Why Do We Buy Another Property
Why Do We Buy Another Property?
There are a number of reasons why clients buy a second or third property and we have attempted to narrow the rationale provided into different considerations. Whether our client is buying the home as an Investment Property, Rental Property, Vacation Home, or a Center for Family Activity, each should be considered in light of the opportunities and risk. Ultimately, is the purchase being considered for Investment, Utility or perhaps both?
The interest rate environment today is clearly attractive to most and has given new rise to the consideration to invest in real estate, but there was also a rather important change to tax law mitigating much of this “opportunity”. As a result of the Tax Cuts and Jobs Act, all homeowners lost the ability to deduct mortgage interest and real estate taxes above $10,000 in a given year (the State and Local Tax Deduction – SALT). Historically, investors would rationalize the true net after-tax cost of real estate against other performance assets, a cost which was effectively reduced by up to 40% due to the tax deduction. Today, with the loss of this deduction, the true cost of these expenses is also the NET cost, a hurdle higher than previous. Even as the mortgage rate has fallen, it has not necessarily done so at the rate of impact associated with the SALT deduction. There has been discussion and rumor this may change, but as we share with clients often, all we can do is plan for the current environment in which we live. As a result, the net cost of carry is higher for many, on an after-tax basis, leading investors to make the decision for appreciation potential rather than on the arbitrage return (portfolio returns above cost).
Many investors will consider the purchase of property for diversification and rental income. Clearly, there is opportunity to purchase rental property and benefit by the income, and there is opportunity the real estate market is not directly correlated to traditional market investments (stock market). However, real estate does appreciate and devalue with market and economic conditions while being truly illiquid. Rental opportunity investments require due diligence specific to the ability to rely upon the income, regardless of economic conditions. There is risk to every investment, all of which should be part of the due diligence process.
Investors will very often purchase a property to stand as the family’s center of gathering. As families mature, often the patriarch’s do sell the primary home yet desire to still facilitate the family events. This is a logical desire; particularly for those investors with financial ability. SSG has watched a number of our clients buy very desirable homes, many on the New Jersey Shore, in Florida, Maine, Vermont and even California. Many will start by renting the home part-time, mitigating the true out-of-pocket cost as they build equity for later years and usage.
At Raymond James, we have the benefit of our own mortgage bank facilitating loans for our clients from origination to close. Past experience and those we have seen at other financial institutions refer mortgage origination out to a third party effectively frustrating the client and separating them from service and counsel. If clients are considering real estate opportunities, we strongly recommend discussing the options with our team. We can provide the mortgage can be linked to our clients’ accounts making it easier and more efficient to see all investments in one central location. More, by working with Raymond James, clients can find comfort in working with our team members, who they already know and trust with their investments.
The SSG Executive Advisory Group has always taken the conservative stance preferring clients retire with little or no debt. Our opinion may differ when considering the home for Utility Purposes versus Investment Purposes, but ultimately each family dynamic is different and must be considered in light of the current rate environment, the current tax environment, and the families plans in the future.
Raymond James Financial Services and your Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs. Real estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, laws and interest rates all present potential risks to real estate investments.
