The Riskiest Property Investments

June 14, 2013 By Leave a Comment

Caveat Emptor, baby

There are so many ways to earn positive cash flows in the real estate investment world.  So why entertain the notion of taking on huge property investment risks with property investment risksnon-performing, no-cash flow or negative cash flow investments?  If you are wealthy enough, and a negative cash flow or extremely risky speculative property investment makes financial sense for you – strictly due to potential tax savings – then this article is not for you.

For all other property investors, then absolutely be aware of several real estate pitfalls that you should steer clear of in order to protect yourself.  Again, always do your homework to ascertain the positive cash flow potential of any piece of rental property before moving forward to the actual acquisition phase.

Be wary of these investments

There are several real estate investments the basic or novice investor should be wary of, and stay away from like the plague.  Chief among them are any rental property that throws of a negative cash flow.  Certainly avoid second homes and investmentsproperty investment risks in strictly land for speculative development.  Unless you have totally concrete plans for a parcel of land, have gotten your feet wet developing a piece of land before, and know all the intricacies and local laws entailed in local land development, just steer clear of this form of property investing.

Likewise, investing in negative cash flow properties, as mentioned above, should only be done by those wealthy enough to yield a net positive return on their investment, by offsetting other earned income (and a lot of it at that) to make the losses worthwhile.

Avoiding time shares

property investment risksAlso to be avoided are vacation time shares as investments.  They have some of the greatest property investment risks assigned to them..  They’re simply too risky because it’s so difficult to accurately predict what, if any, value will accrue as you continue to hold them.  They are highly sensitive to overall market fluctuations, and can drop in value precipitously when you least expect it.  They are also extremely difficult to predict future cash flows and rental income based on past performance.  In addition, they ultimately can be very hard to unload should you need to resell them quickly.  You could end up taking a really large haircut on them.

Foreign real estate dangers

Finally, be aware of the inherent risks involved in buying foreign real estate for investment purposes.  As I have advocated in numerous articles here, try to stay close to home in your investing.  You’ll get to know your local area a whole lot betterproperty investment risks than property bought farther away, or as an absentee property owner.  This concept becomes heightened (as do the risks) when you consider buying foreign properties to rent out.

Risks inherent in foreign purchases include fluctuating currencies, wildly varying real estate laws from country to country, as well as the kind of real estate protection laws afforded here in the U.S. relative to other countries.  So be very wary of all these property investment risks when evaluating your next set of real estate rental properties.

 

photos courtesy of wealthasia.net, theatlanticcities.com, rebiccharlotte.wordpress.com,  sellworldmarktimeshares.com,  foreclosure-support.com

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Locating Investment Property: The Walk Score

June 9, 2013 By Leave a Comment

An important measuring device 

locating investment propertyWhen evaluating a set of potential money-making buildings while locating investment property, one factor seriously tied to the building’s ultimate cash flow will be its “Walk Score.”  This is a relative measure, compiled by the web site WalkScore.com.  The score is a ranking between 1 to 100.   It takes into account the proximity of shopping, transportation, schools and recreational facilities in relation to the actual walking distance from any particular rental property.  So you can use it when evaluating potential rental properties to see which ones offer the greater possibility for rental profits.

Comparing Walk Scores 

Thus, for a rental unit in a large, central city location that has a close walking distance to all local shops, buses, trains, parks, playgrounds, etc.,  a Walk Score could be in the high 90’s, for example.  A good suburban setting, while still closelocating investment property to shops and transportation and other recreational amenities, would usually garner a Walk Score in the 70’s.  And on the other end of the spectrum, a rural rental property, which requires a car to get to any local shopping, public transportation, downtown area, parks and schools, would probably yield a score close to zero.

There have been studies that have shown a high correlation between greater Walk Scores and a higher valuation on a similar property (same size, square footage, bedrooms, baths and amenities) than those rental units with much lower Walk Scores.

In monetary terms… 

It has been estimated that for every point increase in a Walk Score, there could be locating investment propertya possible increase in overall property market value for a like property by as much as $3,000.  The reason for this is simple:  the rental housing arena places a much higher value on units that are located within an easy walking distance to public transportation, schools, recreation and other services, like shopping.

If renters don’t have to use their car for everyday chores and/or commuting to work, then they attach a much higher value to the rental unit.  And this translates into greater overall demand for the unit based on its better locale.  And ultimately, that demand pushes rental prices (and cash flows for investors) up.

The bottom line 

To sum up, any rental property with a higher Walk Score will produce greaterlocating investment property overall rents.  They’ll produce a higher rate of cash flow, as well as have greater demand.  And this will ultimately yield fewer overall vacancies, and down the road, when it comes time to sell the asset, will yield a greater overall sales price in a faster selling time than a comparably-sized property in a lesser Walk Score locale.  So it’s always a good bet to check any location’s cash flow potential by utilizing their Walk Score as part of your overall evaluation process.

 

photos courtesy of  bs757.com,livesimplyenough.com, usatoday.com, davegi.com, nakedphilly.com

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Property Investing Advice – The Best And The Worst

May 14, 2013 By Leave a Comment

Two extremes

Sometimes I am asked by novice property investors what types of advice I’ve received in my investing career.  And what was the best advice I ever received – as well as the worst.

The absolute best advice I ever got about property investing:

Roll, baby, roll. Leverage is EVERYTHING in real estate.  It is unlike any other investment asset class, in that you can increase your leverage with each new property you acquire.  Forget about the bank “owning” the property.  They’re simply your “partner.”  Lenders are what allow you to grow your business steadily over time…even without the need to put more of your own capital into each new acquisition.  If you manage your acquisitions properly, maintain them, improve them, then refinance them, all on a planned, strategic acquisition schedule, you’ll be able to roll your property investments up – that is, increase your leverage with each new property acquired.  Ultimately, you can build your own version of a “real estate empire.”  Keep things realistic, and you will succeed in property investing.  Keep growing your property portfolio with high leverage  – always putting down as little of your own funds as possible.  That’s the absolute best property investing advice I ever received.

On the south side…

The worst advice I ever got about property investing:

Anyone can do it.

WRONG!

It takes a certain temperament, a certain je ne sais quoi, to be a good property investor.  Basic personality qualities include being entrepreneurial, being decisive, and having a proper aptitude (though not genius-level)  with math, as well as being meticulous, grounded, and having stick-to-itiveness.  These are some of the basic qualities a good property investor will display.  Notice I did not include:  being good with people, or being a  “wheeler-dealer” type.  These two traits are not something you need…and they can be learned, as well as delegated to others.  That’s what property managers , as well as real estate agents come in and can do for you.

What are the traits that make a good real estate investor?

So be cognizant of what makes you tick – and what your passions are….Active investors in real estate (those that prefer to control their own properties, as opposed to investing in Real Estate Investment Trusts, REITS, for example) don’t get in strictly for monetary rewards alone.  There are too many pitfalls to running a successful property investment business to take on the added risks.  Rather, hands-on property investors enjoy wearing many different hats:  being the site locator, searching for properties, then being good numbers crunchers to see which are the most attractive properties available at any given time.

They then switch hats to become buyers, making offers, negotiating, then finding financing for the properties.  Finally, there’s the investor who needs to wear the hat of property manager – acquiring tenants, refurbishing units, and keeping them continually maintained properly.  This requires great diligence and attention to detail.  You are running an active business, not simply parking your investment dollars in a fund that will (hopefully) offer you positive returns.  So heed the worst property investing advice I ever got – that anyone can do it.  And make sure you have the right temperament and personality for the job.

 

photos courtesy of newmusicworld.org, dionisteam.ca, carterrealtyagency.com, sanpedrosquareproperties.com

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Property Investing Tips: Be Quick Like A Bunny!

May 9, 2013 By Leave a Comment

Increase your rental profits

One of the elements in trying to maximize your rental profits is to act extremely quickly, as the proverbial  bunny would…Besides making sure that you always have decent quality tenants in your units you’ll want to make sure that when there is turnover, you act as quickly as possible to get the unit rented out again with no further delays.

You should make sure that you keep your vacancy rates as low as possible.  No unit should go more than one full month being vacant.  If so, you’re going to lose money that is preventable from slipping through your hands.  In order to achieve this, you’ll have to act fast when a tenant gives you notice of leaving.

Tenants on the move

Since tenants move about many, many times before they ever buy a house, you have to expect turnover, and even with the best tenants, you have to expect them to move around a great deal – job promotions, relocations, family events – they all create change in tenants’ lives. And tenants move around.  That’s the nature of the business.

If a tenant stays two years, consider yourself lucky. Most tenants move within a year – or less!  That adds costs for you as you constantly are trying to find new, quality tenants.  With that, you have to ensure you get your unit filled up with another quality (read:  paying on time, no hassles) tenant as soon as possible.  It’s one of the most solid of property investing tips, and that means not leaving the unit vacant for more than one month.

Checking for damage

You’ll have to go in and check after a tenant leaves, and before giving them their security back (in whole or in part due to damages done),  make sure only normal wear and tear was done to your unit.  You can expect this simple wear and tear on any tenant’s usage of your rental.  You may have to do more than a simple cleaning after a tenant has been living there for a while.   The unit may require a whole new paint job. 

Hopefully, you won’t have to do any major repairs to the unit, and that your tenants kept it in proper shape.  In that case, to keep your vacancy rate as low as possible, and to not lose money for being vacant for more than one month at a time,  you’ll have to have your painting crew ready, as well as your cleaning crew on call and available in order to get in as quickly as possible after the tenant leaves.   In this way, you’ll be able to begin showing it to prospective new tenants immediately upon cleaning up the unit. 

Naturally, the sooner you can get the unit on the market to show, the sooner you can line up prospective tenants in to view it.  One of the best property investing tips is that the better your  place shows, the faster you’ll be able to get a quality new tenant under lease.

Time for small upgrades?

Also consider that (after a tenant has been in your unit for a very long time, and they decide to leave) whether it is a good idea to do a small bit of renovating to the unit. More than just a paint job, things like adding new appliances, or better yet, stainless steel appliances for a real spiffy image, will look great, and attract a higher-quality tenant.  It will really spruce up the overall look of your unit.  It will also mean you should be able to find a tenant faster, and be able to charge more rent for your refurbished, modern-looking unit.  Also, tenants feel you are maintaining your overall building with more care when you upgrade appliances…it’s a wonderfully positive psychological effect on prospective tenants.  Just figure in to your costs and time schedule, that with the addition of new appliances, you’ll most probably have to hire a plumber to install them as well – so you need to be ready for that expense, as well as prepare your crew to be ready to do the work in a very quick manner.

The quick turn-around

It’s all about timing…and the better you’re able to cut down the time between vacancy and new tenant, the better you will be able to maximize your rental profits.  It’s one of the most basic property investing tips,  So don’t leave your units open for more than a month after a tenant leaves. That’s the best way to ensure low vacancy rates overall on your building, as well as continuing to maximize your cash flow.  Also remember that the better your curb appeal, not only on the outside of the building, but on the inside of units as well (the minute they walk through the door), the faster you’ll be able to rent out your unit…and to a better quality tenant.

 

photos courtesy of scenicreflctions.com, iresvegas.com, lowesforpros.com, regulatedtenants.com, thatgreenmaid.com

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A Tenant’s Nightmare

May 1, 2013 By Leave a Comment

Being a  bad landlord – from the tenant’s perspective

I was recently pitching in with a local United Way “Day of Caring” campaign.  I was helping out by doing some yard work for a disabled woman in my area.  While there I was told that she was a tenant of the house she called home.  And while I was raking leaves and branches in her yard, I couldn’t help notice all the building code violations and generally unsafe conditions that existed around just the exterior of the house alone.   Items like rotting window sills, rotting foundation beams, missing gutters and leaders and unsafe walkways to name just a few.

Without going inside, I knew from experience that there had to be general water leakage problems present.  I asked her why her landlord had not made the necessary repairs.  She said that he just doesn’t do anything.  Basically, she painted a picture of a classic slum lord – except this house was not in an inner city, but rather more in a rural setting.

Reporting the violations – the basic problem

I then asked why she doesn’t call the town building inspector and report these violations.  That way, the landlord would be forced to make the necessary repairs and create a safe environment for his tenant.  But then her answer was chilling:  “because he’d kick me out.”   Folks, we’re talking about a blind woman with diabetes, who had recently suffered a heart attack.  And she’s scared her landlord’s going to throw her out for reporting safety violations.  So, for paying her rent in a timely manner, she gets the right to live in sub-standard, unsafe conditions.  This truly gives all property investors a bad reputation by inference.  For my part, I reported the problems to the United Way in hopes they can investigate and intervene.

Doing the right thing

I note this little story in the hopes that all property investors will be cognizant that running a cash-producing investment into the ground is unacceptable when other people’s lives, and safety, are at stake.  Basic, minimal and constant maintenance is required of all hands-on property investors.  God forbid there is a fire, or your tenant gets hurt in some way due to your negligence, it’s not enough to say, “I’ve got property as well as liability insurance.  And that will cover it.”

All property investors belong to the same club.  No one says you have to be a “people person” to be part of this club…Or want to earn as much profit as possible on your investments. That’s the goal, after all.   But if you’re not going to treat your tenants – your customers – like human beings…well, please stay out of our business.  You hurt the good name of all of us decent property investors.

 

photos courtesy of investors.housez.ca, neastphilly.com, 24dash.com, keypersonofinfluence.com

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Doom And Gloom…Or Real Opportunity?

April 26, 2013 By Leave a Comment

Get ready – it’s going to be a bumpy ride

A new article published this week in MSN Money on-line (“Welcome To The New Recession” by Anthony Mirhaydari, MSN Money, April 24, 2013) questions the underlying stability of the U.S. economy right now.  Mr. Mirhaydari, a regular writer on stocks for MSN Money, makes a strong case for this instability.  He cites that many indicators are pointing to very stormy weather for our economy in the near future.  This will occur despite the stock market’s current robustness, as well as the Federal Reserve’s continuing to pump more money into the U.S. economy.

Mr. Mirhaydari makes his case clear and succinct:  “But while the market suffers from Ben Bernanke’s reality distortion field, the situation on the ground is deteriorating quickly. Nearly 70% of the economic data points released over the past month have missed expectations, up from 53% two months ago and 35% three months ago. As a result, by some measures, the economy appears to have succumbed to a new recession, invalidating the theory that cheap money solves all problems and casting a pall over the market’s recent rise.”

Backing it all up…

He goes on to back up his conclusions with more recent information:  “Just consider the economic data we’ve received so far this week. The Chicago Fed regional manufacturing index disappointed. Existing home sales disappointed. The Flash PMI manufacturing activity index disappointed. The Richmond Fed regional manufacturing index disappointed. New-home sales disappointed.”

The writer then goes on to reach some rather obvious deductions:  “It wasn’t supposed to be this way. The fiscal cliff and sequestration battles are behind us. The Fed is pumping $85 billion a month into the bond market. The Bank of Japan just pledged to double its monetary base over the next two years. The Eurozone debt crisis is off the front pages.  But as I’ve been saying for months, none of this addressed the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings.  Or a slowdown in Asia, especially China. Or a deepening recession in Europe, which is now infecting Germany, as illustrated by its abysmal Flash PMI manufacturing activity report Tuesday. Or the fact Congress hasn’t finished its budget battles, with $2.5 trillion more or so in additional budget austerity needed over the next 10 years to stabilize the national debt.”

How these conclusions will affect property investing

I had previously written here at the beginning of this year that “I don’t believe Congress, in all its machinations on the fiscal cliff, will allow the full sequestration cuts to go through.  The country would be placed in a very real jeopardy for a new recession if this were to occur, especially if there are major cuts to the defense budget, as well as social programs.  If sequestration were to occur, the overall unemployment rate would zoom up in 2013 and beyond.”

So I was wrong – sue me…

We did get sequestration.  Though Congress is trying to amend certain provisions as I write this article.  Nevertheless, the market data indicated above proves out that we are heading towards a new, secondary recession.  I had also previously written that “if the unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate.  And cash flows on rental properties would commensurately increase as well.”

Time to repeat myself

Oh, how I hate it when I’m right…OK, I won’t gloat here.  But again, my suggestions for residential property investing  from earlier this year are still as much, if not more, valid now:  “My best suggestion for property investors in the unlikely event of a Congressional meltdown and a descent into another recession, is to consider taking the properties you already own, and use the time to properly maintain and upgrade them in a downturned economy.  Use the downturn to your advantage, and try to rebuild your weaker, or deferred maintenance properties.  You’ll be able to address all necessary repairs, and/or increase their valuation by upgrading the properties. In so doing, you’ll also be able to increase the rents you charge on all your improved units.”

Obviously, this will put you in better shape to ride out any recession that is forthcoming – regardless of how deep it becomes.  Your cash flows and profitability should increase as you beef up the attractiveness of your properties in a market that will see even more demand for rentals as people lose confidence in home buying.

One final note…

Also remember the advice I gave in that earlier article on the coming shape of our economy, and how it will affect what you do in your property investing strategy for the coming year. “Consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties.  With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings.  So in the event of a recession, look to revamp, refinance, increase your rent rolls and build cash flow on existing properties owned in 2013.  And hold these properties in the short term until you see signs of a recovery.”

Can I get an amen, somebody?

 

 

photos courtesy of funagain.com,  singaporepropertycycle.com.sg, worldpropertychannel.com, ehow.com, phlegmfatale.blogspot.com

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Is It Time To Cash Out?

April 18, 2013 By Leave a Comment

Never cash out your money-maker unless it’s an emergency

With residential rental property, always stick to your long-range goals of steady yearly cash flow growth, combined with the tax advantages of depreciation and holding your investment property asset, as well as capital market appreciation in the long term.  The only time you should be cashing out should be reserved for emergencies.

Recent data from the National Association of Realtors (NAR) suggests property investors are intending to hold onto their rental property for at least eight years now (up from five years the prior year).   However, some are finding the strong demand for properties coupled with a decreasing inventory of foreclosures and investment properties in general, as well as continued low mortgage interest rates to be too irresistible.  And so they are placing their cash cows on the market now.  Again – big mistake if you’re not in an emergency situation, and must have the cash on hand quickly.

Investment drop-off

Since real estate investments peaked in 2011, there was a dropping off of property investing last year as inventories declined, and foreclosures available to the marketplace lessened.  With decreased inventory and market valuations rebounding, many investors decided to begin cashing out.  As noted in my prior articles, only negative-cash flow rental property (or, the “dogs of war”) should be jettisoned when consistently non-performing, or when you are unable to make positive cash flows when still renting out at full capacity and at top market rents.  Positive cash flow properties should remain within your stable of properties for increased leverage to acquire additional property, as well as future cash growth and appreciation.

Institutional investors

As foreclosures have dwindled in the past year or two, so too are property investors that originally came into the marketplace by swooping in and purchasing large numbers of foreclosures, fixed them up, then rented them out for positive cash flows.  As prices have been on the increase of late, and with fewer foreclosures readily available in the marketplace, investors (especially institutional hedge fund type investors) have cut back on their rental property investment.

Higher entry costs into the market

In addition, with the rebound in the entire housing market over the last year, prices to get into the rental property acquisition market concurrently have risen.  For example, according to the NAR, the median investment property price rose 15% from 2011 to 2012 – from a median price of $100,000 up to $115,000.  Significant to note is that while the median down payment on all investment properties remained the same, at 27% of property price, the percentage of buyers who paid all cash for their investments rose to almost 50%.

The combination of increasing prices and tight credit have also produced a scenario where investors are lessening their current buying schemes for investment rental property.  However, the NAR data also shows that 47 % of real estate investors intend to purchase another property at some point within the next two years.  Though with current tight credit standards in the mortgage industry, roughly half of all investors will continue to make all-cash buys.

 

photos courtesy of  clearlyderby.blogspot.com, mathforgrownups.com, flickr.com, infrawindow.com

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Rental Property Rates Should Remain Strong This Year

April 11, 2013 By Leave a Comment

The latest jobs report’s effect on rental property

With the latest news out of Washington showing that U.S. employers added only about 88,000 jobs last month, compared with 268,000 in February,, residential investment rental property is poised to remain quite strong through the remainder of this year.  The latest Labor Department statistics reveal that this is the third Spring season in a row where employers cut back on hiring after starting the year more robustly.  And while the unemployment rate went down ever so slightly, from 7.7 to 7.6 percent nationally, the major cause appears to be that more workers were dropping out of the work force.   Clearly, not that many people were hired over the last month.

A dwindling work force

The work force of the U.S. has been dwindling for some time now – and stands at about 63 percent of the total U.S. population – a figure which has not been that low since 1979.  Retirement from baby boomers would certainly account for part of this figure.  But a large helping of psychological pessimism seems to be wreaking havoc with both employers and potential employees in such a lack-luster economy as we currently are in.

Probably the greatest drop in the worker participation rate can be attributable to young, new workers just entering the economy.  Many of those fresh out of college are rapidly giving up hope of finding entry level positions in their fields.  And in turn, they are choosing to continue their education on the graduate level, thereby deferring their entrée into the job market until a (hopefully) better jobs picture develops in the not-so-distant future.  Of course, in so doing, they take on more debt to finance their education, thereby showing a higher overall increase in outstanding consumer debt loads nationally.

Keep watching the unemployment rate

As I had mentioned in an earlier article, the unemployment rate will be one of the most important figures to keep a watchful eye on for the remainder of this year.  With the stagnant nature of today’s economy, and more workers feeling driven out of the work force, continue to look for overall U.S. rents to  increase as homebuyer malaise sinks in.  Housing valuation increases and continued drops in housing inventories and days on market are more a reflection of institutional property investors swooping in and purchasing massive amounts of foreclosures over the past year.  While displaying quite a positive sign for the housing market numbers overall, keep in mind that the general malaise in the workplace lurks right behind the cheery reports

Beware a false housing market rebound

Any rental property investor should be fearful that the housing market rebound will continue in its robust way.  Once the foreclosures are worked through, the overall psychological component of an unsettled workforce will play havoc on the housing arena.  And this means that the rental market should remain quite strong for the rest of this year, with landlords able to squeeze out higher rents as vacancy rates continue to edge downward.  So individual rental property owners should be able to see increases in their cash flow as the year progresses. Clearly, residential rental properties will become even more valuable than they were in 2012.  So it would behoove the individual property investor to continue to search for and acquire additional rental property for the remainder of 2013.

 

photos courtesy of flickr.com, sultharproperties.com, davegi.com, diegoviera.girlshopes.com, ericksonsdrying.com

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Appraisal Approaches of Investment Property Valuation

April 4, 2013 By Leave a Comment

Three different appraisal methods

Any licensed state real estate appraiser will utilize three different approaches when analyzing investment property valuation.  Since it’s a different animal than a standard home appraisal, the melding of the three approaches helps unify an appraiser’s valuation, giving it more weight.  While appraising is more an art than science, and no two appraisers will value a property exactly the same way, they will (or in theory, should be) very close in analyzed market value for any given investment property.

Of course, the more specialized the property (a specific-use manufacturing plant, for example) the more rigorous and difficult the analysis will be. The three approaches most often used are the market value approach, the cost approach, and finally, the income approach.   Naturally, each type of approach requires different methodology and information for the appraiser’s analysis.  They then determine what weight to place on each individual approach, based on what data is available to them, and then they pull all three approaches together in one last analysis to come up with an investment property valuation amount.

Income approach

With residential rental property, the income approach tends to be weighted the greatest.  When rents and expenses are completely known, this approach works best.  Even when a rental property is vacant, or only partially rented, this approach works well, since there is usually plenty of data to show what market rents in the same area will throw off in terms of likely income for the building.

Cost approach

The cost approach would then be used to determine what a like building would actually cost to build to create the same amount of rent.  Another part of both approaches takes into account the time necessary to build from scratch, as well as the time to expand to full capacity rentals.

Market approach

The market approach is used as another qualifying way of determining an investment property valuation, or the real market value.  It helps the appraiser see just how in line the other two approach valuations truly are.  Market approaches (also known as comparative market values) are commonly done for home appraisals.  With residential multi-family properties, the market approach may still be weighted highly if there are enough good, recent sales data available of like properties for comparison’s sake.  However, this approach is usually weighted less than the other two approaches when non-residential real estate is being appraised.

Reconciling the approaches

Once the three approaches are reconciled, one market value is arrived at by the appraiser for the income producing property.  This is known as the appraiser’s “opinion of value.”  The appraiser’s report not only contains all three approaches, but details how he has weighted them, as well as his analysis of how he related each to the other.

Commonly, lenders rely on the appraisal to help qualify the purchase price of a property they are considering offering a mortgage on.  If the appraisal comes in below the purchase price, some lenders will allow a second appraisal to be done.  But others will simply not make the loan – or will require the buyer and seller to “re-negotiate” the purchase price, based on what the lender will allow for a mortgage.  In some cases, the buyer may make up the difference in appraised value and purchase price with their own cash, just to make the deal happen.

 

photos courtesy of thorequities.com, thealternativeinvestor.net, haleycustomhomes.com, rohdeappraisal.com, giulioruffini.ifunnyblog.com

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Investment Property Tax Tips When Selling

March 28, 2013 By Leave a Comment

Yes, it’s that time of the year again

The Internal Revenue Service really, really wants to hear from you by April 15th.  And they want to know just what you owe them on your investment property sales.  Here are a few items you’ll want to discuss with your tax professional concerning your real estate investments over the last year.  While you’ll have to pay taxes on profit earned from your rental properties, you may be able to limit the damage if you bought more investment property, or if you were able to move in to one of your properties and made it your primary residence prior to selling it.  These are very basic investment property tax tips when selling your rental property.

Determining your profit

In order to determine your profit on a particular piece of rental property, you’ll first need to figure out your adjusted cost basis.  Your purchase price is only the starting point here.  You’ll then add in all your closing costs, as well as all your improvement costs to the property as well.  You’ll also need to add in the total depreciation you previously claimed on the property too.  Your profit is the amount you get when you subtract this adjusted cost basis from your sales basis (the selling price less costs of the sale, like broker commissions, for example.)

Are you eligible for the capital gains tax?

Assuming you did manage a profit when you sold your rental property as described above, and you held the property for at least a year, you’ll pay a capital gains tax.  In 2013, this tax rate is 15% (or 20% if your taxable income as a single taxpayer is above $400,000, or $450,000 if married and filing jointly).  In addition, you’ll have a surtax added to pay for Medicare – an added 3.8% of your profit if your taxable income is over $200,000, or $250,000 if married.

Buying more investment property advantages

A good way to avoid capital gains on the sale of your property is to buy more investment property!  There is a part of the IRS code, section 1031 to be exact, that allows you to carry your cost basis forward from a newly–sold property to a newly-bought property without having to pay taxes on the sale.  There are however, many IRS rules regarding how the monies are held between the sale and purchase, as well as strict time lines for achieving this little maneuver.  So while this is part of many basic investment property tax tips, again, check with your tax professional regarding the exact way to accomplish this tax deferment properly.

Converting to a primary residence

As long as you live in your former rental property for at least two years, you can claim a part of the standard home $250,000 exclusion for your primary residence (or $500,000 if married and filing jointly) when it comes time to sell your rental property.  This exclusion will be prorated based on the length of time you lived in it versus how long you actually owned the property.  (For example, if you owned the property for 8 years, but lived in it for 4 years, you’d be able to claim 50% of  the exclusion.)  Of course, always check with your tax professional for further advice on how to save from overpaying the IRS when investment property is involved.

 

photos courtesy of  amillionlives.net, statenislandlifestyle.com, buyersutopia.com, blog.turbotax.intuit.com,  denversrealestate.com, ehow.com

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