When you purchase a property, one of the simplest ways to make income from it is to rent it out. You’ll want this rent revenue to cover the mortgage payments and any of the maintenance on the property itself. Ideally, you’ll have some profit left over on top of that.

But what are other ways you can have your property work for you? What many folks don’t realize is that they can leverage the equity of their home to generate more income.

Now, there are some people who are completely against using home equity and their number one goal is to pay off their mortgage. They either find it too risky or don’t know where to start. Yes, it can be risky if you don’t know what you’re doing, but if you do, you can wisely wield the double edged sword known as leverage.

When you want to tap into the value of your house, you can use it as collateral and get a home equity line of credit (HELOC). A HELOC basically translates your home equity into funds you can use.

Now that you have funds that you can work with, how can you get that money to work for you? There are several things you may want to consider:

Other Real Estate Investments
If you’re an avid real estate investor, you can use the funds from your HELOC as a down payment on other properties. Wisely selected properties can generate more income and appreciation in return and can allow you to keep on expanding your property portfolio.

Stocks
Unless you’re knowledgeable in stocks, you’ll want to forego on this option because it’s too much of a gamble. While you can make an investment in a company like Apple and double your money in a few years, your stock picks may tank and your equity could vanish. The problem is – if you lose the money from you home equity line, it’ll take longer for you to finish paying down your mortgage (assuming that is even your goal).

Index Funds, ETFs and Mutual Funds
This option is less risky for those who are not familiar with investments and financial products. You can usually find an index or a mutual fund that averages a return of 3-8% a year. If you can beat the interest rate paid on your line of credit, your will end up ahead of the game. Your gain in this case may not be a lot, but it’s better than nothing and the interest on this loan, since it is for investment purposes, is tax deductable.

Life Insurance with Cash Growth Component
While a lot of life insurance products are scams, there are some decent ones out there.  What you want to look for is a policy that has a cash growth component, meaning that the money you pay generates a return. There are also tax advantages to this option where you can defer taxes. With a good insurance company, you can generate a double digit annual return on your money (not including taxes), which could translate to about 7% including taxes.

How to calculate available equity:
Here’s how you can get a rough idea of how much equity you have available to you:

If you have a $100,000 house and $50,000 of it has been paid off, you have that $50,000 of equity to work with. A bank will typically lend you up to 80% of the value of your home. So with a home valued at $100,000 at 80% loan-to-value you’d be able to borrow $80,000. If your mortgage balance is only $50,000 you would be able to get a HELOC for the remaining $30,000. Some lenders also provide options to exceed 80% LTV allowing you to take out even more equity. With the basic scenario above, you’ve got $30,000 to work with.

How much will a line of equity cost you? The interest rate will depend on your credit history, for the most part as well as the loan to value ratio of the loan. The more equity you want to take out, the higher your rate. A 5% interest rate is a realistic number.

A word of CAUTION:
Remember, whatever you do, you’ll have to pay that money back to the bank. So make sure that your investments are either very safe or you really know what you’re doing. Otherwise, if you can’t make your mortgage and HELOC payments, the bank will come after you and your other assets.

Be smart and put your equity to work to earn a greater return.

Tax season is here and the deadline is fast approaching. If you’re a landlord, there are several tax deductions you may qualify for. Nolo.com has a great article on how you can keep some cash in your pocket this tax season.

Here’s a list of 10 deductions landlords should take a look at:

1.    Loan interest
2.    Depreciation
3.    Repairs
4.    Local travel
5.    Long distance travel
6.    Home office
7.    Employees and independent contractors
8.    Casualty and theft losses
9.    Insurance
10.  Legal and professional services

I am sure you’ll agree it’s better to keep your hard earned money in your pocket than let it go to the IRS. To learn more about each of these deductions, take a look at the original article:

NOLO: Top Ten Deductions for Landlords

Ever wonder what would happen if you were to double a penny each day for a month? By the end of the month, you’d be a multi-millionaire with $5,368,709 in your pocket. That’s the power of compounding.

I got into the topic of compounding in the Amortization Schedule article, which talked about how much interest you’re really paying on your loans. This article will focus on difference between APR (annual percentage rate) and APY (annual percentage yield).

The Difference
The main different between the two is compounding. APR stand for annual percentage rate and does not include compounding. APY stand for annual percentage yield, and does include compounding.

A Simple Example
If you pay 1% interest every month on a loan or a credit card, your annual percentage rate (APR) will be:

• Tnumber of periods per year multiplied by the rate, so 12 x 1% = 12%.

Calculating APR is pretty straight forward. However, this does not include the fact that you’re paying interest on top of previous interest after the initial month. That’s where the annual percentage yield (APY) comes in.

APY’s calculation is a bit more complicated:

• APY = (1 + interest rate) ^{# of periods} - 1

You can use Excel spreadsheet or a financial calculator to calculate the APY. There are also websites that will help you convert one rate into the other.

For the above example, the APY would come out to 12.68% when calculated, which is 0.68% higher than the APR. The higher the rate or number of compounding periods per year, the greater the difference between APR and APY.

Borrower vs. Lender
As a borrower, you are looking for the lowest interest rate possible, whether it is for a credit card or a mortgage. When you do look around for interest rates, you need to be looking at the right one. APR will be the lower interest rate out of the two, however, it is the APY that you’ll really be paying. Some financial institutions may advertise the lower APR rate to get you interested, and then mention the APY in their fine print. This is something you need to be on the lookout for.

As a lender, you want just the opposite – a higher interest rate on your investment. Here is where the bank may quote you the APY instead of the APR since it works in their favor when you are the lender. With interest bearing investments such as GICs, the compounding period plays a role in the actual return you’ll earn on your money.

The Bottom Line
While the difference between these two terms may not be drastic, it can add up over time, especially if you’re talking about large sums of money. Remember that by law, US banks and financial institutions are required to disclose both of APR and APY when you do any type business with them. But, it’s up to you to know the difference between the two.

Sources:
Investopedia

Renting out properties can be exciting. Not only can you get an additional revenue stream, but you can also build up a solid rental portfolio, just like in the good old game of monopoly.

While there are many aspects to becoming a successful landlord, today I’d like to focus on legal protection and why you should consider setting up your rental properties as a Limited Liability Company (LLC) if you operate in the United States.

Your rental property is a business and should be treated as such. It has customers (your tenants), revenue (monthly rents) and expenses (insurance, taxes, utilities, etc). You, the landlord, are the CEO of your business.

Let’s do a brief overview of terminology. There are four main ways to set up a business: sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). For the first two, you are your business. It is in your name and any liability falls on you and your personal assets (your house, your car, etc). The latter two separate you from your business, and set it up as a separate entity.

The reason why you should consider the LLC structure is because it’s a hybrid between a corporation and a sole proprietorship. It gives you the best of both worlds, so to say.

When it comes to managing your rentals, using an LLC is better than a corporation because it limits the amount of paperwork and hassle. With corporation, you must have a board of directors, hold shareholder meetings, and file minute meetings. With an LLC, you can have just one owner but still receive the limited liability benefit of a corporation.

With an LLC, you get to choose whether you want to be taxed as a proprietorship or a corporation. This gives you the benefit of pass-through taxation. A corporation gets taxed on two levels. It has to pay taxes on its revenues, and then when it pays dividends to its shareholders, those dividends are taxed at the personal level as well. With an LLC, you can avoid this double-taxation.

A Limited Liability Company is better than a sole proprietorship because it limits clams to assets owned by the LLC in case of litigation. This protects your personal assets in the case you are sued in relation to your property. This protection is not perfect, though. Heatherman Law mentions, “If you were personally responsible for doing something, such as snow removal, and you didn’t do it, and that omission lead to an injury, you would still potentially be on the hook as the person responsible for that job, and not merely as the land owner.” So in some cases, your own assets may be at stake. However, having LLC protection is certainly better than having nothing at all.

Some things to consider:

• When you set up an LLC, it can own one or several properties, which is up to you. You may want to put each rental property under its own LLC. Then, in case of litigation, any damages will be limited to that property alone.

• Another important point brought up by Heatherman Law: most mortgages have a “due on sale” provision, which requires the mortgage to be paid off in full when the property is sold. You transferring ownership of your rental from yourself to the LLC is considered a sale. In this case, your mortgage holder has the right to ask you to pay off whatever was owed on the mortgage or you lose the property. It’s best to renegotiate with your mortgage broker if moving your property to an LLC structure to avoid any issues later on.

• Treat each of your LLCs as its own entity. Set up a separate bank account for each.

• If you’re the sole owner of the LLC, you don’t have to file separate tax returns for the LLC. It can be  done via Schedule C on your personal tax returns.

• You may wish to have additional owners for each LLC which may further diversify any potential liability.

As you see, setting up your rental properties under a Limited Liability Company is a great way to go despite its flaws. The setup process is fairly quick and easy. It’s also relatively inexpensive. According to CostHelper, fees can range anywhere from $60-800. LegalZoom.com has some basic LLC packages for as low as $169.

When dealing with legal structures like an LLC, it is advisable to consult a lawyer who is knowledgeable in real estate. You want to make sure that you structure your LLC properly to ensure there are no problems which could come back to bite you later on.

Sources:

• Heatherman Law
• NuWire Investor
• Rent Law
• Cost Helper

I’ve talked to many people who were surprised by the amount of interest they were paying out on their loans. These ranged from student loans to house mortgages. It’s not very obvious how much total interest you’ll be paying when you first get the loan. That’s where an amortization schedule will come in handy.

Let’s say you’re buying a nice condo or a house and need some money for the down payment. You feel pretty good when you leave the bank. You just signed a 25 year loan for $100,000 with 5% annual interest rate, which sounds like a very good number. However, by the time you’re done paying off that loan, your interest will add up to about 75% of the original $100,000. That’s$75,377.01 to be exact. This is how the bank makes its money.

How is that possible? The answer lies in compounding and an amortization schedule can show you the nitty and gritty details. These schedules can be a bit of a pain to build from scratch, so we’ve created a working sample schedule for you to use. You’ll need to change the numbers to reflect your own scenario. The link to the excel file is at the bottom of this post.

A quick how-to:

1. Enter the loan amount, annual interest rate, number of years, and number of payments per year:

Excel will calculate your monthly payment automatically.

2. Adjust the amortization table if required. The default table includes 300 payments (25 years of monthly payments so 25 * 12). You may have to add or subtract rows. If you have a 30 year loan with quarterly payments, you’ll need 30*4=120 rows.

3. Once the rows are adjusted properly, you can view the statistics about your loan. You’ll see how much you’ll pay in total interest, in total principal, and the grand total for your loan.

Another useful feature of an amortization schedule is that for every payment period, you can see the exact breakdown of interest versus principle. For example, in the 20th payment on our default spreadsheet, you’ll pay: $402.86 in interest and $181.73 in principal.

When you take a look at this loan, you’ll notice that the majority of your initial payments will be covering interest. Only after the 134th payment will you be paying more towards the principle of your loan rather than its interest.

And that’s about it. These amortization schedules will come in handy when you’re shopping around for loans. Use them to your advantage and see how much interest you’re really paying. The excel file is below:

The Rentables Sample Amortization Schedule (Microsoft Excel Spreadsheet)

If you’d like to build your own amortization schedule from scratch, take a look at this guide:

University of South Dakota: Step By Step Example of PMT Function

This article applies to Canadians, specifically those living in Ontario, but is also beneficial for anyone interested in the area or curious about investment and home ownership incentives available to Canadians.

Buying your first home can be an overwhelming experience, we’ve designed this quick reference guide of all the tax benefits/credits you can receive from your first purchase:

HBTC (Home buyers’ tax credit)
This is a tax credit of $750 you (or your spouse) can receive when you purchase a qualifying home.

• Tax credits reduce your personal taxes payable (or increase your refund) for the year. They are applied against the tax that you’ve paid on your personal income and it’s transferable, meaning your spouse can claim this credit on his/her return.
• A qualifying home is a housing unit acquired after January 27, 2009.
• Where to claim? Line 369 of your personal tax return.

See the following link for more details: http://www.cra-arc.gc.ca/gncy/bdgt/2009/fqhbtc-eng.htm

Land transfer tax refund for first-time home buyers
Land Transfer Tax applies to all transfers of land in Ontario.

• If you purchased your first property after Dec 13, 2007, the refund applies to all properties: newly constructed and pre-owned.
• Maximum refund is $2,000 and it’s claimed at the time of the registration. No interest is paid on refund.
• You must be over 18 years of age and occupy the home as your principal residence within 9 months of the transfer.
• You cannot have owned a home, or interest in a home anywhere in the world.

See the following link for more details: http://www.rev.gov.on.ca/en/refund/newhome/

HST Rebates
Newly introduced Harmonized Sales Tax will come in effect starting July 1, 2010 and will apply to purchases of new properties only.

• Buyers of new homes will receive a rebate of up to $24,000 regardless of the price of the new home. This rebate will ensure that buyers of homes priced up to $400,000 will, on average, pay no more (or possibly less) tax than under the current PST system.
• This rebate also applies to residential investment property purchases

See the following link for more details: http://www.servicecanada.gc.ca/eng/goc/gst_new_housing.shtml

RRSP Home Buyers Plan
HBP is a program that allows you to withdraw up to $25,000 from your RRSP to buy or build a qualifying home. Here are the details:

• Obviously you can only take out what you contributed into your RRSP ($25,000 max)
• Property must be your principal place of residence
• No repayment is necessary in the year of purchase
• You have up to 15 years to repay the amount you withdrew from your RRSP
• CRA will send you a statement that will include your HBP balance and required repayment for the following year
• You make a repayment by contributing to your RRSP and designating the required portion of the contribution as an HBP repayment (let your accountant do that for you)
• If you don’t make a repayment, the required HBP payment will be added to your annual income for the year

Why is this a good idea?
Your RRSP account is sitting idle until you retire and transfer the balance to RRIF, therefore you might want to borrow money from it tax free to help you with your down payment or renovations.

See the following link for more details: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html

By taking advantage of these credits, rebates, plans and programs you can offset some of the tax man’s hit on your wealth creating efforts.