Are you an seller or investor looking to sell a property, buy a new property, but want to avoid paying capital gains or recapture taxes?
Have you heard of 1031 exchange? This is a process where you are redistributing the equity of one property into another investment, to defer additional taxes.
Here are some simple facts on the 1031 process;
1. Sell property & identify new purchase within 90 days.
2. Find a like kind/replacement property you want to acquire. (Must be equal or greater value).
3. Reinvest all equity into the new property OR apply equity to a higher valued property.
This transaction is similar to a trade, where the equity is transferred to a new property, rather than received as proceeds, and taxed.
We have had clients sell a long term investment property, for a new construction investment, sell their investment, and apply the proceeds towards a portion of an investment or, apply the equity of one property to the purchase three new properties.
As part of the exchange process, the purchase property must be identified with in the specified time frame, and the owner may not receive cash or other benefits from the sale.
Using a Qualified Intermediary to complete this process is highly recommended, given the complicated nature and timing of the transactions.
If you have more questions about completing a 1031 Exchange, our team has completed these types of transactions on our personal properties, and for clients. Contact us today, for more info!
We’ve discussed the expense side of the cash flow equation in a previous post here, but how does one go about estimating a reasonable rent? There are several main sources:
Craigs List – Most landlords in this area go the ‘do it yourself’ route and list their properties on Craig’s List, which is free. Local renters know this is THE go to place to find rentals. Unfortunately Craig’s List postings, while plentiful, are only live for about a week, and once they disappear it’s tough to know how much the home was actually rented for. In addition, there’s no easy way to tell how many weeks the landlord had the posting up there before they found a renter. It’s wise to start monitoring Craig’s List ads at least a month before you list your own property for rent, to get an idea of rentals in that neighborhood.
Multiple Listing Service – Some landlords hire real estate agents to list their property in the MLS. This is a very reliable source of data and an agent can quickly tell you how many days the property was on the market and what the actual agreed-upon rent was (not just what was advertised). However, as noted above, most landlords rent units themselves to avoid the brokerage fees, so this data, while accurate, represents only a sliver of the market.
Nearby Apartment Buildings – If you’re renting a condo, your primary competition is nearby apartment buildings so check out their websites and, more importantly, call them up! They frequently have unadvertised specials, and that represents your true competition.
Rental Estimation Websites – A variety of websites like Rentometer.com are very helpful in aggregating data from several third party sites to let you easily compare your rent to the nearby advertised homes.
If you need help identifying a good investment property, please contact us.
Agents keep a close eye on the market and can help you identify a good opportunity. Winter is an especially good time…there are fewer buyers out there, and sellers are generally more anxious. Contact me if you want to discuss some good opportunities that are out there right now.
In our continuing series about buying an investment property, we turn our attention to the expenses. In our current market, it’s relatively easy to find properties where the rent covers the mortgage payment, but what else should investors take into account?
Obviously, condo or HOA fees are a big ticket item. Don’t forget these!
Property insurance. Even in a condo that comes with a master insurance policy built in, you’ll need landlord insurance.
Maintenance and repairs. Remember that you have a basic standard of safety and living that you need to provide your tenants. The amount you budget is largely impacted by the condition of the property you buy.
Vacancy. In a perfect world you’d have a tenant move out and another one move in the next day, but in reality it rarely works that way. Budget for at least a week or two of vacancy, which doesn’t sound like much but when you do the math, 2 weeks vacancy = 3.8% of your annual rent.
Property management. Most property management firms charge 6-10% of the rent to manage your property. Some states require you to have an in-state representative for the property, so if you’re not local, keep that in mind. The percentage sounds hefty, but do you want to be the one taking midnight phone calls about the leaking water heater, and then taking time off of work to wait for the plumber?
Advertising/Tenant Screening. If you plan to hire an agent to advertise, find a tenant, show the property, and then screen the tenant (check credit reports, references, and verify employment), you’ll need to pay for that service. Fees vary.
Depreciation. This is a non-cash expense, of course, but significantly reduces your tax bill. When estimating depreciation, remember that you can’t depreciate the value of the land–only the structure.
It’s also a good idea to budget for a ‘miscellaneous’ category…Murphy’s Law applies to investment properties, too.
Read More: How do I find an investment property?
Read More: Finding an investment property.
Are you thinking about adding a rental property to your investment portfolio? Wondering how to go about identifying an appropriate property and estimating cash flow? Not sure what typical expenses are for an investment property? Then attend this free informational seminar that will cover:
– Identifying opportunities in the current real estate market
– Finding the right property
– Estimating rental income
– Estimating expenses
– Calculating total return
The class is free, but registration is required.
Arlington Central Library
1015 N Quincy St
January 31, 2011 8:15 pm – 9:00 pm
Looking for help in finding an investment property? Contact us to discuss a strategy for building your real estate investment portfolio.
I’m working with several investors right now. They believe that the Northern Virginia and DC market is having a ‘perfect storm’ of opportunity: low prices, high rents, and ridiculously low interest rates, even for investment properties (which historically have carried a significant premium to owner-occupied properties.) I recently had a transaction where the investor put 25% down and paid just 4 1/8% on a 30 year fixed mortgage! And all in an area that is arguably the strongest job market in the country. The property, located within walking distance of the incredibly popular orange line in Arlington and commands high rent, was cash flow positive immediately.
Given my business background and CPA, I tend to get a lot of inquiries from potential investors–some experienced, and some looking to buy their first investment property.
I’ll try to address these in this and subsequent posts. The Washington Post had a good article with some items to think about when buying a home, and the lessons can also be applied to buying an investment property.
First and foremost, remember that you’re locking in the majority of your expenses via a FIXED 30 year mortgage. This means inflation is your friend. The value of the property will rise, and rents will rise, but the bulk of your expenses remain the same. This is time to buy-and-hold, not flip.
Consider the tax effects of a purchase. For owner-occupied property, the interest is deductible (within limits). For an investment property, the income is considered passive income, and the rules get much more complicated. You’ll need to file a Schedule E. Be sure to consult your tax adviser about your specific situation. You’ll also want to factor in capital gains taxes (due to significantly rise soon) for the sale.
Finally, consider the cap rate. The article states:
Make an educated guess as to what the home would rent for if it were on the open market. Granted, this is easier for condos, which have a more active rental market than single-family homes. Let’s say that for a home, on sale for $400,000, the rent would be $2,000 a month. Subtract any condo or homeowner fees, monthly property taxes, insurance, and an allowance for repairs from that rental rate. Let’s call that $500, meaning we’re down to $1,500 a month. That’s the monthly operating income an owner would expect to take in if the property were rented. Multiply that by 12 to make it an annual number, and divide by the purchase price. In this example, that leaves you with a 4.5 percent cap rate…..You can use the cap rate to compare homes you might buy to figure out which is the best deal when viewed purely as an investment. The higher the rate, the better.
In another post I’ll discuss some of the common expenses associated with an investment property.
Read More: Foreclosure Properties: A Good Investment?
The nation’s housing market is bracing for another wave of foreclosures. The past few years saw waves driven by subprime loans, but inventory was partially mitigated by the temporary demand created by the first time buyer credits. Now experts are concerned about the “shadow inventory” that banks allegedly have been holding back, and new waves are potentially on the horizon, this time driven by option ARM loans and owners making the decision to ‘strategically default’ on their severely underwater homes by simply walking away.
If you’re in the market for a new house, you should look at foreclosed homes being held by banks. Here’s why…
Click here to continue reading the article, posted at http://singlemindedwomen.com
Attention Investors: I’m about to give you 8.8 reasons to sell your investment property in 2010. Actually I’ll give you 5 reasons, and then another 3.8 reasons. 8.8 reasons that will net you an additional 8.8% when you sell your investment property. Guaranteed! What am I talking about? Capital gains taxes.
Many investors are already aware that capital gains tax rates for most brackets are due to increase from 15% to 20% in 2011–so your profit is 5% less if you sell January 1, 2011 versus December 31, 2010. 5%!
But many investors haven’t yet realized that, buried in the health care bill that recently passed, for those above certain income limits, there is an additional 3.8% surcharge on real estate investment profit starting in 2013.
Of course there are ways to avoid these taxes–many investors will consider pursuing 1031 exchanges, but if you’re hoping to liquidate some of your real estate holdings, you’d be well advised to consider doing so in 2010.
Another reason to consider selling now? Low interest rates. Buyers have more purchasing power than they’ve had in years thanks to historical low interest rates within the conforming loan level limits. But these rates won’t last forever, and buyers are taking advantage. A flood of inventory in the upper price ranges ($1,000,000 and up) in our area is expected in the coming years, which will create competition in those brackets for years to come, as financing remains tight.
If you own a Northern Virginia investment property and would like to keep 8.8% more profit by selling in 2010, contact Katie Wethman, CPA, MBA, Realtor for a free analysis of your home’s value.
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More Resources: Free Market Report for Your Property
Read More: Marketing Your Property
Read More: Myths About Choosing a Listing Agent