that cash to pay off your mortgage and any other liabilities on your home first.  Once your home is sold, the reverse mortgage needs to be paid off. While this option is not right for everyone, a few things to keep in mind are: how much cash is needed, the fees associated with getting a reversed loan, your legacy, and the value of your home—among others.

As with any loan, you would want to research the interest rate, terms, and eligibility for such a loan.

In the past, it was a rule of thumb for retirees to pay off their mortgage. This is less the case today.

We would encourage you to speak with a fiduciary advisor, who will look at your financial picture holistically. We tend to ask difficult questions in order to challenge you to carefully think through each decision you make. Our goal is to help our clients navigate their lives with purpose and to recommend what’s in the best interest of each individual.

Schedule Appointment

[1] Economic and Strategic Research Group, “Baby Boomers Accelerate Their Advance into Free-and-Clear Homeownership”, Fannie Mae, October 4, 2017, on http://www.fanniemae.com/resources/file/research/datanotes/pdf/housing-insights-100517.pdf  accessed on October 5, 2018.
[2] “Does Your Mortgage Retire With You?”, American Financing on https://www.americanfinancing.net/reverse-mortgage/mortgage-options-after-retirement  accessed on October 5, 2018.
[3] “IRA FAQs – Distributions (Withdrawals)” on https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals  accessed on October 5, 2018.

The post Should You Pay off Your Mortgage? A Difficult Decision. appeared first on AWM.

Portland Real Estate Still Obeys the Laws of Gravity

What goes up might come down (especially in a sizzling market).

After 8 strong years of relentless price gains, the party is cooling off in the US.  This is even more apparent in metro Portland/Clark County.  Here are 2 data points:

1. Rents Are Dropping

   According to Zillow[1], residential rents in the metro Portland, OR are down nearly -3% from a year ago.  After being one of the hottest rental markets in the US (where rents were virtually flat), Portland might be suffering from a case of indigestion.

   A combination of higher interest rates, new supply, and wage growth that has failed to keep up with real estate values are potential reasons why the market is cooling off.

2. Listing prices are falling.

   Zillow also observed that a greater share of Portland homes suffer from price cuts below listing prices.[2]  Nearly 1 out of 5 homes in the higher end are being discounted, a decent uptick from the last 2 years.  Indeed, this is the highest rate of price discounting in nearly 6 years.

   1 in 7 homes in the lower tier are now seeing price cuts, a spike from only 1 in 17 over the last couple of years.

Do You Still Own Too Much Real Estate?

We have written in past blogs about how we got here.  Why did the housing market expand so rapidly nationwide?  Why has SW Washington and metro Portland skyrocketed so much?  It has been a good ride for many owners of real estate over the last decade.

However, we also cautioned that certain people might benefit from diversifying their nest eggs beyond just real estate. Indeed, many Americans still own an exorbitant percentage of their personal net worth in real estate, an asset where liquidity can come and go.

Where do you stand?  Is your financial health capable of holding up in a less robust housing market?

We would be happy to hear your concerns and brainstorm potential solutions to fortify your family’s financial health.ambassador.partners/…/low-housing-supply-helps-local-real-estate

Schedule Appointment

[1] Aaron Terrazas, “Rents Drop Year-Over-Year for the First Time Since 2012 (September 2018 Market Report)”, Zillow.com, October 18, 2018, on    https://www.zillow.com/research/rents-drop-september-2018-21655/  accessed on October 22, 2018.
[2] Aaron Terrazas, “Price Cuts Becoming More Common, Especially at the High End,” Zillow.com, August 16, 2018, on      https://www.zillow.com/research/high-end-price-cuts-21018/  accessed on October 22, 2018.

The post Update on Your Real Estate: Portland Is Cooling Off (Part Five) appeared first on AWM.

How Too Much Home Can Put Your Financial Health at Risk

If you had the choice of ascending a large skyscraper, would you rather ride up in an elevator held by several strong cables?  Or would you prefer riding up in an elevator suspended only by one cable?

While many people would prefer to ride an elevator with many cables, the reality of their lives is just the opposite.

According to a study by the National Bureau of Economic Research [source], many middle and upper-middle class Americans have placed a huge part of their nest egg in real estate, namely in one asset: their own home.

Nearly 2 out of every 3 dollars of their net worth consists of their primary residence.

In contrast, only 1 out of every 3 dollars of their net worth is available to fund their lifestyles once their income decreases (such as retirement or unemployment).

With very little liquid, financial assets, it is difficult for many Americans to sustainably fund their future retirements, even if they have some financial savings.

People often justify exposing so much of their personal balance sheet to residential real estate for non-financial reasons: location, comfort, raising a family, and others.

However, they risk “falling in love” with their home.  By the time retirement approaches, they might end up just as vulnerable as other middle and upper-middle class Americans.

Case Study of How We Might Help You

Let us share a case study of people we work with, how we try to help them, and also what issues they need to overcome.

Consider a married couple whose kids are in the process of graduating college and where one or both parents are a few years away from retirement.  Here are 3 situations we often see:

1. This family can experience a shortfall in income.

   Most people who retire experience a reduction in income, sometimes dramatic.  While certain expenses might decline, such as college tuition when children graduate, other expenses might reappear.  In addition to taking international trips or other discretionary spending, older children have an increasing tendency to move back  home.

2. Residential real estate, a major part of their net worth, is tied up in a dead asset.

   Let us define “dead asset”.  We mean that this asset (2 out of every 3 dollars of many Americans’ net worth):

   1. Does not produce income (unless you rent your house)
   2. Often is illiquid (average time of a home on the market is 6 months even in today’s reheated market)
   3. Periodic expenses (taxes, repairs, renovations) can eat away at liquid net worth.

3. The family gets educated about their fragile situation, but emotions need to be overcome.

At Ambassador Wealth, we want to help clients find many potential ways for their nest egg to help them to live their lives with purpose.  We believe that many streams make a river.

This couple clearly understands the logic of diversifying their holdings out by downsizing their home and investing in more liquid assets.  So what makes them hesitate?

Most of their hesitation comes from sentimental ties to the home, reluctance to adapt to new seasons in life or just inertia.  We understand that change can be difficult.  While we are sensitive to these issues, we persuade clients that change in life is something inevitable.  It is not a matter of “if”, but rather “when” and “what type of” change they will experience.  Do not let too much euphoria on residential real estate put your future at risk.

While the current housing market remains in “boom” mode, let us not forget that only 10 years ago, people were scared that real estate prices would never recover.  People who were about to retire ended up having to work a few more years or else retire and accept a substantially lower standard of living.  Heavy reliance on one investment – even your own home – can hurt your prospects for a solid financial future.

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The post Your Home: Do You Own Too Much of a Good Thing? (Part Four) appeared first on AWM.

1. Job Growth

   Although wages have not shown dramatic growth in many areas, official unemployment rates both nationally and in the Portland area have declined to levels associated with cyclical lows.

   However, jobs present a potential double-edged sword.  Based on historical trends, unemployment might be as low as it gets for this economic cycle.  Without further improvement in jobs and purchasing power, prior home price gains might be more difficult to sustain in the absence of economic acceleration from current rates of growth.

   

   

2. Low-Interest Rates (but Perhaps Not For Long)

   Low mortgage rates have led to cheap credit and better affordability for borrowers with a clean credit history.  Yet since the New Year, mortgage rates have risen to levels not seen for nearly 5 years.  With the possibility for the Federal Reserve to raise interest rates further, mortgage rates could continue to rise.  Rising rates could pinch housing affordability further, and, at a minimum, slow the recent pace of gains in home prices.

   

3. Renters Vs. Owners

   Home prices have recovered in spite of a decline in the homeownership rate.  Part of this decline has been spurred by certain borrowers being unable to access non-standard mortgage credit (subprime, Alt-A loans).  Regulatory pressure and risk aversion by banks have significantly reduced the supply of non-traditional sources of mortgage credit.

   

One factor that interests some potential homebuyers to consider owning versus renting a home is the relative price of owning versus renting.  Following the bursting of the US housing bubble in 2008, prices became more affordable for owning (but only for those who could obtain mortgage credit with good credit histories or cash).  However, the recent recovery in home prices has reduced the attraction of owning versus renting.

Homes in our region of Clark County, WA and Metro Portland appear a bit expensive from this perspective.

Nerd Wallet estimates that owning a home in WA or OR costs roughly 60% more than simply to rent.[1]  Their analysis of the 50 states in the US revealed a range of overvaluation of buy vs. rent between 33% and 93%.  For comparison, California also scored roughly 60% more expensive to buy vs. rent.

Zillow estimates that someone buying a home in Vancouver, WA will only benefit financially vs. renting after 3 years and 11 months of home ownership.  This is far above the national average of 1 year and 10 months.

The home bubble has reflated in our region.  Could it pop?

Think about the issues that might be more important to your family’s situation.

Schedule appointment

[1] Emily Starbuck Crone, and Daniel Tonkovich, “How Much More It Costs to Own vs. Rent in Your State”, nerdwallet on https://www.nerdwallet.com/blog/mortgages/cost-homeownership-vs-renting/?trk=nw-wire_1096_368795_26686  accessed on June 28, 2018.

The post Your House: Is a Bubble about to Pop in Metro Portland/Clark County? (Part Three) appeared first on AWM.

Why have home prices recovered so strongly?  Are these factors sustainable?  What might this mean for the value of one’s property?

The limited supply of housing (new and existing) has been a major support for the housing recovery.  Lack of new home starts and high home occupancy by both renters and owners have contributed toward rapid turnover in homes listed for sale.

Inventory of homes across the US appears low by historical standards.  At the current rate of sales, the average home potentially sells 6 months after its initial listing.  Supply of homes is above the trough of 4 months in the early 2000’s during the housing bubble.  However, inventories still are on the low end of the historic range over the last 50 years and have been stable at around 5-6 months since 2012.

Limited supply is also reflected in low levels of vacancies on owned homes and rising occupancy in rentals.  The slight recent uptick in rental vacancies reflects an increase in supply in certain markets as a response to recent market tightness and rising rents.  Nonetheless, both owned and rental vacancies remain toward the low end of recent historical ranges.  Finding a home can be a challenge.

Supply of New Homes Recovering but Below Prior Peaks

The amount of new homes being built is still lower than historical averages.  Although new home starts have recovered from their trough in 2010, the number of new homes built still lies at the lower end of historical economic expansions.  The current rate of 1.3 million units compares with the historical midpoint of 1.6 million units over the last 50 years.

Similar trends apply to our region.  The Oregon Office of Economic Analysis also forecasts home starts to peak next year.  Current rates are still well below peaks in the last 2 cycles.

Workers Are Returning to Home Construction

Tighter credit coupled with an exodus of workers from residential construction have dampened recovery in new housing starts compared to past cycles.

Workers in construction jobs are still below the prior peak by about 4% in spite of the robust recovery in home prices.  However, growth in labor supply of construction workers along with other economic factors might temper future home price gains in the future.

Learn about the looming risks of housing in metro Portland/Clark County WA.

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The post Your House: Low Supply Has Inflated Prices in Portland/Clark County (Part Two) appeared first on AWM.

Americans’ biggest investment just made up its losses from the correction of 2008: US housing.

In fact, home prices are at an all-time high and surpass levels of 2008.

Despite this recovery, Zillow.com estimates that 10.4%, or 1 of every 10 homes, in the US remains in negative equity.  (“Negative equity” is defined as the mortgage exceeding the estimated sales value of housing).  This number has stabilized after falling dramatically from a peak of 31.4% (nearly 3 in 10 homes) in 2012.

Portland Housing Is Even Hotter: Reason to Celebrate or Fear?

Additionally, home prices in the local Portland region are outperforming the nation.

Zillow.com estimates Portland as one of the 3 hottest markets in the US. Currently, Portland boasts the lowest levels of homes in positions of negative equity (4.2%).[1]

According to the US Federal Housing Finance Agency, home prices today well exceed the prior peak in 2007.  The graph below estimates that prices today are +26% above the prior peak achieved 10 years ago.

Clark County Housing: Should We Laugh or Cry?

Clark County homes have also enjoyed a strong recovery. Prices are nearly +10% above the prior peak price a decade ago.

So, is this a rational development or a return to an irrational property bubble?

On the one hand, current low supplies of homes, low vacancies, and more renters might support further gains for housing.  However, risks such as a possibly weaker job market or a future spike in interest rates might put housing out of reach for many buyers.  That might cool the real estate market.

How did the market get to where it is today?  Can it last?

Should you consider precautions for your financial nest egg?

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[1] https://www.zillow.com/research/q1-2017-negative-equity-15888/ Retrieved on March 14, 2018.

The post Your House: Are Homes in Metro Portland/Clark County a Bubble Waiting to Pop? (Part One) appeared first on AWM.