Tuesday, June 30, 2015

Why I Bought My Second Home Before My First Home: Money, Freedom, Fireflies



Like a lot of New York City residents who don’t work in finance or have access to family money, I’ve always regarded the real estate market here as “not for me.” Over the past 20 years, I’ve watched neighborhood after neighborhood pass me by in terms of affordability. Where once a half-million bucks bought a Brooklyn brownstone in need of TLC in, say, Fort Greene circa 2000, that same house will now set you back $3 million. A bargain-priced “handyman’s special” former tenement two-bedroom on the Lower East Side? A “full of character” Long Island City, Queens, townhouse with bragging rights–worthy monthly payments and awesome views of Manhattan? All History Channel stuff.

So someone with my income—which would make me quite comfortable in any part of the country not named New York, San Francisco, or Silicon Valley—is left with three choices:
  1. Spend everything to buy in a neighborhood with mediocre schools, a far stretch from my usual social scene, and aesthetics that could best be termed “challenging.”
  2. Rent a nice, livable apartment, hoping for the (peaceful, timely) death of a moneyed aunt to aid the purchase of a future place that, while not ideal, at least won’t depress me each month when I’m making that $3,500 mortgage payment.
  3. Buy a “second home”—even though I didn’t actually own a first one. Which is what I did.
In 2007, my wife and I closed on a farmhouse on a stunning piece of land in the Catskills for $260,000, which wouldn’t even get us a studio apartment in our Brooklyn neighborhood of Boerum Hill. Sure, the place was in need of work—a modified two-story farmhouse with a case of 1960s renovation blues—but the views were incredible, and the town had a wonderful mix of farmers, ex-farmers, NYC transplants, and second-homeowners (many in the same boat as us). It offered us the chance to invest in a property without mortgaging our future on a million-dollar box of depression.

We needed two things to make it work: enough money for the down payment (in our case, about $50,000) and—this part is keya city apartment with below-market rent to make it economically feasible. The combination of our mortgage plus our rent is what most of our friends pay just to rent their (admittedly, much nicer) apartments. But if you buy wisely, you can still pull it off while renting an apartment closer to market rate. You’d be surprised by what $120,000 will buy you in upstate New York.
Once we came up with a game plan, a major question remained: How would we pull it off? Here’s our insider’s cheat sheet.

Figure out the ‘first second home’ financing

My wife and I have good credit, so we were quickly approved for a $200,000 loan at 6% (refinanced two years ago to 4%). Because we didn’t already have a mortgage or own another house, the bank didn’t look at this as a “second home” purchase, which tends to be harder to finance and often carries a higher interest rate. In fact, we were (tacitly) encouraged by pretty much everyone involved to proceed as if this would be our primary residence. This made sense to us as, well, we didn’t own anything else. Though some years we might not be there the requisite 183 days a year to establish residency, it would be our primary residence, because it was the only residence we owned. On paper, we were buying that house and moving in.
If you’re lucky enough to be able to work at home, you can claim primary residence and not have to pay those notoriously high NYC income taxes. I couldn’t manage that myself, and faking it is risky (not to mention illegal): Your ATM and E-ZPass will sink you quickly if you ever got audited.

Decide whether to make money on it—or not

We couldn’t live there full time, or work from there, but we also didn’t want to be landlords. Plus, we don’t have to pay tax on that would-be income or declare the place as a business, which would make things complicated if we tried to sell; capital gains snatches up a sizable amount if it’s not your primary residence. Plus, we could afford our mortgage. Much of the time it’s empty, but we love letting friends use it whenever we can; we’d rather have someone there than not.
But others may want to go the Airbnb/VRBO/Craigslist route, which can cover a significant chunk of the mortgage. Don’t forget to file those tax forms, though.

Understand the stuff you never realized you’d pay for

As much as we love the nature, the quiet, and the views, this kind of homeownership has its drawbacks, especially when we’re not making a profit.
Think of all the responsibilities that come with owning a house. Now think about having that house 150 miles away. Is there too much snow on the roof? Is the basement flooding? Did the contractor show up and fix the sagging hearth? These are things that keep me up at night.
When you own a weekend home, you end up paying for services you might never use if it were your primary residence. After realizing that I spent three hours each weekend mowing the lawn, I decided to pay someone to do it ($75, but I have a big lawn!). The same with plowing the snow ($20). You have to pay someone to get the mail, check the pipes (and call a repairperson if they’re frozen), and keep an eye on the place, though we are blessed with a great neighbor who does it for less than the cost of a fancy New York City meal (she feeds our cat, too, who lives there full time).
As with any fixer-upper, you have to get used to the fact that most of your extra cash will go into the house. What makes it more complicated is renovating from 150 miles away—it’s as hard as it sounds. We renovated the kitchen so it opens to the back and the view, and we put in dormers to make a “real” upstairs out of a glorified attic—all with the help of FaceTime.

Enjoy! Home is where the country is

Still, it’s worth it. For now. Brooklyn may be where we live and work, but the Catskills is where we feel most at home. It’s where we celebrate Thanksgiving and Christmas. It’s where my wife and son have spent the past two summers almost exclusively, hanging out with a group of other families, many of whom are doing what we do. Despite the three-hour drive (!) we look forward to hitting the road every Friday and find ways to eke out extra time on either side of the weekend. My bedroom upstate contains the various objects and life souvenirs that I care about. My bedroom in Brooklyn contains my work clothes and a large canvas L.L.Bean tote packed with things to take upstate. I am grateful for the cheap-ish rent, but I feel no love for my tiny two-bedroom apartment.
There is something else we didn’t consider when we embarked on this adventure: You have to really want to be in your “second” home as much as possible, otherwise you endure a certain level of guilt when you vacation anywhere else. Shouldn’t we be upstate, working on the house? The sad reality is always lurking there in the bushes—the second house won’t always make sense for your life. When you’re single or married without kids, escaping to the country is a blissful way to spend your free time. And then, suddenly, you have two school-aged children and that free time disappears.
But I wouldn’t trade anything for the time I spend with my older son (my other son is an infant, so he’s just getting to know the place), running barefoot outside, throwing rocks in the pond, digging up carrots we planted on Memorial Day weekend. This despite the fact that we go to the house less often now than we did before they came along. Classmates’ birthday parties (those damn birthday parties!), sports, the hassle of strapping a 4-year-old and a 1-year-old into the car for a three-hour drive mean that “every weekend” has turned into “two or three times a month” in warmer months, and “once a month” in winter.
For now, we will continue the bifurcated existence. My kids will learn to navigate life in a 700-square-foot apartment in the city, and on a 10-acre former dairy farm where coyotes wake you at night with their howls. My wife’s freelance work means that the kids will be spending another summer almost exclusively up there this year, running after lightning bugs and learning to swim at the town pool while I toil in the hot city. Luckily, I have my L.L.Bean tote packed and ready to go.

Monday, June 1, 2015

Think You Don’t Need Flood Insurance? Think Again



Flash flooding from intense storms over central Texas and Oklahoma over the past week has brought images of rivers and bayous overflowing their banks, streets inundated with water, homes floating off their foundations, and cars set adrift.
In Houston, more than 4,000 homes have been damaged by the muddy waters so far, officials say. Rebuilding those homes will take months, if not a year or more. But some homeowners may not get all the help they’ll need, because they don’t have flood insurance.
While homeowners in high-risk flood plain zones are required to buy flood insurance, others should consider buying it, too. More than 5.5 million homeowners in more than 21,000 communities across the U.S. already do, according to the Federal Emergency Management Agency.
Anywhere it can rain, it can flood. When you consider that, and what’s going on in Texas, which was in the midst of a drought until last week—homeowner’s insurance policies do not include flood damage,” says David Schein, a regional flood insurance specialist for  FEMA.
“You don’t have to be in a high-hazard area to flood. We pay claims for the obvious: a stream, creek, river coming over its banks. However, in an urban environment that’s paved, the water can be just ponding, or pooling on its way into the stream. That can be a covered claim, water flowing over the land.”

Why buy flood insurance?

Floods are the most common weather emergency in the U.S., according to FEMA, and they usually strike without warning. Flooding can result from hurricanes, tropical storms, cyclones, plain old heavy rains, winter storms, spring thaws, overburdened or clogged drainage systems, or occasionally from nearby construction. The increased development of buildings, parking lots, and roads has made flooding more severe throughout the country, FEMA says.
You can live miles away from water and still be a victim of flooding. It  takes only a few inches of floodwater to cause tens of thousands of dollars in damage, according to FEMA.
And don’t assume that federal disaster assistance will bail you out when there’s a flood. It’s helpful to homeowners only when the U.S. president declares a state of emergency—and is usually a loan that must be repaid with interest, FEMA notes. Flood insurance policies pay out on qualifying claims whether or not a federal disaster is declared.

What kind of risks am I running?

High-risk flood zones: Insurance required

People buying homes in certain designated flood hazard areas are required by FEMA to purchase flood insurance before getting a home loan from federally regulated or insured lenders. High-risk areas are those declared to have at least a 25% chance of flooding during the typical 30-year mortgage. FEMA estimates there are about 30 million structures, both residential and commercial, in that position nationwide. There’s less risk of a structural fire in your home, Schein notes (about 10%, over a 30-year mortgage), yet no one questions the need for fire insurance. You can find out if you’re in a flood zone or get a full breakdown of high-risk subcategories.

Low- to moderate-risk flood zones: Still recommended

Homeowners who aren’t close to a body of water may still want to consider buying flood insurance. About 25% to 30% of flood insurance claims come from areas that have less than a 1% annual chance of flooding, according to FEMA. The agency still recommends flood insurance in these low- to medium-risk areas, and in fact homeowners and businesses there might be eligible for a lower-cost preferred risk policy.
You can find out your property’s level of risk at FloodSmart.gov. This can help you assess your potential flood insurance premium.

How to get insurance and what it’ll cost you

Flood insurance is available in more than 22,000 communities that participate in the National Flood Insurance Program, created more than 45 years ago. The program requires certain flood plain management initiatives in high-hazard areas. However, it also offers policies outside of flood plains, whether or not your property has flooded before.
“What we’re hearing from our offices in Texas is that a lot of people who had major damage are quite far outside the mapped flood area,” Schein says, adding that it’s not terribly unusual. “We hear heartbreaking stories all the time. We hear, ‘My insurance agent told me I don’t need it.’ What the agent should have said, or meant to say, is: ‘The bank is probably not going to require it.’ That’s not the same thing.”
Premiums vary depending on the date of construction and relative risk of the area—they average $550 per year—and most policies have a 30-day waiting period before coverage begins (that’s so you don’t take out a policy as you see the waters rising). Homeowners can purchase up to $250,000 in coverage for their home. Separate coverage is available for its contents, of up to $100,000 for homeowners or renters. Residential condominium associations can purchase up to $250,000 of coverage for each eligible unit, or the replacement cost of the building, whichever is less.

Monday, March 30, 2015

How to Find the Right Financing Option for Your Home Renovation



There are several ways to pay for your home improvement project. Which one is right for you? That depends on a range of factors, including project cost, your household budget, how much you’ve saved, and how soon you plan to start work. This checklist of pros and cons can help you choose the financing option that best fits your budget and your project.

Option No. 1: Pay cash

Pros:
If you’ve saved money to pay for the project, or received a big tax refund or work bonus, paying cash may be a good option. You won’t take on any more debt and you’ll have immediate access to the money, unless it’s tied up in a certificate of deposit or an investment account.
Cons:
Unless you’re a super saver, it could take years to save enough to pay for a large project like a kitchen overhaul, which can cost $50,000 or more.

Option No. 2: Pay with your credit card

Pros:
If you have a low-interest credit card or a 0% balance-transfer option, you can also consider paying with a credit card. You won’t have to go through a lengthy approval process, especially if you’ve already been approved for the card.
Cons:
Many contractors won’t accept credit card payments. While you can get a cash advance through your credit card, the interest rates are often very high. If you’re using a card with a limited-time, low introductory interest rate and don’t pay off the full balance before the offer ends, you’ll face much higher monthly payments and end up paying a lot of interest on the remaining balance. In addition, the length of introductory offers is usually only a year or a year and a half, which gives you a very tight time frame for paying off the debt.

Option No. 3: Get an unsecured personal loan

Pros:
In contrast to credit cards, an unsecured loan—also known as a personal loan—can have a fixed interest rate and a fixed monthly payment. This type of loan does not require you to put up your house as collateral, so your home is not at risk. And, you can still qualify if you haven’t built enough equity. The application requires minimal documentation, so the process takes just a few minutes. And, you’ll receive your money in a few days. In addition, there are no closing costs and you usually have several years to pay back the loan.
Cons:
Interest rates for unsecured loans can be higher than those for home equity or other secured loans, which means you pay more interest over the life of the loan. You cannot deduct loan interest from your taxes.

Option No. 4: Take out a home equity loan

Pros:
If you have equity in your home, a home equity loan or line of credit can help you pay for a more expensive project. These loans usually have lower interest rates, and you may be able to deduct the interest and any points on your income taxes as well. In addition, you may have longer to pay back the loan—anywhere from five to 30 years.
Cons:
This type of loan is also called a secured loan. That means your house is collateral for the loan and, if you don’t pay it back, the lender can take your home. It can take six to eight weeks to complete the application process and receive your money. Though the interest rate may be lower, the fees can add up. You’ll pay closing costs—including the cost of an appraisal, attorney’s fees, title search charges, and more—which can add up to several thousand dollars. The amount you can borrow will also be limited to a percentage of your home’s value minus any current mortgage.
Before you decide how to pay for your home improvement project, think about which option best suits your budget, the amount you need to borrow, and how soon you’ll need the money. Doing so will help to ensure that you get the loan that’s right for you.
This article is intended to provide generalized information to assist the general public in making financial decisions; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


Friday, February 27, 2015

THE HOUSING MARKET IS IN FULL BLOOM! - WHY THIS IS GOOD FOR YOU



As we roll into spring, the U.S. housing market continues to grow and improve. For homeowners, the continued improvement of the housing market is fantastic news.

For homeowners, the last four or five years have been a roller coaster. First came the peak of the housing bubble, followed by its inevitable crash. Millions of homeowners found themselves underwater and under the threat of foreclosure while others, who might otherwise have sold their homes during a healthier market, found themselves with few options until the market recovered.

However, beginning in 2012 the housing market started to rebound, and homeowners began finding themselves in dramatically improving situations. 2013 saw home prices skyrocket, increasing by double-digit percentages, and things continued to improve in 2014, though more slowly. Today, the housing market finds itself in “full bloom,” steadily improving and bringing even more good news to homeowners.

1) The 2014 Recovery and Where We Stand Today
Several factors fueled the housing market recovery of the last few years. From 2012 to the end of 2013, the housing market rebounded drastically. As economic conditions began to improve, investors and other buyers helped clear the inventory of distressed homes, buying undervalued homes in foreclosures or short sales.

With fewer distressed properties weighing down home prices, prices were able to start recovering. At the same time, homebuyers entered the market faster than homes became available, and simple supply-and-demand furthered the spike in prices.

According to the National Association of Realtors, the national average home price increased 11.5 percent over 2013 compared to 2012, the strongest gain in home prices since 2005. Homeowners who found themselves underwater on their mortgages during the housing market crash finally regained much of the equity they lost.

In 2014, home price growth slowed. With fewer low priced homes for sale and more balanced levels of supply supply-and-demand, price increases normalized. Home values still increased, though more modestly.

Today, home prices continue to increase at the more sustainable level (still growing, but without sidelining new buyers). This year, the housing market will depend more on job growth, rising incomes, and more new homeowners entering the market to fuel growth.

So, what does all of this mean for current homeowners? No matter what your situation was during the peak of the housing market crisis, chances are your situation has improved dramatically due to the huge gains we’ve seen in the housing market. If you’re thinking of selling your home, now may be the perfect time.

2. Home Prices Have Increased, And Will Continue To Do So!
As mentioned previously, from 2012 to today home prices have increased significantly. According to the investment group BlackRock, home values appreciated more than 20 percent since the first quarter of 2012 to the end of 2014, bringing many homes close to their pre-crisis peak prices. This dramatic increase in prices helped more than 4 million homeowners regain equity in 2013, and millions more in 2014.

This year, experts predict home prices will rise 4 to 5 percent. Two primary factors will continue to help push home prices up: the number of homes for sale remains low compared to historic numbers and demand, and the demand for homes continues to increase as economic conditions improve.

With the growth in home prices slowing to , many homeowners are now looking to, many homeowners are now looking to sell their homes and take advantage of the low mortgage rates available today.

3. Mortgage Interest Rates are Low Now, But Rising This Year
In recent months, mortgages rates have hovered at yearly and near historic lows. Towards the end of last year, mortgage rates hit a low of 3.89 percent.

Since then, they have started to increase. According to the Mortgage Bankers’ Association, 30-year,fixed rate mortgages will rise to 4.5 to 5 percent by the end of the year3. The increase may not seem like much, but slight changes in mortgage rates can have a big impact on your ability to buy a new home.
A 1% increase in rates can reduce your buying power by as much as 10%4.

As the year goes on, buying a new home will become less affordable because both home prices and mortgages are increasing. Rates are expected to start increasing around the middle of this year, so if you’re thinking of selling your home and buying another, you need to act fast to take advantage of these
incredible rates!

What’s Your Home Worth Today?
If you have been waiting to sell your home, especially if you or someone you know is having difficulty with their mortgage, it is time for you to start exploring your options. Your home is likely worth more than you realize, and right now mortgage rates and home prices are opening the door for many homeowners to sell and buy homes. The most important thing, however, is to know where you stand.

Do you know what your home is worth today? What are homes in the area selling for? These are all questions to which the answers have changed significantly in the last few months and knowing what your specific situation is will help you make more informed choices.