In Real Estate There Are Four Ways You Can Make Your Property Work For You
Updated: Jun 27, 2022
In real estate, there are four you can make your property work for you.
1. Cash flow 2. Building equity 3. Valuation 4. Taxes
1. Cash Flow Cash flow tends to be most popular and where most investors focus when entering into a deal. It is the most immediate of the payouts and can largely determine if the deal is good or bad. Cash flow is defined as the money left over after you pay off all your expenses, also referred to as your Net Operating Income. The higher the cash flow, the more payout you receive at the end of the month.
2. Equity Equity (or in layman, paying down the debt of the asset). Depending on your leverage amount on your loan, the equity play can be significant; the less leverage you use the faster the equity builds. If you’re renting the home out then you're using OPM (other people's money) to build this equity.
Determining where you buy your home and the type of home will determine the amount of valuation you achieve. Meaning the increase in value over time. During the pandemic valuations have been double digit in most places in the country. Some homes have appreciated more than 20%. If you owned a home in Phoenix, Tampa or Miami, you know what I’m talking about. Generally speaking, your home's value will appreciate at about 3% in an average year. Again, depending on the area this will fluctuate. Usually migration is a good indicator to watch. For example, populations have increased significantly in Florida and Arizona and those states have boasted some of the highest year over year increase.
4. Taxes. Investment in Real estate is a solid hedge against paying high taxes. Especially if you are using leverage (talk more about that in the future). The government wants to encourage investment in housing and therefore incentivizes this action through the tax code. On this note, it is strongly recommended to find a true tax professional to investigate these opportunities as the IRS tax codes are complicated and do change from time to time. Finding a good tax CPA that focuses on real estate is key. One of the gems of the IRS tax code is commonly referred to as “an exchange” or “1031 exchange.” Given the right circumstances, an exchange allows the seller to defer any capital gains. How long? Well, essentially forever or until the IRS code changes. This is an amazing opportunity. “Gains” are defined as the positive increase or difference in what you paid for a property versus what you sold it for. For example, if i purchased a property for $100K and sold it for $150K, the positive increase or difference is a “capital gain” of $50K. Depending on your situation this will incur a 15-20% tax on that gain. This would mean a tax burden of $7500 to $10,000. Yikes! However, if the property is an investment property, you could defer this tax by performing a 1031 exchange. Here are the basic requirements to fulfill the 1031 exchange. Again, we are talking an investment property (don’t worry though, there are other opportunities with personal properties- talk to a tax professional). First, within 45 days of closing, another like property of equal or greater value must have an accepted offer. Second, the offer must close within six months of the last close.
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