One of the reasons investing in real estate is so appealing is that we can leverage our investment. Even though we invest only 20%, for example, of the purchase price as a down-payment to buy the property subject to a mortgage, we earn appreciation on the entire purchase price. Creative financing today allows investors to put less money down to purchase property and still reap the benefit of appreciation of the property upon sale.
Real estate, like any investment, has its risks. There is no guarantee that real estate market values will continue to improve or that any particular property will appreciate in value. However, in balancing one’s portfolio, real estate is another area to consider.
While there are many people who make their living investing in real estate, there are also many people who do not invest in real estate as a full-time job and still benefit from including real estate as one of their investment choices. If you are thinking about investing in real estate, Ideal Properties can help you find properties that match your budget and strategy.
You need to know what your investment objective is before you begin. Your first decision needs to be whether you wish to invest for the short term or the long term.
A great example of short term real estate investing would be the fix and flip. The investor purchases property in need of repair, improves the property, and sells the property for a profit. The successful short term investor makes money on the sale of the property, and pays taxes on that profit.
A long term investor holds the property until the market makes it more valuable. If the property can be rented, the investment may be even more attractive. Upon the sale of the property, the investor will have capital gains, rather than ordinary income and thus incurs less of a tax burden.Long term investors who reinvest the profits from their real estate investments for additional real estate investments can defer and even avoid taxes by use of a 1031 exchange.
A 1031 exchange is a way to defer potential income and recapture taxes. Normally when you sell property, you must recognize a gain or loss in that transaction.
If it is a gain, it is subject to tax (Federal capital gains tax, potential State income tax, and potential depreciation recapture taxes). However, if you comply with the requirements of Section 1031 of the Internal Revenue Code (IRC), you can defer, and possibly avoid those taxes.
IRC §1031 states: “No gain . . . shall be recognized on the exchange of property held for productive use in trade or business or for investment if such property is exchanged solely for property of like kind . . .”
The concept is simple: If you put all of the proceeds (and profits) from the property that you are selling into another property that you are buying, your tax liability is deferred.
There are strict dates and timelines for completing a 1031 exchange, and you must use a Qualified Intermediary (also called an “Accommodator”) to accomplish the transfers on both properties and to hold the funds.
If, however, it is your goal to continue investing in real estate, you will have more money to invest in your replacement property if you complete a 1031 exchange.
Finding investment property is not unlike finding your home. There are ads in newspapers, for sale signs on property (sometimes), and properties are advertised on the internet.
If you are not going to give up your day job, hiring an Ideal real estate broker to locate properties for you is your best bet.
The investment market is filled with aggressive individuals and companies buying and selling property, and unless you can devote the time to continually search for the right investment opportunities for you, an Ideal Properties broker will.
Evaluating a particular property is easy. Unlike purchasing a home where you plan to live for the next several years, there is generally little emotion involved with purchasing investment property.
The numbers either do or do not work for you. Analyzing the cost – which requires you to consider your financing options, and considering the rent potential (on property that you will hold) or the resale potential (for property that you will flip) is all that you need to do.
Your Ideal Properties broker will help you analyze any investment options. We use a simple Excel spreadsheet so that we can easily make changes to any assumptions.
If you do choose to buy property to hold, and rent it out, managing the property is another job you will have to either perform yourself or hire a professional to handle it for you.
There are many good property managers who will lease out the property and maintain it for you for a fee.
Of course, Ideal Properties can help you find a suitable property manager for your new investment property.
You can buy investment property with others, but make certain that you share the same investment goals.
You will want to create an entity (limited liability company or corporation, for instance) to be the owner of the property. This will limit the liability of each of the individual owners as well as to protect your investment from the creditors of any of the individual participants.
Financing investment property can be a little more challenging than financing your own home. If you do create an entity to own the property, you may nonetheless have to purchase the property in your own name(s) so that you can obtain a loan.
Lenders do not want to make loans to new entities with no financial history. The title can usually be transferred into the entity’s name after closing, but you want to make sure that is acceptable to your lender.
Lenders generally require more money down and offer only higher interest rates to investors for non-occupied properties than for owner-occupied properties.
If you are looking to buy commercial property (non-residential or residential property with more than four units), you will need to seek financing from lenders who offer commercial loans.
Your bank might be a good place to start shopping for that kind of financing. We at Ideal Properties can also help you find lenders for the type of property you are thinking of buying.
Selling Your Investment Property
When the time comes to sell your property, your Ideal agent will be able to help you get the best price in the shortest amount of time.