Real Estate User Guide

Video: Examples of selling and buying homes, paying off and beginning mortgages

Adding Real Estate as “Other Assets” 

Real estate, like homes, rental properties, etc., can be entered in the 'Other Assets' tab under the main Assets section of the household. It's important to enter the 

Adding Mortgages as Liabilities

Mortgages can be entered in the 'Liabilities' section of a plan. Regardless of whether they are going to be paid off on schedule or before their term is up, the first step is always to enter the correct values for the loan.

Important loan values are:

1. Current balance: The loan balance today or on another known date
2. Balance as of date: The date when this loan balance holds (typically today)
3. End date: The end of the loan term (not the early pay-off date)
4. Interest Rate or Principal & Interest (P&I) Payment Amount: Choose which you would like to enter. Be extra careful when entering payment amounts, not to include taxes and insurance.

It is essential that #4 is entered correctly, as this will enable the software to create an amortization table and calculate how the loan balance evolves over time. If the P&I payment is too high (because, for example, you accidentally enter the full principal, interest, taxes, & insurance (PITI) payment) or too low, the interest calculated and balance at pay-off will be wrong. If the payment is too low, this could even result in the loan having a negative interest rate, in which case the total amount paid on the loan will be less than the loan balance.
 

Modeling an Early Payoff

To show the mortgage being paid off before the end of its term, select 'Pay Off Early' at the bottom of the item

This date can be any time before the end of the loan term. Including an early payoff will end the loan on this date in the plan and include a one-time lump sum additional payment on the loan.

Video: Early Payoff Tutorial

Modeling home sales and purchases, with and without mortgage financing

To include a home sale, check the "Include Planned Sale" box for that asset. You can state the projected sale price or use an assumed growth rate to project the price. Be sure to state the "Adjusted Basis at Sale" so that it includes all offsets to capital gains, including any applicable Section 121 exclusion for $250,000 or $500,000.

If there is a mortgage associated with this property, be sure to include that in the "Liabilities" section and to check the "Pay Off Early" box. Set the payoff date as the same as the sale.

If a new property will be purchased at the same time that the home is sold, include that as a different item under "Other Assets" and check the "Include Planned Purchase" box. Set the purchase date to the same as the sale to see the proceeds from the sale used to fund the new purchase. The purchase price will be the amount entered in the "Value" field. This value will be the nominal (future dollars) price paid for the property.
 

If the new purchase will be financed, include a liability that begins and originates on the purchase date. Be sure that the "Use as loan origination date" box is checked. This will ensure that those new funds hit the plan with the right timing.

With these options combined, you can show clients selling one house, moving to another, paying off the mortgage on the first, and taking out a new mortgage, with the proper amount heading to their portfolio (if there are excess funds from the transactions) or coming out of their portfolio (if they need to include extra investment assets to fund the transactions).

Understanding Mortgage Originations

Video: Mortgage origination when financing future purchases tutorial