Tag: Strategy

Rental prices have seen aggressive growth over the past five years, but the gas tank may finally be getting low with prices over the past year growing half as much as recent years.

Raising Rents as an Investment Strategy May Get Difficult

A lot of this is market dependent and growth could certainly kick up again, but the rates have been steadily strong prior to this year so it’s worth keeping an eye on this data going forward and adjusting strategy if needed.

Nationwide Rate

As a whole rental prices increased 1.4% year over year, according to apartmentlist.com data, while the month over month change for October was 0.1%.

Picking Growing Markets Is Important

Many real estate investors in recent years, especially those doing large multifamily deals have used a strategy of acquiring under performing properties, sprucing them up and raising rents as units are turned over.

Then, with the cap rate higher due to the increased rents they can refinance out of an original loan and pull a good chunk of equity or just sell outright for a profit.

It is a solid strategy, but we can’t just blindly assume higher rents will be supported indefinitely.  Capital improvements will help attract higher rents, but in the end the market dictates the ultimate cap regardless of how nice a place is.

This is why it is imperative to pick strong growing markets.  That doesn’t just mean in rental prices, it means a growing population with increasing job opportunities.

That will help provide the market growth needed, but will also hold up the best if we hit a period of stagnation in the future.

Growing vs. Shrinking

Here is a glimpse at some states with the best and worst year over year growth.

• Arizona: 3.5% growth
• North Dakota: 2.9% growth
• North Carolina: 2.7% growth
• Nevada: 2.6% growth
• Delaware: 2.4% growth

Rental prices falling:

• West Virginia: -0.8% growth
• Louisiana: -0.6% growth
• Alaska: -0.3% growth

No Red Flags, but Pay Mind

As you can see there are some leaders and some laggards of the 1.4% national average.

The good news is we still have growth in rental prices, the bad news is growth has slowed a considerable amount over the past year.

Again, it is data worth watching, especially for those with the business model of aggressively raising rents on new projects as growth projections may not keep pace compared to recent years.

There are many expenses involved when selling real estate taxes is one of the biggest, especially if you have to pay capital gains.

However, if you know the tax rules then the amount of taxes you pay (if any) can be drastically reduced.  Let’s cover a few ways to reduce that tax burden.

Reducing Capital Gains Taxes on Real Estate, Legally!

1.) Short-term vs Long-term capital gains

Properties that are held for more than a year are taxed at the long-term capital gains rate.  This is noteworthy because that tax rate is 0% up to $39,475 for a single filer.  Then it jumps to 15% and holds there all the way up to $434,000.

If you buy and sell a property within one year then it’s taxed as short-term gains and you pay the ordinary income tax rates which start off at 10% up to $9,700 and progresses to 12% up to $39,475 before jumping to 15% and so on and so forth with 37% being the top tax rate.

2.) Increase Your Cost Basis

The price you pay for a property is your cost basis in the eyes of the IRS.  Meaning if you spent 150K to acquire a property and sold it for 200K then you have a 50k taxable gain.

If you completed capital improvements on the property those costs can be added to your costs basis though.  Be sure to keep those receipts so you can tack on that 8K cost for a new roof and reduce the tax burden.

3.) Do a 1031-Exchange

Many investors have heard of this one and it gives you the ability to not pay capital gains (or technically postpone them) on the sale of a property by rolling the money into another property.

It’s deemed a “like-kind” exchange meaning you sell an investment property to buy another investment property that is used similarly.

There is a 45 day window to identify properties to the IRS that you plan to buy and then you must close on one of them within 180 days to avoid triggering the capital gains tax.

Plenty of other rules and methods…

Those are just three ways to alleviate the tax burden, there are many other options out there such as investing from a self-directed IRA and so on.  This is why it’s important to have a solid account knowledgeable in real estate investing.

Be sure to have them work you through the all the options and verify the examples I have given above as I’m an investor, not an accountant.

Having to pay some taxes is a good problem to have.  It means you are doing profitable deals and are buying right.  Always use the property calculator to ensure you buy right!

If you have done a couple large renovation projects then you know what I’m talking about.   When estimating rehab costs – always add a buffer on top of your total number.

Here’s Why You Always Add a Buffer to Your Reno Budget

This isn’t about how good an investor is at estimating the costs of repairs and replacements.   Most of us can get good at that with some experience.

This is about the stuff that you generally can’t foresee. The stuff that just pops up, and trust me there will be things that pop-up.  Especially if you are working with properties that are much older.  In fact, the older the property the more likely you will have “surprises.”

Real Life Examples

I’m going to keep it simple and give you a “cheapie” I’ve personally experienced so not to scare you off.  Just know, the surprises can range much higher is cost.

This is one of the reasons I stress performing as much due diligence on a property as you can before purchasing.

There are many “surprises” that can be avoided – then there are some that are just part of doing business.

My latest example fits into that category.

Main Water Valves and Sleeves

We are finishing up a major renovation on a property that was built in 1901.  However, along the way we got caught with a few surprises.  One of which had to do with the main water shutoff and the sleeve pipe that runs to the water department’s main valve.

Long story short is the sleeve had become so cockeyed that it was not possible to access the valve to turn it back on.  Considering you need water in a home this was a bit of a must fix.

The real question was – is the sleeve bad or the valve too.   Either way we needed to have a qualified operator come in a do his thing to repair.

After widening the opening to the exterior piping/valve and doing a little digging out the earth he was able to access the sleeve to replace and test the valve.  

Good news – valve was fine.  Bad news – sleeve needed to be replaced.  $1200 later all is good an we can got water turned on.

Unexpected cost, yes, but at only $1200 feelt like a win.  Here’s the things though.  What happens when you have 4 or 5 items come up that cost that?

Since this property was so old that is exactly what happened because things needed to be up to code.  Replacing the side door entrance became a $1500 costs instead of $300 because of all the layers of siding that had been slapped on over the decades.  The flashing had been bumped out so far it was a mess and we basically needed to re-frame it.

These examples are the cheap ones.  I have heard plenty of stories from other investors that got hit with $5-10K “surprises.”

Add a Reno Budget Buffer

This is why on the majority of big rehab projects I always slap an extra $10K on my total expected budget.

If the numbers still work with that then I know in the end I should come out in decent shape and better yet, if the “surprises” are limited or not existent than the deal becomes even more profitable.

Always be working your numbers and buying right!

To get the full guide on how I buy right check out the videos or the book.  Remember to use the property calculator when analyzing deals!