Archives for June 2011

Commercial Investment Opportunities – Part 4

Commercial property types – industrial properties

These forms of commercial property comprise a very complex and specialized type of real estate investment. The investor/developer has to understand the local industrial labor force, utilities and local transportation facilities, along with knowing how to comply with all the governmental regulations that cover local zoning and environmental concerns.

Among these types of commercial buildings are properties that help house manufacturing and warehouse operations of companies. They include buildings in business parks, industrial parks, manufacturing buildings/plants, warehouses and self-storage facilities.

In addition, these buildings tend to be classified as either general purpose (offering a wide range of uses), special purpose (which have particular parts that limit their type of use) or single purpose (obviously, suitable for only one use – for example, a brewery).

Industrial property development must be on property that is properly zoned for industrial usage. This land has to be able to accommodate the buildings as well as off-street parking. Most importantly, the property must be close to major transportation (major highways, railroads and/or airports) that will help serve the manufacturing operations in these buildings.

Types of industrial property investments

Business parks

Buildings in business parks are traditionally composed of sets of mixed-use, low-rise buildings that are employed for both light manufacturing and office use.

Industrial parks

In the interests of local zoning, heavy and light manufacturing operations are usually zoned for specific areas within towns known as industrial parks. This is done to keep the potential for noise or chemical pollution separated geographically from quieter residential neighborhoods.

Manufacturing buildings

Manufacturing buildings were traditionally built for the specific product to be produced. However, many manufacturing buildings are reconverted from previous product production, and are retrofitted for the new product to be produced.

Warehouse buildings

Warehouses can be separate standalone buildings, or they can be part of a larger building with office space and/or manufacturing space included. They are designed strictly to allow for storage of goods and merchandise, as well as to create for ease of shipment of smaller amounts of merchandise.

Self-storage facilities

Self-storage facilities are usually simple secure facilities that allow the public to rent out unfinished space for storage purposes. Depending on their location (and land values in the area), they can be laid out as horizontal storage space, or as a multi-leveled building.

Land

Land development for commercial properties is an extremely specialized niche within the property investing community. It requires great knowledge and research on the particular form of commercial property to be invested in and developed. For example, any land that is to be purchased for any change in land use, will require a lengthy step process of local governmental approvals before any development would ever be allowed. This will require utilizing local attorneys well-versed and experienced in land use law, local architects and contractors who specialize in the form of development that’s proposed, as well as who are also well-known within the community where the development will take place.

Local development can become quite political as the time-worn trade-offs of “jobs versus over-development” are debated in very public forums in order to win approvals for any given project.

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Commercial Investment Opportunities – Part 3

Commercial property types – retail stores

Retail store operations are another form of commercial property investing. Stores can be found as part of small strip malls, neighborhood shopping centers, community shopping centers and regional shopping centers (for example, indoor malls).

Strip malls

Strip malls, those sets of small store buildings that tend to line both sides of busy commercial streets in every town around the country, make for a great entry opportunity for the small investor. Small two or three store buildings may actually be less expensive than purchasing a residential duplex or triplex house. And because tenants usually are placed on longer term leases, turnover and vacancy rates are traditionally lower as well. This makes managing the property easier too. Most strip store leases run three to five years, and usually include renewal options.

One key element to remember about strip malls though, is that building profitability is directly related to the profitability of the tenant businesses. If a tenant is not doing well, regardless of having a lease, they may be forced to close down – and you’ll need to find a new tenant. But if their business is a success, they’ll want to stay for longer periods, and rental increases are more easily accepted. The landlord will want to help the tenant’s business out as much as possible due this symbiotic relationship. Many leases are graduated leases, which start with a low rent in some initial period, then gradually increases as the tenant’s business increases.

Small shopping centers

Small shopping centers are situated close to residential neighborhoods for easy driving access to basic goods and services. Usually there is an anchor store of a supermarket, with many personal services stores surrounding it (like dry cleaning, laundry, barber shop or pharmacy). These centers also have plenty of available off-street parking associated with them. Leases for business in these centers usually will include a minimum rent plus some form of override – a small percentage of their gross sales will be added to (or drawn against) their base rent.

Community shopping centers

These types of retail centers are usually characterized by a much broader range of goods and services being offered, to a larger geographic area. Here, anchoring tenants include major department stores in addition to a supermarket. Movie theaters, large appliance dealers and furniture stores are just some of the fixtures that comprise tenants in these centers. In many instances, these groups of stores will be aligned as an outdoor mall. And due to the larger size of the centers, many competing business may be found there.

The greater the size of the center also requires the use of a professional management company to run the entire property. Lease terms for larger tenants may run 15 to 20 years, while smaller tenants may have lease terms that run between 5 to 10 years. Leases are traditionally of the “percentage lease” variety, with base rent being augmented by a percentage of gross sales, with annual adjustments.

Regional shopping centers

Regional shopping centers are comprised of large outdoor or indoor malls, that service areas from 15 to 20 miles away. Like in a community shopping center, businesses tend to be grouped together around several key anchor department stores. A full-time manager is required on-site at all hours of operation, but full-time maintenance crew and security personnel are also required costs for the center owner(s).

photos courtesy of warrentemplesmith.com, interstateauction.com, wesparkle.co.uk

Commercial Investment Opportunities – Part 2

Commercial property type – residential apartment rentals

This category of commercial property includes multifamily houses of 5 families and above, as well as small, medium and large apartment buildings. Like residential rentals, many of the same basic concepts for acquiring and managing these types of buildings can be applied. However, the larger the apartment building, the greater the economies of scale, and the potential for much greater profit exists. However, most of the risk inherent in this type of investment lies in vacancy rates. The larger the number of units in a building, the greater the responsibility of keeping them fully occupied at any given point in time. This represents the greatest challenge in managing these kinds of properties.

Commercial property type – Office buildings

There are many forms of office buildings The most common types consist of small offices, low-rise buildings, high-rise buildings and office parks. Tenants typically are non-retail business operations that do not require street frontage.

Determining value

When evaluating the profitability of any commercial space, you will need to determine what the realistic market rent for the space should be. If it currently is too little, then the building’s profit potential is being minimized. And where rents charged are too high, you’ll have many vacancies – producing a potential cash flow shortage.

Market rent has to take into account the overall economic landscape, the quality and location of the building and the services the property provides (for example, parking, air conditioning, utilities, floor coverings). Rents are usually established as a specific dollar amount per square foot of usable space.

Lease agreements

In general, standard leases are used when renting out commercial space. However, there are special conditions that can be added to the lease to tailor them for any specific renter. An example of these type of conditions is an escalation clause. With this provision in a lease, rent can be adjusted upwards each year at a set rate. This helps the building owner offset increasing building expenses.

Many leases allow for special types of services to be provided, like a janitor or maintenance service, receptionist or storage facilities use. Another special condition that’s sometimes allowed by building owners, is for the ability of any tenant to sublet their space should the tenant need to move. This a kind of escape clause, and traditionally requires the landlord’s approval of the subletting company.

Usually when entire buildings are being rented out, triple net leases are used. This type of lease calls for the tenant to pay for all utilities, taxes and insurance on the building during the term of the lease.

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Commercial Investment Opportunities – Part 1

Some basics of commercial property investments

Buying commercial property

Most property investors will tend to stick with investing in types of properties they know best, and feel most comfortable managing – usually residential real estate. But for those who are looking for greater profits at a quicker pace, then commercial property should be considered as well. Most investors will not be as well versed or comfortable with commercial property, so there is definitely more specialization required when investing in it. In addition, the absolute dollar amounts required (as well as financed) tend to be much greater than with residential property investing. With more risk comes more potential for return.

Unlike houses, commercial properties almost uniformly derive their value from rental income, not so much from general market appreciation. The greater the rental income, the greater the value of the commercial property. If you can purchase a building where rents are low, then manage to increase the rent-roll on the property, you can increase the overall value of the building. In addition, the quality of the leases you have with tenants in a commercial property will help determine its value. Poor tenants (read: poor paying) with very short leases will yield a less valuable property compared with a building that’s locked up with very strong tenants on long-term leases, with rent escalation clauses built into those leases.

Types of commercial investments

Commercial property investment runs the gamut from small apartment buildings to large-scale ones, small office buildings to large high rises, as well as office parks, shopping centers, strip malls, and many types of industrial buildings, including warehouses, manufacturing buildings and industrial parks.

With each successive commercial property type, the level of sophistication and specialization for that particular form is required. In may ways, relative to residential property investments, commercial properties require much less estimating and speculation, and therefore risk is actually lessened because as is the norm, actual income statements can be analyzed from existing, performing properties. That’s not usually the case with residential rentals, where the investor needs to make guesstimates as to market rents for vacant units, as well as for many expense items, such as fuel and electrical consumption. With commercial, past performance of a building will dictate it’s market value.

In addition, the high cost of most commercial property will be out of financial reach for an individual investor. However, investors can pool their financial resources (and credit lines) to form investing groups. Also, investing is Real Estate Investment Trusts (REIT’s) is also very popular. These are usually publicly traded funds that, like any stock-type of investment, you’d be simply investing in without having a say in the management of their respective property portfolios.

photos courtesy of ellara-marble.com, rojasrealtygroup.com, phaorient.com

Residential Investment Opportunities

Types of residential real estate investments – an overview

When we refer to residential investment property, the two main types are single family and multifamily houses. Land for development purposes is also another form of real estate investment, as are condominiums and cooperatives.

Single family houses

Single family properties are the most widely used investment types for property investors. They are traditionally the easiest to obtain and to finance, making them the preferred entry point for investing amongst first time real estate investors…

Multifamily houses

Multifamily houses are another attractive investment opportunity for beginner investors. They offer the investor the option of either renting all the units in a building out, or making one of the units in the property their own home, while at the same time renting the other units out and managing the entire property. The obvious advantage to this latter scenario, is that as on on-site landlord, you won’t have very far to travel when a tenant’s unit requires repairs, or when they have emergencies. There are also many tax benefits from being the landlord of your own building.

There are several types of multifamily properties you can invest in. The simplest ones are the two family or the three-family. Some two family properties are duplexes, which are side-by side homes, separated by one common wall. Likewise, a triplex is comprised of three side by side houses, each with a common adjoining wall. In addition, two or three family houses can look like a single family house, but be comprised of units on top of one another.

Four-family homes are usually comprised of four units on several levels – some are vertically grouped, with one unit in the basement, and the others on separate succeeding floors. Others have a couple of units on each floor. However, four-family houses represent the largest multifamily houses that can be financed utilizing residential mortgages. From five-family and above buildings, properties are considered commercial.

Land

Land purchases and development are not usually in the scope of beginner property investors. Most residential land purchases are done by experienced developers who have the deep pockets necessary to accept the increased risks of this type of investment. Purchasing tracts of land, whether small or large, requires a great deal of market research into the areas in question. Since mortgages are not traditionally given by lenders on land alone, developers require a great deal of cash on hand to finance the initial land purchase, prior to actually beginning the development of the property.

Condominiums

Condominiums (condos) can be created for any type of real estate – not strictly apartment buildings. Condos traditionally create a legal structure whereby some of the land of the condo complex is owned in common, but each individual unit (and the land under it) can be bought and sold under separate title. So each unit has it‘s own separate tax assessment.

In addition, bylaws are created for the entire condo complex. These bylaws, among other things, define the exact common areas of the complex (for example, a pool area, clubhouse, parking spots, tennis courts, etc.)

These bylaws also allow for the creation of an association of the owners to manage the entire complex. Each condo unit owner is allowed one vote in the association, and elects a board of directors to take on the duties of managing the complex. This board also sets the budget for the entire complex, including the amounts each unit will have to pay for property taxes, insurance premiums and costs for maintaining all the common areas.

Cooperatives

Most cooperatives (co-ops) are actually private corporations. The corporation owns the land and building with all of it’s apartments on it. The corporation also provides for the election of a board of directors (the co-op board) made up of some of the apartment owner/shareholders. The officers on the board take on the responsibility of managing the entire cooperative. Stock in the corporation is issued and sold to apartment buyers in quantities that are proportionate to the value of the apartments available for sale. In effect, buyers are purchasing a proprietary lease within their own company. These tenants are then required to follow the rules and regulations that were created in the corporate charter.

Co-ops can set their rules for buy-ins to the corporation. As an example, a co-op can require only all-cash purchases of it’s units/stock, so that it can attract strictly high-end buyers. But it also can control it’s own economic and social environment as well in so doing.

photos courtesy of 3dluxe.co.uk, philcebuproperties.com, newpointeestates.com

Types of Investment Property Loans

Conventional investment property loans

Most conventional investment property mortgages are standard income and asset verified loans. They can be conventional 30 year terms, or short-term adjustable rate mortgages (ARMs) with balloon payments.

These loans usually require a minimum of 30% down in most instances. In that case, you’d be obtaining a loan of 70% of the purchase price. Your loan-to-value ratio (LTV) would therefore be 70%. When buying investment property, you’ll usually want to try to obtain the greatest return on investment (ROI). Leverage (also known as cranking) is one of the ways you can purchase multiple properties over time, and thereby maximize your ROI. Depending upon your credit rating, as well as the type of property you’re purchasing, the down payment required may be higher, and could go up to 50% – and therefore your LTV would be a low 50% as well. In addition, the points charged on the loan (pre-paid interest) are roughly twice as high as for a conventional home loan.

There are some lenders today who will make no income verification, or no income and no asset verification type loans to investors. Due to the inherent extra risk of these loans (from the lender’s perspective), you can expect to pay more in the way of higher interest rates, as well as more points on these type mortgages.

Commercial investment property loans

When considering the purchase of 5-family or above rental buildings, or more typical commercial space (for example, office buildings, retail stores, warehouse buildings), you’ll need to obtain a commercial loan. Lenders have separate divisions to evaluate and extend credit on these type properties. Since commercial properties are much more specialized, their inherent risk need to be evaluated as a niche within most banks.

Lenders will rely very heavily on the expertise of commercial appraisers, who themselves are sort of like the Jedi knights of the appraisal industry. Unlike conventional residential mortgages, expect much heavier scrutiny of your assets and income, as well as the existing income statement of the property you’re considering purchasing. Also expect rates and points to be higher than standard residential loans.

FHA 203K (fixer-uppers)

If you know you’ll be living in a multi-family rental building, then you can consider an FHA 203K type of mortgage. If you won’t be living there, this type of loan will not be allowed.

If you find a 2 to 4 family rental property that needs a ton of work, and you’d like to finance the renovation costs as part of the first mortgage (rather than self-financing the improvements, or trying to obtain a second mortgage after the work is completed), you can consider an FHA 203K type loan.

Before the mortgage can be approved by the lender, your contractor will need to have all the improvements, their time frame and his payment schedule approved by the bank. (You can also choose to make the payments to the contractor directly, and then you’ll be reimbursed by the bank – also known as a draw.)

These loans can be structured in a step fashion. In the first step, you receive the funds to close on the property. In the next step, some funds are released to your contractor when he begins the renovation work. Funds are then released to him in succeeding steps based on the intervals of work completed on the project, until it is completed.

This type of loan is great for leveraging all the necessary improvements needed on a run-down multi-family property. It also helps increase your ROI on this owner-occupied type of investment.

Home equity lines

Use the equity in your home to create a credit line for further property investments. This is a great way to finance investment property. The costs for loan acquisition are typically low for home equity loans, especially compared with conventional mortgages. And you can structure the loan as a revolving credit line. So when you sell a property, you can pay off the credit line. Then you can take it out again when you’re ready to purchase the next house. And home equity lines typically allow for interest only payments during their first 10 years. This will help increase your cash flow on your investment properties, as your monthly costs, relative to standard mortgages, will be much lower, since you’re not paying back any principal in monthly installments. Rather, you’ll be paying the principal off when you repay the credit line when you sell off any given property.

Seller financing

Always ask a seller of a property you’re considering making an offer on if they will extend some form of seller financing. Most will usually say no, but it never hurts to ask. Even if they won’t (or can’t) extend you a first mortgage, try to obtain a second mortgage. Again, always ask if it‘s possible.

Hard money loans

When you’ve exhausted all other avenues of property investment loans, crunch the numbers to see if hard money lenders will make a deal workable. Usually used if you have poor credit, or poor cash reserves, as their name implies, you’ll pay for the privilege of doing business with hard money lenders. Their investment mortgage rates are usually at least double conventional mortgage loan rates. And their points charged (pre-paid interest) can be triple or quadruple conventional points charged.

photos courtesy of realestatesez.com, thehomeconsultants.wordpress.com, asmartremodel.wordpress.com, hodgesrealty.net

The Best Times of the Year to Locate Property

The historical perspective

Seasonal buying patterns in real estate historically have created wonderful opportunities for property investment in certain parts of the year. While we currently are in an overall buyer’s market, Spring months create a mini-seller’s market as more buyers flood the market to try to secure homes prior to the new school season that begins in September.

Even in down times, families with children historically begin looking by March and April to try to find a home they can get into contract by June, and therefore close by August. In recent years, this “Spring market” has been creeping backwards, with that traditional start time backing up from March to February (usually starting with the weekend after the Super Bowl now).

The next most active season…

Another secondary mini-seller’s market is also created in the Fall, traditionally from September to right before Thanksgiving. Buyers looking at this time of year tend to want to be closed and in their new homes by Christmas.

Both the Spring and Fall traditional home buying seasons tend to create a vacuum in between, a mini-buyers market if you will. Thus, the months of January and August tend to make for the best, most opportune times for property investors to place offers. You don’t necessarily want to begin looking in these two months. In fact, it’s a good idea to be looking throughout the year. But if you’re patient and wait until January and August to actually place your offers and negotiate, you’ll certainly have less competition. And therefore you should be able to obtain better values in purchase prices.

The best month of all…

January, even more so than August, represents the best time in which to place offers. There is definitely a psychological barrier that is broken in the mind of any seller that’s had his property languishing on the market for many moths without an offer. But that barrier is then compounded once Christmas comes and goes, and the cold weather months hit. Shorter days, colder, fiercer winter weather, combined with a house that’s been sitting for months translates into feelings of desperation, and a “need” to unload their property – almost at any cost. So sellers will traditionally be more flexible in January than any other month of the year, since an attitude of despair exists in most sellers. So making offers in January is the prime time for property investors.

What if a “steal” opportunity presents itself outside of January or August?

Jump on it – and hope for the best. If you recognize a steal and feel waiting would be disadvantageous, then by all means make your offer quickly. Just understand that you’ll have a lot more competition surrounding you very quickly. In this situation, you have to hope that moving quickly will create a great investing opportunity you can capitalize on.

In general, try to keep your searching a year-round activity. But do your “pouncing” in January and August. You’ll find sellers the most amenable to making a deal then.

photos courtesy of raleighrealestatetalk.com, meted.ucar.edu, kristinnicholas.com

Locating Investment Property: How to Minimize Your Risk

Property factors you can change

When you evaluate any property as an investment, you’ll want to look at all the negative physical characteristics that are helping to devalue the property. For example, many older homes have what’s known as functional obsolescence, and they are run down due to age characteristics such as no insulation, poor or inadequate wiring, old plumbing fixtures and pipes and/or no off-street parking, just to name a few items. The house may be in dire need of repairs – for example, it may need a new roof, new windows, a complete paint job, or possibly new flooring. All these items are property factors you have control over – you can change the run-down, obsolete parts of the house by throwing money at the problem.

Of course, you’ll need to first determine what the market value of the property will be after you rescue it, and turn it into a spectacular product. Then you’ll have to subtract your cost for making all the necessary upgrading repairs. You’ll then be able to figure out the price at which the property should be sold for you to make a profit that meets your own personal return on investment (ROI) requirements. If you think you have a chance to make a deal for that price, then by all means make an offer on it.

Property factors you can’t change

Now, figured in to your estimate of how much the property will sell for once improvements are made to it, is the neighborhood and exact location the property occupies. Obviously, you can’t change this factor.

I don’t believe in the concept of a “bad” neighborhood as a reason to deter you from property investing. Everything’s relative in real estate. An area with historically higher crime rates will have commensurately lower absolute house values. And these areas may offer opportunities for the property investor who’s just getting started, and who may not have the financial resources to buy in to a better area. If you look carefully block by block, even in an area with a higher crime rate relative to a lower crime rate area, or in an area where schools have students who perform more poorly on standardized tests than other districts that are better rated, you can still find blocks which look great, are well-kept up, and will hold their value over time. And there will always be great buys waiting for you there as well. You may not be able to change the entire neighborhood, but you can surely help upgrade it, and most importantly, make a nice profit by doing so.

Of course, in general people like to work close to their jobs, and so areas which offer better opportunity for commuting (close to public transportation or close to major highways, for example) will be more highly valued than those that are further away. Likewise, proximity to schools and shopping are also more highly valued.

Beware environmental obsolescence!

These are the set of issues that are the most difficult to overcome, and have the most negative effect on valuation. Beware of houses that are close to or directly on main roads, near to highways, commercial buildings, parking lots, overhead power lines, cell towers, train lines or any major source of noise pollution, eyesores, town dumps, factories (or former factories), or any source of past or present chemical pollution. These are the kinds of properties to avoid, because you cannot control public perception of negative environmental factors.

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Depreciation – A Valuable Tax Advantage of Rental Property

The concept of depreciation

When purchasing rental property to be held for the long-term, it’s important to understand the concept of depreciation as a valuable advantage come tax time each year.

Simply put, the IRS treats rental property as an asset that loses part of it’s value every year. How much is being lost? The IRS says that the building on the property (not the land it sits on) must be depreciated over a life span of 27.5 years. Why exactly 27.5 years? I have no idea. But hey – it’s the IRS…they’re allowed to be arbitrary.

So using what’s known in accounting circles as the straight-line method, you would be able to deduct 1/27.5 of the value of the building each year as a loss. This depreciation cost is further defined as the purchase price of the property plus your transaction costs, less the value of the land.

Paper loss

Obviously, depreciation is strictly a paper loss. Most assets will deteriorate over time, and in the case of real estate, a building will certainly fall down at some point in the future ( even if something was done to it to keep it standing for a longer period of time).

Of course, land does not deteriorate. So it is never included in the depreciation expense. So you and your accountant will decide on a “reasonable” amount to be attributed to the land value component of the total property value. (It would be bad if the IRS didn’t agree with this amount.)

Depreciation as a big contributor to loss

Most rental properties take some time after you purchase them to throw off positive cash flows. You’ll need time to make improvements that will attract better tenants that will enable you to charge higher rent, all adding to a positive net income. But depreciation, being strictly a paper loss, will help in adding a great deal of expense to your overall expenses on a property each year. And this may help show your property as having a negative cash flow. The loss on the property can then be used to offset your personal income, if your income is less than $150,000 a year. Consult your tax advisor on new tax treatments to this rule.

The great equalizer

Once you’ve determined it’s time to sell your rental property, however, it will be time to “settle up” with the IRS for all the prior years of depreciation that you took. Here is when you will have to subtract from the cost basis for the property, all the depreciation expenses you’ve taken since you owned the building.

As an example, say you purchased a property for $500,000, made improvements of $100,00, and took roughly $20,000 in depreciation each year for 10 years. Your new adjusted basis would be $400,000.

Original basis cost $ 500,000

Improvements 100,000

________

Adjusted basis 600,000

Depreciation ($20,000/year for 10 years) 200,000

________

New adjusted basis 400,000

If you now sell the property for $800,000, your new, lower adjusted basis due to depreciation will throw off a profit of $400,000. And, you’ll owe capital gains on this profit. (Of course, with the capital gains rate currently at 20% , it’s usually lower than your individual tax rate.)

So while the IRS giveth (in the form of the depreciation tax advantage you had while owning your rental property), it also taketh away (when it comes time to sell, and your cost basis gets reduced by the depreciation expense you received while holding the asset).

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Basic Tax Considerations For Investment Property

The basics

There are some basic tax considerations when investing in property that you’ll want to discuss with your accountant. And you should always seek the counsel of an accountant when deciding on purchasing income producing property.

Here are a check-list of items to go over regarding the tax treatment of your investment property. Some of these issues involve whether you are planning on buying or selling a property in the current year. And some involve planning for future years, if you plan on holding the asset for the long-term.

Know that with investment property, all expenses attributed to the purchase, fixing up, maintenance and marketing for sale are fully deductible against any income on the property.

Closing Costs

Like a home purchase, when you purchase investment property, all closing costs incurred during that purchase (for example, title insurance, attorney and recording fees) are not deductible. However, they will be added to the cost basis of the property when it comes time to sell it (which may be in the same tax year), thus reducing your eventual capital gain and concomitant tax as well.

Good record keeping is crucial

Be sure to keep careful records of all your improvements to the property. Unlike a home purchase, repair items to your investment property are deductible, since every thing you do to the property is considered an “improvement.” So bringing a plumber in for minor sink or dishwasher repairs (which would not qualify as deductible for a homeowner) would be deductible for your investment property.

Of course, more obvious improvements might include large-scale projects such as renovating a kitchen or baths, or adding a deck or an extension on the house. These are not considered deductible. Rather, these are considered capital improvements, and they will add up. They will help increase the cost basis of the property, which will help reduce any eventual profit when it’s time to sell.

Rental property expenses

Rental properties that are held for a long time can have many expenses deducted from rental income on a yearly basis, to further reduce any profit on the building. These include items such as the mortgage interest, taxes, insurance, water service, garbage service, maintenance and repairs, fix-up costs, advertising and marketing costs, landscaping service and depreciation.

Seller financing considerations

If you decide to act as a mini-Bank of England, and offer a private mortgage to a buyer when you go to sell your property, the IRS will want to know about your lending empire. All interest earned on the mortgage paper you hold must be reported to the IRS.

Other issues to discuss with your tax advisor

There are several key property issues that some specific groups should be aware of and discussed in detail with their accountants.

These include the transfer of property from one spouse to another in a divorce proceeding. (This could yield no tax liability for the transferring partner).

Also, if you’re doing your real estate investing as an unmarried couple, the IRS rules concerning the sale of property among unmarried couples should be brought up for those in this category. Again, it’s imperative to check with your accountant on these complicated issues.

photos courtesy of 123rf.com, abttax.com, epochtimes.com