Archives for March 2013

Investment Property Tax Tips When Selling

Yes, it’s that time of the year again

The Internal Revenue Service really, really wants to hear from you by April 15^th. 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

Commercial Real Estate Investing In Rebound Mode

Europe helps shape current investing patterns

Just as the U.S. residential property investment picture has been transforming itself over the last year, with valuation gains occurring in most areas of the country, so too commercial real estate investing has been on the rebound as well. While not growing at the same pace, it is still seen as extremely attractive, especially to foreign investors. This is mainly due to its relative stability over the past year, as returns on commercial properties such as offices, retail space and warehouses continue to increase steadily.

Poised for a rebound

While not producing stellar returns, the commercial U.S. market is poised to rebound strongly this year. The reduced vacancy rates overall, as well as the perception that the commercial real estate investing arena is less risky and is not considered overpriced at this time, have led foreign investment firms to plow billions into the commercial property sector in this country. It is expected that commercial values will rise throughout the remainder of this year, making it an attractive time for investors before prices rise due to this increased demand.

Increased competition from abroad

Naturally, individual investors, as well as U.S. investment companies, have to contend with increased competition for the most desirable commercial properties because of the increase in overseas investing here. Compared with other countries, commercial real estate investing has increased at a much faster rate in the U.S. over the last six months. While investment increased by six percent in Europe and 15 percent in Asia in the second half of last year, it grew by almost twenty percent here in this country, according to DTZ, a London-based commercial real estate brokerage.

Safety in the U.S. commercial property market

They also report that investment in a single country is a safer way to place investor funds rather than spreading their capital pool over many different nations. Of course, Europe’s current financial woes have played a big part in the overall increase in shifting investment funds to the U.S. Despite all our political stalemate woes over controlling the U.S. budget, foreign investors are still quite concerned over all the volatility in their home countries in Europe, and still see the U.S. as much more stable and stronger economically. With their shift in investment patterns, individual investors should be aware of the way this increased demand will place upward pressure on price valuations for the entire commercial real estate investing segment in the U.S. over the next six months.

photos courtesy of miamire.com, collaperty.com, bloomberg.com, foreclosure-support.com, retaillawadvisor.com

The Most Important Flipping Investment Property Strategy

How organized are you?

In the world of speculative property investment for quick profits (flipping), it goes without saying that the trite adage “time is money” holds absolutely true. This is because the quicker you can get to making your renovations, completing them, and putting your investment property on the market, the quicker you should be able to make a profitable sale on it. So it behooves you to have your plans, tradespeople and marketing strategy for selling your property all in place – before you actually go to the closing on your newly-acquired piece of investment property.

The power of incentives

Create a schedule for all work to be completed and drive your tradespeople with a steady but firm hand. Incentivize the completion date for them by adding in a small bonus to their already-agreed to contract. Or, if they’re on time and materials, build in a bonus for completion of work by a certain date. It will be “extra” money well spent when ultimately flipping investment property.

The all-important window of time

You’re always looking to narrow the amount of time you actually own the property to as short a window as possible. Carrying costs of insurance, taxes, heating, electricity, etc. all add up for every day you own the parcel. So you can’t afford to waste a single day. It’s always a good idea to try to acquire your properties for flipping which allow you ample time frames to make your renovations, and then be able to place the house on the market in one of the two prime real estate selling seasons: Spring (beginning in early March and lasting through mid-June), or Fall (early September to the very end of October).

The time to work your ass off…

Pre-planning is everything. From the date you get a signed contract until you actually close on a house should be the heaviest work-load period for you in any flipping investment property project. If it isn’t, you’re not optimizing your time correctly – and you’ll be eventually holding onto your property, and incurring greater costs in doing so.

No deal is ever a 100% lock to go through – even all cash deals. If there’s a problem with the seller’s title, for example, you may end up waiting a long time for them to clear the defect – or, you may decide (and have the right) to back out of the deal, with any deposit money returned to you.

However, this is a rarity. I like to take the risk of doing all prep work right after signing a contract. This prep work includes purchasing materials ahead of time, prior to actually closing on the property. Many materials, such as custom kitchen cabinets for example, require lead times of a minimum of three to four weeks. You never want to have your contractor or carpenter waiting on materials once they’ve begun their work.

Time to get your crew in…

In addition, you’ll want to start interviewing several sets of tradespeople (if you don’t already have your crew set – see my article on assembling your crew). If you already use a standard set of tradespeople for all your projects, which, of course, you should, get them all in to discuss the project the day you have an executed contract (one which has been signed by you AND the seller)). Discuss the renovations/repairs you want to make to the property. You should have already drafted a set of “work to do” punch lists for each tradesperson – even prior to obtaining a signed contract!

Start creating your “exact” budget

Go over the punch list for each tradesperson with them, get their price, and negotiate a contract with each one. If you’re on time and materials, discuss their guesstimate of the amount of time required to complete the project. As mentioned above, also incentivize it for them so they complete the work even faster than what they predict.

If you’re planning major renovations such as kitchen or bath rehabs, work on developing full kitchen and bath layout plans in this crucial time period. They too will become part of the overall costs your tradespeople will be figuring in, so you must have the full plan already created and ready to go for them – as soon as possible after signing contracts.

Coordination of people – a difficult job

Ultimately, your goal is to hit the ground running after you close on a house. When flipping investment property, one of the hardest jobs you’ll have is trying to coordinate the “tentative” closing date (which will eventually turn into the “actual” close date with your attorney – and then line your first set of needed tradespeople to come in and begin work immediately upon closing. Demo and cleaning work is usually the first job on your punch list – and you or your contractor will also have to coordinate the delivery of a dumpster to the property immediately after the closing.

Sweating the details…

You’ll find the detail work to be more and more voluminous as you move from contract signing to closing dates. Again, just be prepared for it. This will obviously test your organizational skills. It is the toughest, most grueling part of any flipping investment property project. And it will require your greatest organizational skills to pull together those punch lists, materials ordering, negotiating and coordination with all parties involved in the acquisition of the property, as well as the fix-up work to be done.

Honing your skill set

However, if you’ve planned well, you’ll find that with each succeeding project, you’ll define your methodology and hone your organizational skills. And if working with a set crew, you’ll find the benefits of utilizing the same people for repeat business. Getting them to move another job to accommodate your project’s time frame will become easier and easier.

In the long run, you’ll find that, while exhausting, the time period between obtaining executed contracts and actually closing on a property will become some of the most exhilarating time periods when flipping investment property. Next to going to the bank and depositing the proceeds from the sale of your property you worked so hard on, that is.

photos courtesy of islaythedragon.com, askmen.com, inman.com, barnettassociates.net, fixandflipnetwork.com, cbsnews.com, home.howstuffworks.com, sandiegohomebuys.net, foreclosurequestionsguru.com

The Bargain Basement Days Appear To Be Over

Resetting your property investment strategy

After several years of horrendous declines in the valuation of house prices in the U.S., the latest reports show a definite pattern of a slow but continued rise out of the housing slump. So much so, that it appears the days of the great “bargain” prices for those looking to buy investment property are beginning to come to an end.

Statistics don’t lie

Even before the traditional Spring selling season is about to begin, statistics show that house prices are rising at their greatest pace in almost seven years. Home prices rose 8.3 percent in December, and are now reported to have jumped 9.7 percent in January, compared to the prior year’s data, according to CoreLogic, which tracks house prices in the U.S. While price valuations are still down a huge 26 percent from their lowest point in 2006, this recent trend upwards is good news for all those looking to buy investment property.

Continued price rises

Except for Delaware and Illinois, prices rose in all other states in January. Western states garnered the lion’s share of price improvements, with Arizona, Nevada, Idaho and California leading the nation, with double-digit percent increases. The nation-wide inventory of homes for sale has been slowly shrinking, and that coupled with increased pent-up demand has been fueling the price increases. Property investors with existing holdings finally have some cheery news to celebrate. Now, for the first time in years, price appreciation can be added to your expectation of returns on rental housing properties, besides the positive cash flows from operations.

Moving off the fence

Another fortuitous sign of the housing recovery is the fact that the number of signed contracts for sale of existing properties jumped in January from December to their highest level in over two years. Again, this activity is occurring prior to the Spring real estate sales market – a very good sign indeed. It would appear that all the fence-sitting buyers are now starting to realize that this is the time to move ahead and purchase before house prices rise even further. Especially with interest rates for 30 year mortgages continuing to stay at extremely low rates – for the time being. So if you’re looking for a great “deal” now as you look to buy investment property, your mindset should be changing. Instead of a good bargain, be more concerned with obtaining a proper cash flow return on your investment. The increase in property valuation will begin to come to fruition naturally after that.

photos courtesy of news.com.au, domain.com.au, robertsinvestmentproperties.blogspot.com, dailymail.co.uk, usprefrealty.com

Financing Investment Property

Some basic tips

When looking to finance investment property acquisitions, here are a few of the most basic tips you’ll want to consider before you begin your property search. Figuring the best way to finance your investment will be one of the first steps you’ll need to take prior to spending a great deal of time and energy in locating a real estate investment.

Get to know your local lenders

There will be greater latitude with smaller, local banks. Each local bank will have their own set of lending guidelines. Get to know each lender’s guidelines, and their individual strengths and weaknesses. Get local real estate agents to refer you to their “preferred” lenders. These real estate pros should each give you three names. See whose name pops up the most out of all local lenders, then work directly with them.

Make sure your credit is excellent before starting your search

Always know your credit score at any point in time. Your score will have the greatest impact on your ability to secure a mortgage when financing investment property, as well as having a tremendous impact upon the interest rate you will be granted. A score of 740 should be a bare minimum. Preferably, you’ll need a score in the upper 700’s to low 800’s these days to ensure getting the best interest rates on real estate investment loans.

Be prepared to put up a large down payment

Unlike homeowner loans, banks assign greater risk to investment properties. They therefore help lower that risk by asking for larger down payments. Most lenders will require 25 to 30 percent down on most investment properties. Some lenders require 40% or more, depending on your credit score. The lower the score, the higher the down payment required.

Ask for some owner financing

Never be embarrassed to at least ask if the owner will consider SOME amount of owner participation when financing investment property – EVEN if they do not say they will on their property information listing sheet. Always ask! You never know just how desperate a seller’s situation may be, and you don’t want to pass up the opportunity to utilize other people’s money (OPM) when possible.

Think outside the box (creative financing options)

Use home equity lines of credit. It’s an extremely cost-effective use of borrowed funds – as long as you’re aware of the potential dangers. You need to set a conservative time horizon for the sale of the investment property to ensure a quick payback of borrowed home equity funds. Otherwise, you’re asking for trouble – placing your own home in jeopardy. In addition, consider short-term borrowing from credit cards – especially discounted credit card offers with zero percent or one or two percent charges on borrowed funds. Of course, shop around for the lowest surcharge cards. Most cards require some upfront surcharge – ranging from two to four percent on average. Again, know your time horizon for holding your investment property acquisition – then choose the credit card offer that best fits your needs, and offers the most leeway in payback period.

Another oft-used method of alternative financing is a shot-term loan from a relative. This can work – but be sure to absolutely create a signed promissory note to your relative/friend/”angel.” That way, everyone is on the same page, knows the repayment period, interest rate, and what will happen if you default. At the end of the repayment period, you certainly want to retain your relative/friend/”angel” as someone who continues to hold you in high esteem. Of course, you should always discuss these creative ways of financing investment property with your financial advisor prior to making any moves. It just makes good business sense to get another outside professional opinion first.

photos courtesy of kwcommercialsa.com, fhasinc.org, anchoragehomesearch.com, thelastembassy.blogspot.com, psdgraphics.com