How to Choose Where to Buy

Silicon Valley is filled with a range of exciting communities that appeal to homebuyers from all over the world. So which one should you consider buying your home in?

Narrowing the list of communities in which you would like to make your home is a process of elimination. The first factor to consider? Affordability. Click here for a guide to determine how much house you can afford.

Now that you have that number in hand, find the communities that make this first cut. The fastest way to do this is to work closely with a real estate agent like Julie, who has access to hundreds of properties through the MLS, as well as in-depth knowledge of the pricing in respect to each community. By giving your agent the price range you can afford, you may be able to immediately identify the communities where your budget will best be applied.

Once your agent provides you with a list of communities that match your price range, it’s time to narrow your choices according to your priorities, values, and overall lifestyle. Current needs and future expectations for your family all come into play at this point. To effectively make these decisions, click here (link to First-Time Homebuyers: Finding The Perfect Neighborhood For Your First Home).

Let’s say you end up with a list of five communities that meet your criteria. What then?

Research further to determine which of these areas are likely to experience the greatest appreciation in value. Again, working alongside Julie or another experienced agent will provide you with a wealth of information in terms of real estate appreciation. Click here for pointers. 

Any experienced agent will urge you to keep an eye on growing trends which could turn a second-tier city into a first-tier city. High prices in the latter category are forcing many homebuyers and investors to consider second-tier cities in search for better value, as reported by Forbes.

This is especially the case for millennials, who, according to the Wall Street Journal, are fleeing first-tier cities and heading to the suburbs in high-density areas like the Bay Area in search of more affordable housing.

Here’s a suggested chart to help your search:

Affordable Good Schools Safety Convenient Amenities Promising Development Plans Appreciation Expectations
Community A
Community B
Community C
Community D
Community E

 

Once you’ve narrowed your list further, it’s time for a second, third, even fourth date with your final candidates. Some people go to the length of renting a house (short-term) in their chosen area to get a deeper feel for the community. Your agent will be able to assist you in weighing all pros and cons, allowing you to finally determine where your next home should be.

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Consider Julie and her expert team as your matchmakers. Our wealth of experience and nuanced knowledge of the market and communities in the Bay Area will help you make the right choice when it comes to selecting your home.

We look forward to helping you with any home buying questions you may have. Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Trade Your Space For Better Living

DOWNSIZERS: TRADE YOUR SPACE FOR BETTER LIVING

 

In a previous article (Downsizers: How And Why You Should Think About Downsizing), we talked about the subjective benefits of downsizing.

The advantages are many, and include the freedom and serenity afforded by an uncluttered life, the opportunity to create deeper meaning through simplification, and the time gained by stripping away the nonessentials to focus on the things that matter.

Plus, the many health benefits a less encumbered and more connected way of life offers us, and the chance to finally pay attention and fulfill the personal dreams we’ve had to postpone while raising a family, provide an immeasurable degree of quality of life that could not be fully enjoyed before.

But downsizing has many financial benefits, too—perhaps none richer and more rewarding than to finally cash out on the enormous appreciation in value experienced by the Bay Area housing market for just the past ten years. With annual percentage gains in the double digits, it has been a fabulous decade for homeowners. 

When Is The Right Time To Downsize?

Is now the right time to make a move?” clients are asking us with greater frequency.

Savvy and successful investors question this every day and share a common secret: they know when to cash out. 

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

 – Warren Buffet, CEO of Berkshire Hathaway and fourth wealthiest person in the world

While we are not suggesting a dip in home prices is in the near horizon, if you are approaching retirement or are already an empty-nester, we believe the moment is ripe to consider a smart move. Appreciation in many of communities of the Bay Area is at record highs. Julie and her team can run a comparable market analysis on properties around your home and let you know what kind of return you can expect if you listed your home on the market.

How Can Downsizing Help You Financially?

Downsizing will not only allow you to reap significant gains in home equity, but will free up cash thanks to lower mortgage payments, property taxes, and maintenance and insurance costs. With your treasure chest thus filled, the possibilities are endless. 

Some homeowners have turned the tables on downsizing by utilizing the extraordinary profits made possible by rising Bay Area home prices. In turn, they can purchase larger and more luxurious homes in more inexpensive areas out of state, or afford a grander lifestyle—on a reduced scale—in their own community or in more affordable neighborhoods nearby.

Does Downsizing Mean You Should Give Up Homeownership?

Just because you’re downsizing doesn’t mean you have to surrender homeownership forever. Many downsizing sellers have reinvested their proceeds into other homes. Some have downsized to purchase a second home overseas, or back home, as in the case of immigrants who long to renew their connection with their places of birth and with the family members and friends who stayed behind. Helping children with a down payment for their own home has been another factor motivating families to downsize. 

In previous cycles, savvy investors have also cashed out near the peak, then downsized (or moved temporarily into a rental) to wait for a price correction. They entered the housing market a second time once certain a new upswing was underway.

Can We Help?

Whatever your circumstances, investment strategies, or long-term goals, let our experienced team help you capture the many upsides of downsizing and to guide your next move toward a richer and brighter future. 

For more information on how we can help with your downsizing needs, please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

 

Which Areas Will Have The Greatest Appreciation

Much like investing in a particular stock, or buying or starting a business, investing in real estate requires a comprehensive due-diligence process to not only identify the best opportunities for value appreciation, but also understand the inherent risk factors.

The main factors which drive real estate values are:

  • The economy
  • Land values
  • Supply and demand
  • Future development plans
  • Building restrictions and legislation

The Economy

Most relevant to the housing market are interest rates which establish the cost of borrowing money. When interest rates rise, homes become less affordable pushing prices lower.

Interest rates are set by the US Federal Reserve in response to market forces and in fulfillment of its statutory objectives established by Congress: maximum employment, stable prices, and moderate long-term interest rates.

For a closer look at short-term trends in interest rates, click here.

Land Values

Many first-time homebuyers believe the physical characteristics of a house will lead to increased property value, says Robert Stammers, director of investor engagement at CFA Institute. But in reality, a property’s physical structure tends to depreciate over time, while the land it sits on typically appreciates in value. Although this distinction may seem trivial, understanding how prospective land values influence property returns lets investors make better choices.

Land appreciates because it’s in limited supply. Consequently, as the population increases, so does the demand for land, driving its price up over time.

If you have the option of buying a larger, nicer house on a smaller piece of land, or a smaller, less luxurious building on a larger piece of land for the same amount of money, go for the latter. This will bring you more real estate appreciation in the long run.

Supply & Demand

Like any product or service, home prices are subject to the law of supply and demand.

For the past 10 years, California new home construction has lagged far behind the growth of the state’s population. Averaging less than 80,000 new homes annually, it is well below the projected housing needs of 180,000 per year. Through 2025, one of the highest percentages of household growth is expected to occur here in the Bay Area (22%).

According to the U.S. Census Bureau’s 2017 population growth estimates, the 10 fastest-growing cities and towns in the Bay Area between 2016 and 2017 were:

Jurisdiction

Percent Increase

Rio Vista

4.3%

Gilroy

4.1%

Newark

3.5%

Brentwood

2.9%

Oakley

2.4%

Dublin

2.1%

Dixon

2.0%

Albany

1.9%

San Carlos

1.8%

Pittsburg

1.8%

An August 2017 report by the San Francisco Business Times shows that the 10 Bay Area cities with the fastest housing appreciation over the past five years aren’t traditionally the most sought-after communities and have seen housing prices grow by more than 15% over the time period. Cities like Richmond, Pittsburg, and Antioch have seen some of the highest increases regionally, yet still have median home prices under $500,000.

Trulia Chief Economist Ralph McLaughlin said the recent housing appreciation in these communities makes sense when considering some of these areas are still shaking off the aftershocks of the Great Recession.

“The big picture here is that the more affordable areas are the ones that have seen the most price appreciation,” McLaughlin said. “Those areas were the ones that were hit the hardest by the housing crash, and working-class homeowners were the ones most disproportionately affected by the housing foreclosure crisis.”

A vast majority of the cities with the greatest housing appreciation are in the East Bay, but two of the markets that have led the charge are working-class enclaves adjacent to wealthy communities on the Peninsula. East Palo Alto and North Fair Oaks (next to Redwood City) are adjacent to cities like Palo Alto, Menlo Park, and Atherton, where median home values are well over $1 million. Both have seen home value appreciation in excess of 18 percent over the past five years but have demographics and histories that more closely mirror other high-appreciation cities rather than their neighboring communities.

Determining which areas are likely to have the greatest appreciation in the future requires an ongoing analysis that contrasts annual building permits (supply) with household growth projections (demand).

Resources:

Annual Building Permits

Annual Estimates of Resident Population Change

California’s Housing Future: Challenges and Opportunities

Future Development Plans

While supply and demand are key forces driving real estate prices, future government and commercial development plans can also have a significant impact.

Buying a house in a not very lively suburb which is scheduled to undergo major infrastructural and commercial developments (connection to a city hub, new schools, hospitals, banks, restaurants, etc.) in the next 5-10 years, will likely experience greater appreciation in value (See: Regional Transportation Plan and Sustainable Communities Strategy for the San Francisco Bay area 2013-2040)

A close eye should also be kept on initiatives by major Bay Area corporations to alleviate housing shortages, such as Google’s announced plans to invest $1 billion dollars in land and money to construct housing in the Bay Area over the next decade.

Building Restrictions & Legislation

With the exception of one irregularly enforced state law, land use planning in California is a local process—and one that affords opponents of change ample opportunity to stall, stymie, or scale down, report Matt Levin and Ben Christopher for Calmatters.org.  The toolkit of local obstruction includes zoning restrictions, lengthy project design reviews, the California Environmental Quality Act, parking and other amenity requirements, and multi-hurdled approval processes.

Areas with more restrictive development regulations and/or well-organized opposition to future housing development will continue experiencing supply shortages and appreciation in real estate values.

However, with pressure mounting on the California Legislature to alleviate the state’s affordable housing shortage, real estate investors must keep a close watch on legislation initiatives which would increase supply and keep a lid on future price appreciation.

Proposition 13, the landmark 1978 ballot initiative that caps how much local governments collect from property taxes, dilutes a city’s incentive to build new housing. Because property taxes are capped, local governments have become increasingly reliant on other revenue sources. Vacant land, for example, is much more valuable to the city’s coffers if a big box retailer gets built on it, as opposed to a multifamily apartment building.

This could change.

In August 2018, a coalition of social justice organizations, affordable housing advocates, and teachers unions, announced they had submitted signatures for a measure that would change a key provision in Proposition 13 that would significantly increase property taxes on California businesses and generate tens of billions in revenue for local and state governments.

The initiative is likely to qualify for the 2020 ballot.

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Julie and her team of experts are ready to help you achieve your home buying goals, even advising you on the locations where you can find the best appreciation.

 

We look forward to helping you with any real estate appreciation questions you may have. Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

How To Find The Best Mortgage & Get Prequalified

Now that you’ve determined how much house you can afford (link to “Figuring Out How Much House You Can Afford”), it’s time to shop for a mortgage loan and get prequalified. Prequalification is a non binding promise from a lender about how much money you may borrow. Prequalification can lead to preapproval, which is a binding contract between you and a lender.

However, before you begin, it is essential you familiarize yourself with the marketplace and its terminology.

“What always astounds us,” says Hugh Frater, CEO of Fannie Mae, “is that more than 90% of homebuyer education is accessed AFTER the buyer has an accepted offer. There is inadequate consumer education around what it means to buy a home, and what it means to get a mortgage.”

“Many homebuyers get intimidated by the mortgage process and just go with whatever is easiest—usually what their local bank is offering,” says Greg McBride, chief financial analyst for Bankrate.com. “Smart buyers shop around to uncover the lowest offers.”

Julie and her team will help you shop wisely, arming you with the knowledge to negotiate the best deal possible.

Basic Mortgage Loans

  1. Conventional/Fixed Rate

Known as a plain-vanilla mortgage, a conventional fixed rate loan offers an unchanging monthly payment, with 15 and 30 years being the most common terms. With a locked-in rate, you’ll always know what your payment will be. This is the best route for those who prefer constancy and predictability. If you’re planning to stay in your home for at least a decade, a 30-year fixed-rate loan is your best bet. If you can afford higher payments, consider a 15-year fixed-rate loan which features a lower interest rate and could save you thousands over the life of the loan. 

  1. Adjustable Rate Mortgage (ARM)

ARMs begin with a fixed interest rate for a specified period of time, then the rate is adjusted periodically—usually once a year—based on the cost of borrowing money. A common ARM is the 5/1 loan in which the interest is fixed for the first 5 years and adjusted thereafter. Because ARM interest rates start lower than fixed-rate loans, they are most often chosen by first-time homebuyers to boost their buying power.

  1. Interest-Only

Interest-only mortgages allow the borrower to pay only the interest portion of the loan during the first 5 or 10 years. The monthly loan payments are subsequently increased to pay both interest and principal.

  1. Federal Housing Administration (FHA) Loans

Designed for low-to-moderate income borrowers, FHA loans require lower down payments (3.5% and 10%) and lower credit scores than conventional loans. Currently, a credit score of at least 580 will allow you borrow up to 96.5% of the value of a home. A credit score between 500 and 579 will require a 10% down payment.

Finding The Best Mortgage

Once you’ve run your numbers and decided on the type of loan that best suits your needs, it’s time to shop around.

When doing this, leave no stone unturned.

1. Start by comparing current mortgage rates and best deals at Bankrate.com.

2. Next, shop for a mortgage at a variety of lenders, including your bank, mortgage brokers, online originators like Quicken Loans, and aggregators like Lending Tree.

3. Call or visit your local credit unions and community banks. Smaller lenders typically have better rates for ARMs and offer better terms and rates to people with variable income streams, like the self-employed.

4. Once you’ve found the best deal, it’s time to gather your information and complete the necessary paperwork. While information requirements vary by lender, refer to this basic checklist.

5. After you’re prequalified, your next step is to get pre-approved. Getting pre-approved is almost like applying for a real loan, but it happens before you select a home. This is an in-depth process, and you’ll need to submit paperwork about your income, assets, employment history, and residency status. Refer to Zillow’s checklist of what’s usually required.

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Julie and her team of experts are ready to help you achieve your home buying goals. We will prepare you with all the necessary info, and even recommend tried-and-true financial professionals with competitive rates.

We look forward to helping you with any real estate financing questions you may have. Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Financing Options For Purchasing A Larger Home

MOVE-UP BUYERS: FINANCING OPTIONS FOR PURCHASING A LARGER HOME

 

As of 2018, household net worth was at an all-time high of $100.3 trillion, nearly double the level in 2008 when wealth was devastated by the recession.

“Affluent households have greatly benefited from strong growth in the stock market in recent years, and the steady rise in home prices has likely given them reassurance that real estate remains an attractive long-term investment,” says Lawrence Yun, Chief Economist for the National Association of Realtors. 

Commenting on the growing trend of second home purchases, Yun says it “reflects long-term growth in the numbers of baby boomers moving closer to retirement and buying second homes to convert into their primary home in a few years.”

The impressive gains in household net worth and investment portfolios are allowing young families and near-retirees alike the opportunity to move up into larger homes. Since purchasing a second home before selling an existing, primary residence offers many advantages (Homesellers, Owner-Occupied VS. Vacant Homes), move-up buyers are using a variety of financing options.

Partially Liquidating Investment Portfolios

Some people are selling part of their investment portfolios (stocks, bonds, etc.) to lock-in the significant gains in the stock market while freeing-up cash for the down payment or outright (cash) purchase of a second home. Liquidating part, or all of your portfolio, however, has tax implications you should review with your investment broker and tax advisor before proceeding.

Using An Investment Portfolio As Collateral

You can borrow against your stock portfolio by taking out a securities-based line of credit or SBLOC. A typical SBLOC agreement permits you to borrow from 50 to 95% of the value of the assets in your investment account depending on the value of your overall holdings and the types of assets in the account. SBLOCs generally allow you to borrow as little as $100,000 and up to $5 million. Click here for more information.

401(K) Loans

Technically, 401(k) loans are not true loans because they do not involve either a lender or an evaluation of your credit history. They are more accurately described as the ability to access a portion of your own retirement plan money—usually up to $50,000 or 50% of the assets, whichever is less—on a tax-free basis.

Conventional wisdom advises against withdrawing funds from your 401(k) early; however, borrowing from yourself is different from withdrawing funds permanently and does not incur the same tax penalties as withdrawing funds. If you fail to repay your loan within the allotted timeframe, it will be treated as a taxable withdrawal.

Using Existing Homes As Collateral

By means of a home equity line of credit, or HELOC, you can borrow up to 85% of your primary home’s value, minus the amount you owe on your existing mortgage loan. To get a home equity line of credit, you’ll typically need a debt-to-income ratio in the lower 40s or less, a credit score of 620 or higher, and home value that’s at least 15% more than you owe.

This type of loan is different from your primary mortgage in that you don’t get a lump sum. Instead, the loan acts as an on-call line of credit from which you can take out sums at any time during the withdrawal period and only required to pay interest until the end of the term. Note, however, that the interest rate is almost always variable. Click here for more information.

Cash-Out Refinancing

A cash-out refinance replaces your existing mortgage with a new home loan for more than you owe on your house. The difference goes to you in cash, and you can spend it on home improvements, debt consolidation, or other financial needs. You must have equity built up in your house to use a cash-out refinance. Click here to learn the differences between a cash-out refinance and a home equity line of credit (HELOC).

Can We Help?

When considering the different financing options at your disposal, make sure you contact your investment and tax advisors to choose the right one. Julie and her team are ready with excellent tax professionals we can recommend to you if needed.

For more information on how we can help with your move-up needs, please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

 

Finding The Right Time To Buy A House

Unless you are an investor, purchasing a home is much more than a financial transaction. It evokes the same exhilarating emotions of when proclaiming “I do” in marriage—after all, it is a committed response to our desire for stability, belonging, and communion.

More than simply a “house,” our home is a refuge from the world. A storehouse for future memories. The cradle and launchpad for our children’s dreams. Our sunny patch in the world in which to sink roots. The cozy, nurturing womb of friendship and camaraderie. A sacred space of arrival. A safe harbor.

Like marriage, the timing for buying a house is when we are ready to entwine our roots in a community and landscape which resonate with our unique lifestyle and innermost needs and values. It is a decision with an expanded horizon.

Charged with such profound human emotions, it is imperative to approach this decision with a clear head, wide-open eyes, and the guidance of a real estate professional familiar with the many pitfalls into which far too many buyers—especially first-timers—usually fall into. You need a trusted ally who will place your interests and desires ahead of the sale.

Based on our vast experience developed over decades in this industry, we have devised a roadmap that has come in handy while helping scores of families acquire their first homes. Below are the essential pieces that must be in place before you are ready to say “I do” to your first home:

Familiarity & Long-Term Commitment

You’ve taken the time to become intimately acquainted with the community, neighborhood, schools, open spaces, amenities, etc. of your chosen location, and are ready to make a long-term commitment. Your time-horizon should be no less than five years. Don’t buy for the life you have today. Reflect on your long-term plans. If you’re not yet certain, consider renting for a while to further your exploration.

Job Stability

Your source of income must be stable and with solid future prospects. Not having steady work for the last two years could potentially impact your eligibility for a mortgage loan.

Affordability

  • You have saved enough for a 20% down payment which will lower your monthly payments, and, in most cases, eliminate the need to carry private mortgage insurance.  
  • Your debt payments – credit cards, student loans, personal loans, and future mortgage – must not exceed 36% of your gross monthly income.
  • You have enough cash to cover moving expenses, furnishings, and potential improvements to your new home.

Financial House In Order

  • Your credit score is the first thing a mortgage lender will check to determine your eligibility. For a conventional mortgage loan, your FICO score should not be lower than 620. Before applying for a loan, check your credit score and, if needed, take steps to improve it.
  • Make sure your tax filings are up to date. Lenders generally expect to see one to two years’ worth of tax returns.
  • Lenders will also require bank statements and proof of income (W-2s, paystubs, etc.) from the past one to two months.

Whatever you do, don’t buy a house simply because:

  • Mortgage rates are low.
  • Someone told you it’s a good investment.
  • You just graduated and got a job.
  • Most of your friends are doing it.

Choosing a home is one of the most important choices you can make in life. As much as it is part of the American Dream, it can also turn into a nightmare.

Julie and her team of experts are ready to safely guide you through the process and ensure you make the right decision.

We look forward to helping you with your home buying questions. Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Financially Preparing To Buy Your First Home

“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” ― Abraham Lincoln

Having made a thoughtful decision to buy a home (link to “Homebuyers: Finding The Right Time To Buy A Home”) and after calculating how much you can afford (link to “Homebuyers: Figuring Out How Much House You Can Afford”), it is time to sharpen your ax and prepare your personal finances. This foresight will ensure you can cover the upfront costs and obtain the most favorable terms on your mortgage loan.

Upfront Costs

  • A 20% down payment will lower your monthly payments and, in most cases, eliminate the need to carry private mortgage insurance.
  • Closing costs include a variety of expenses above the purchase price of your property, such as attorney fees, title search, title insurance, taxes, lender costs, and some upfront expenses such as homeowner’s insurance. The amount you’ll pay varies according to the size of your loan and tax laws in your area. Closing costs are average between 2% and 5% of the purchase price.
  • While moving costs are dependent on the amount of furniture, appliances, and other household items you currently own, average costs for local relocation within the Bay Area are below:
    • 1-bedroom home: $200-$500, 3-5 hours of labor
    • 2-bedroom home: $375-$750, 5-6 hours of labor
    • 3-bedroom home: $800-$1,500, 7-10 hours of labor
    • 4-bedroom home (and up): $1,000-$2,000, 10+ hours of labor

The hourly cost of labor varies widely among moving companies, so it is helpful to get a few estimates from different companies for a more accurate idea of expected costs.

Because Julie has collaborated with many different moving companies when assisting her clients with relocations, she has several prospects she can recommend to you.

  • Minor repairs and additional furnishings should also be considered. Cosmetic issues and normal wear-and-tear are not usually the responsibility of the seller, so keep some money aside for minor repairs. If you’re moving to a larger space, make a list and price out any additional furnishings.    

Most Favorable Loan Terms

  • Your credit score is the first thing a mortgage lender will check to determine your eligibility. For a conventional mortgage loan, your FICO score should not be lower than 620. Before applying for a loan, check your credit score and, if needed, take steps to improve it.
  • The 28/36 rule is generally used by lenders when considering a conventional loan. The 28/36 rule states that a household should spend no more than 28% of its gross monthly income on total housing costs, and no more than 36% on all debt which includes total housing costs plus other recurring debt payments. Taking steps to reduce the amount of these other recurring debt payments—car loans, student loans, and credit cards—will bring you closer to meeting the 28/36 rule. Before applying for a loan, keep these tips in mind:
    • Lower your monthly student loan payments by: (a) extending your repayment plan, (b) opting for a graduated payment plan, (c) enrolling in an income-driven repayment plan, (d) consolidating your student loans, or (e) refinancing at a lower interest rate (for details, click here and here). If your student loans are being paid by a third party (such as your parents), lenders will not consider them when calculating your debt-to-income (DTI) ratio.
    • Banks will exclude your car loan from your recurring debt payments when only nine months (or less) are left to pay it off.
    • Whenever possible, pay off your credit card debt. If you don’t have the cash at hand, consider borrowing from your 401K plan. While lenders won’t consider this new loan as part of your DTI, it is good practice to disclose it during negotiations.
    • Avoid taking on more debt until after you close on your loan.

Discover more about your debt-to-income ratio here.

Julie and her team of experts are ready to help you sharpen your ax and prepare you to achieve your dream of homeownership. We look forward to helping you with your home buying questions.

Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Helping Aging Parents Downsize While Building Wealth

HELPING AGING PARENTS DOWNSIZE WHILE BUILDING WEALTH

 

America is getting older. 

By 2040, about one in five Americans—or eighty million people—will be 65 or older, up from about one in eight in 2000. The number of adults age 85 and older (the group most often needing help with basic personal care) will have quadrupled by 2040. And while overall longevity rates are declining, affluent and well-educated individuals are still expected to live past their eighties.

An aging population is expected to strain government budgets because younger people are much more likely than older people to work and pay taxes that fund Social Security, Medicare, Medicaid, and other public-sector services. The latest Social Security Administration projections indicate that, by 2040, there will be 2.1 workers per Social Security beneficiary, down from 3.7 in 1970.

Meanwhile, the cost of long-term care keeps going up and most Americans keep believing—incorrectly—that the government will cover most, or all of it.

“Our population is aging, living longer, and not prepared.”

 – David O’Leary, president and CEO of Genworth’s US Life division

Preparing A Place For Your Aging Parents

Caring for our aging loved ones in their later years is becoming a costly challenge.

Nationwide, a private room in a nursing home now costs more than $8,000 per month, or $97,455 per year, according to a report by Genworth Financial. That’s an increase of nearly 50% since 2004. A semi-private room is less expensive, but still carries a hefty price tag: $85,775 per year. As it is, 87% of adults over the age of 65 want to age in place, according to an AARP survey, and nearly three-quarters of those will eventually need some kind of long-term care, reports Genworth.

Given the staggering rise in nursing home costs and the uncertain long-term financial viability of Medicare and Medicaid, a growing number of families are seeking to add a “senior-friendly flat” to their aging relatives’ properties. This can be rented out until the time comes when Mom and Dad are ready to move-in. In the meantime, the rental income is held in escrow to help cover future in-home healthcare costs. Once the seniors move into the smaller flat, the main residence is rented out to outsiders, or used by the younger generation who wish to stay close to their parents and save money on in-home healthcare services (which can run as high as $47,000 per year, for homemaker services, and $49,000 annually for an in-home health aide).

How An ADU Can Help

Adding a “granny flat” or auxiliary dwelling unit (ADU) to an existing property is not only a creative solution to allow seniors to age in place and save money. It also boosts the property’s resale value. According to Remodeling Magazine, real estate professionals in high-tech areas of the West Coast (Silicon Valley, San Francisco, North Bay, etc.) report that most of the homes sold in recent years that included a recently constructed ADU more than recouped the ADU project cost in the resale—well beyond, in most cases.

To help alleviate the housing crisis, the California legislature recently passed a series of bills ( “Homesellers, New ADU Housing Bills Could Add Significant Value To Your Home) aimed at facilitating the addition, or new construction, of auxiliary dwelling units. This easing of restrictions, coupled with the potential for rental income and higher property values gained by the addition of an ADU, are allowing families to build wealth. But more importantly, it gives loved ones the chance to age in place and save money on senior care in the process.

Rental income, higher property resale values, costs savings—what’s not to like?

Can We Help?

For more information on how we can help with your downsizing and life adjustments needs, please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

    

Defining A 1031 Exchange

Section 1031 of the Internal Revenue Code allows a tax-deferred exchange of an investment property for another, as long as the transaction represents a “trade-up” in value. For instance, the exchange for vacant land (which is not yet producing income) for a commercial building that is bringing in rent would be considered eligible for exchange under Section 1031.

Benefits Of A 1031 Exchange

LEVERAGE

Investors can take advantage of the 1031 tax-deferred exchange to acquire a more valuable investment property. By utilizing the money otherwise paid to the IRS in taxes, investors can increase their overall buying power to acquire a more expensive and profitable replacement property.

CONSOLIDATION/DIVERSIFICATION

With the flexibility of an exchange, an investor may exchange one property for several others, consolidate multiple properties into one, and acquire property in other areas.

INCREASED CASH FLOW/INCOME

Cash flow and overall income can be increased through a 1031 tax-deferred exchange. For example, a vacant parcel of land that generates no cash flow or depreciation benefits can be exchanged for a commercial building that does.

Main Types Of 1031 Exchanges

TRADITIONAL 1031 EXCHANGES

There are two types of traditional 1031 exchanges:

  1. A delayed exchange is when the relinquished property is sold to a buyer and the replacement property is purchased within 180 days from a third party.
  2. A simultaneous exchange is when two parties either “swap” properties with each other, or the exchanger closes on both the sale of the relinquished property and the purchase of the replacement property on the same day.

REVERSE EXCHANGES: BUY NOW, SELL LATER

A reverse exchange allows the acquisition of new property before the selling of the existing investment. If a seller cannot sell the existing property within the timeframe to perform a standard 1031 exchange, a qualified intermediary (QI) can hold title on the desired property until the first property sells. The seller is then able to take possession of the new investment parcel from the QI.

Requirements For An Eligible 1031 Exchange

NET SELLING PRICE (NSP)

To avoid capital gains tax on the sale of your relinquished property, you must spend an amount equal or greater than your net selling price (NSP = selling price minus closing cost.)

QUALIFYING PROPERTIES

All real estate can be exchanged as long as it is held for investment or for productive use in a trade or business.

USE OF QUALIFIED INTERMEDIARY (QI)

The regulations require that you use a QI to facilitate your exchange. The QI is the independent third party required by the IRS to act as the middleman in both the sale and purchase transactions. The QI cannot be the taxpayer, a descendant of the taxpayer, or an agent of the taxpayer (realtor, attorney, accountant, etc.). The role of the QI is to prepare the exchange documents, coordinate with the closing agents for each transaction, and escrow the funds. (Click here for a list of top-rated QI’s in the San Francisco Bay Area).

45-DAY RULE

You have 45 calendar days from closing on the sale of the relinquished property to identify up to three replacement properties. If a property has not been properly identified by midnight of the 45th day, you will be unable to complete the exchange. If you wish to identify more than three replacement properties, restrictions will apply.

180-DAY RULE

You must close on the replacement property by the earliest of either the due date of the tax return (including extensions) for the tax year that the exchange took place, or within 180 calendar days after closing on the relinquished property.

Click here for a detailed look at Section 1031 of the United States Internal Revenue Code. Julie and her team of experts look forward to helping you with any real estate investment questions you may have.

Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Buy Before Sell? Or Sell Before Buy

The answer to this chicken-or-egg dilemma can be summarized in three words: “It all depends.”

The determining factors are these two things:

  1. Your finances, and
  2. Prevailing market conditions.

 

Buying Before You Sell

In a competitive environment, with continued home-value appreciation like the one prevailing in the Bay Area, it makes sense to buy before you sell.

You won’t have to move twice, won’t be pressured to quickly pick a house that may not exactly be what you want, and you’ll be able to vacate your home and properly stage it (“Sellers: Owner-Occupied Vs. Vacant Homes”) to appeal to a greater number of buyers.

If you don’t have the cash reserves to make the down payment on your new home and temporarily cover two mortgages, you can use the built-up equity on your existing home to take out a line of credit, or HELOC, in which a lender promises to advance you a particular amount which you can draw upon as needed.

This type of loan is different from your primary mortgage in that you don’t get a lump sum. Instead, the loan acts as an on-call line of credit from which you can take out sums at any time during the withdrawal period. You are only required to pay interest until the end of the term.

However, note that the interest rate is almost always variable.

 

Selling Before You Buy

What if you have neither the cash nor the equity? 

  • Sell with contingencies.

 

Homeowners can sell their properties with contingencies built into their contracts, stating that they must be able to buy a replacement house, or the deal is off. The time limit is usually between 30 and 60 days.

However, a contingent agreement may include a kick-out clause allowing the seller to continue showing the house and “kick out” the buyer if the seller receives an offer from another buyer without a home sale contingency. Sellers are likely to view contingent offers as less attractive than those with no strings attached.

All things being equal in terms of the amount of the offer and credit qualifications, a would-be buyer making a contingent offer is likely to lose out if the seller also has an offer on the table from someone who is ready to fully commit. 

  1. Implement a rent-back agreement.

A rent-back agreement essentially lets you become the new buyer’s temporary tenant, giving you extra time to live in your home after closing. It doesn’t last for long, but it will give you a chance to close on your new home and pack up for the big move.

Of course, just like the previous contingency option, a rent-back requirement will likely get fewer offers. 

  1. Sell and hope for the best.

Since contingencies and rent-back agreements may place you at a disadvantage compared to other buyers, the alternative is to sell without conditional clauses. If you don’t have family or friends you can move in with in the meantime, then you can temporarily rent elsewhere.

This option can buy you plenty of time to focus on searching for your next home. Julie and her team can help with this too, as we’ve helped many of our satisfied clients find temporary housing while in between homes.

 

Can We Help?

Whatever your circumstances, Julie and her team will help you navigate through every option to choose the one that best meets your needs.

For more information on how we can help with your buying and selling needs, please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.