By Charlie Eck
With the residential real estate market going through a tumultuous period, is now the right time for your rental clients to make the move into buying? The answer is, “most likely.” There are many potential clients out there that will need help deciding which choice is the right one for them, making you a trusted advisor that should have all the answers to their questions.
Many in the real estate industry have indicated that residential home prices are starting to stabilize. The inflationary effect of all of the stimulus money has not yet impacted the long-term interest rates. With so many houses and condos up for sale, this could be the perfect time for your clients to find a home that fits their needs. Simply put, if a potential clients’ time horizon for staying in their next residence is one to two years, then continuing to rent is most likely the better choice. However, once you have them start to consider occupancy over two years, the financial evaluation of this choice starts to shift toward ownership rather than renting.
There are several online calculators that allow you to help quantify their choices, such as http://www.eloan.com/s/rentvsown/input. Homeownership also provides tax advantages to the buyer. The interest paid, the annual real estate taxes and now your state income taxes are allowed to be deducted individually. These three items alone generally are higher than the standard deduction allowed by IRS rules. Once your client starts to individually deduct, other expense can be added toward the reduction in taxable income. One of the good tests is to have your client take last year’s tax return and redo it as if he/she had already owned a home and see what these deductions would do on his/her tax bite. A tax preparer or Turbo Tax can run these scenarios easily.
The tax impact is a bit technical, but a real motivation for homeownership. There are also a number of other considerations, including affordability, which tops my list. With interest rates so low (now barely higher than 5 percent), locking in now assures the affordability of your client’s purchase for years to come. Just over 20 years ago, interest rates were doubled. Generally, your clients’ housing cost (loan payment, real estate taxes, insurance or condo assessments) should be around 28 to 33 percent of their gross income. After adding all of the other costs (car loans, charge cards, student loans, etc.), the total debt to income should be around 39 to 44 percent of gross income.
However, since there are many exceptions, having your clients get prequalified by a mortgage professional is a good way to start the process. Have them answer the following questions: What can you really afford and what do you really feel you can pay? The answer to these two simple questions is not always the same. The first one is derived with the help of a mortgage professional, while the other shouldn’t be hard to answer.
Inform your clients that the mortgage pre-qualification process will explore:
• The income they earn to repay the loan to be obtained; • The other debts and obligations which have claims on their income;
• The monies available for down payment, closing costs and reserves. Generally, an initial conversation can be completed in 20 to 30 minutes, and should be easy and painless. After your clients answer what they can afford and what they feel that they can pay, it’s time to compare what they would pay in rent for a comparable unit. There are a number of different rent vs. own calculators online that can be used to evaluate an individual’s situation. Before visiting the sites, the following information should be ready:
• expected monthly rent
• current mortgage interest rate (using 5.25% should be an accurate guess)
• the percentage of taxes to gross income (use last years tax return to take tax bite into gross income) • estimated loan amount (getting prequalified by a mortgage professional will help here) After your client completes a rent vs. own analysis, their journey is not complete, and this is where you, the Realtor, can come in and really help. Now it’s time to show your clients what they may be able to purchase for the payment and loan that they have qualified for. It’s also important to remind them that there are additional costs they may not have had when living in a rental unit, such as repairs, association obligations, etc. While in the end your clients are the ones who will make the final decision as to whether renting or owning is a better route, your knowledge as a Realtor will also help to steer them in the correct direction.
Charlie E. Eck is the president of Lincoln Mortgage. He can be reached at 630.322.8444 or by e-mail at email@example.com.