Archives for May 2023

Cap Rate Calculation: How To Use Cap Rate In Real Estate?

May 18, 2023 by Marco Santarelli

Capitalization Rate or Cap Rate is a term often thrown around in real estate discussions. Yet many people don't really understand what it means. After all, it can be confused with cash-on-cash returns and the rate of return. You will understand what a cap rate is in real estate in this post, from its definition to methods of calculation. When to utilize capitalization rates, how to calculate cap rates, what is a decent cap rate on investment properties, and why determining cap rates is crucial for real estate investors are among the topics covered.

What Is The Capitalization Rate?

The ability of a property to repay its initial investment and generate income beyond that is measured by its capitalization rate. It is one of the most fundamental concepts in real estate investing and is mostly referred to in calculations as Cap Rate. Cap Rate is defined as the rate of return on a rental investment property based on its income, according to Investopedia. This determines the investment's potential return.

When you invest in income-producing property, you are looking for cash flow. You also expect to realize a capital gain, selling the property at some time in the future for a profit. When analyzing investment opportunities, real estate investors evaluate a multitude of different factors. But a typical investor will be interested in the income that the property can generate now and into the future. That investor is likely to use capitalization of income as one method of estimating value. The capitalization rate is similar to the rate of return on investment.

It allows you to compare the relative value of real estate investments independent of their dollar value. The standard cap rate formula is net operating income divided by the market value. Cap rate is one of the most important calculations done by real estate investors. The cap rate is ideal for evaluating comparable properties in the same market area. A cap rate calculator is a useful tool as it allows you to quickly get an estimate of how much money the property is expected to make, and how this compares to similar properties in the area.

The two components of a Capitalization Rate are the Net Operating Income (NOI) and the purchase price of the investment property. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. NOI is a before-tax figure, appearing on a property's income and cash flow statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization.

In other words, the cap rate measures a property's yield on an annual basis, making it easier for investors to compare the risk and return profiles of different assets. It is an estimation of an investor's potential return on a real estate investment. Several factors can affect the cap rate of a property, such as market demand or interest rates, but one of the most critical factors is its occupancy. A property's occupancy directly affects the amount of NOI it can generate.

A vacancy rate is the opposite of the occupancy rate. It refers to the percentage of units that are vacant or unoccupied in a given property. Vacancy rates play a big part in business and can help investors determine whether they're making a good move by putting their money into certain real estate deals. A fully occupied property will generate a higher NOI and a higher cap rate at a given price than one that is only half occupied.

Cap Rate Calculation Example

The Capitalization Rate is the NOI divided by the purchase price and is represented as a percentage.

Cap Rate = NOI / Purchase Price

Now that you know the basic equations used to calculate the cap rate, below is an example to better illustrate how this is used. First, let’s find our values.

Property Value (or Purchase Price): $250,000
Total Revenue: Four units x $1,000/month in rent = $48,000/year

Total Expenses:

Property manager salary – $20,000
Cleaning and maintenance – $10,000
Inspection and broker fees – $5,000

Next, let’s calculate NOI. $48,000 (revenue) – $35,000 (expenses) = $13,000. Lastly, we can use this number to calculate the cap rate of the property.

$13,000 (NOI)/$250,000 (property value) = .052, or 5.2% Cap Rate.

The same formula can be used to calculate the purchase price if you have the Cap rate and NOI. To solve for the price, just rearrange the original formula to:

Purchase Price = NOI / Cap Rate.

Purchase Price = $13,000 / 5.2% = $250,000

Now, let us suppose that a similar investment property (B) has the same NOI but a higher Cap Rate of 6.5%.

Purchase Price of B = $13,000 / 6.5% = $200,000

Both the properties have the same NOI of $13,000 but a lower Cap produces a higher purchase price and vice-versa. As Cap rate increases to 6.5%, it decreases the property value by $50,000.

Note a very important consideration involving a Cap rate calculation shown above. The purchase price is based on an all-cash purchase. No loans or mortgages were involved or factored into the calculation. The leveraged money that is used to acquire an investment property must be accounted for in any calculation involving a rate of return. Therefore, a Cap based on an all-cash purchase can never equal a rate of return.

Using a Cap Rate Calculator in Real Estate

A cap rate calculator is used in real estate to find the comparative value of a piece of property to determine if it would be a good investment. It’s calculated by balancing the costs of owning and maintaining a property, the property’s market value, and the direct earnings received from that property.

For example, say your client wants to buy a property for $250,000. It currently has four units and receives $1000 in rent from each tenant each month. The current owner paid $35,000/year in inspection fees, maintenance and cleaning fees, and a property manager’s salary. The cap rate calculator takes each of these factors into account to come up with a simple percentage that’s easy to compare across properties.

Cap Rate Calculator Equation

The cap rate calculator equation is pretty straightforward, assuming you have all of the necessary information at hand. To calculate the cap rate, you take the Net Operating Income (NOI)/Property Value. You can typically take the asking price as the property value, or there are plenty of online tools available that can provide property value estimates as well.

How to Calculate Net Operating Income (NOI)

Coming up with the NOI for a property is a bit trickier, not because the math is complicated, but because it requires a lot of different numbers upfront. The equation for NOI is Total Revenue – Total Expenses. Total revenue is typically the yearly rent collected from tenants and/or the interest gained over the year. Expenses can include any number of factors such as:

Broker or inspection fees
Pest control
Maintenance
Property management salary
Tenant screening
Property taxes

To find NOI, you add together your revenue sources for the year, then subtract the combined expense amount. You can then use this number to calculate the cap rate. It’s important to note that the cap rate does not take the mortgage payments into account, as this is not a factor that affects the value of the property itself.

Benefits of Using a Cap Rate Rental Property Calculator

There are many ways to use the cap rate when evaluating rental properties. In general, you can think of the cap rate as an estimate that’s used to get the lay of the land for real estate investing. Examples of the different uses for a rental property cap rate calculator include:

Understand the value of a property in relation to its neighbors – It stands to reason that properties in similar neighborhoods with similar assets should have similar cap rates. You can use the cap rate to identify if a particular property is priced too high or too low, or if there may be underlying issues contributing to an unusual cap rate.
Get a picture of larger market trends in an area – Cap rate is a useful indicator of wider changes in a certain city or area within a city. For example, cap rates changing in a specific neighborhood but staying flat in another similar area can indicate a shift in buyer/renter interest.
Provide useful estimates to clients – For agents, the most important use for a cap rate calculator is to be able to provide accurate estimates to clients for the value of the property, an important factor when making a buying decision.
Identify under-the-radar opportunities – If a property has a conspicuously high cap rate for the area, this could be an indication of mismanagement and an opportunity for a higher return on investment if operations were to be more streamlined and yearly expenses minimized.

Drawbacks of Using a Cap Rate Rental Property Calculator

Though the cap rate is undoubtedly a useful estimate of a property’s value, there are a few limitations to using this metric.

Requires comparisons to be useful – Because cap rates are most often used in comparison to properties of similar sizes, assets, and areas, they require a robust market to be valuable. This limits their usability in both smaller markets and for unique properties like tourist attractions, where there typically aren’t enough similar properties to compare to.
Relies on knowing historical costs – Since the cap rate calculation incorporates net operating income, which in turn requires knowing the property’s yearly expenses, it can be difficult to get an accurate estimate without the proper records. For mismanaged properties or even properties that have been owned by a single family for a long time, tracking down this information may not be possible.
Only accurate with steady income and expense costs – Like any estimate, the cap rate can be thrown off by any outlying data points in terms of extra income or unexpected costs. Things like flooding damage can skew maintenance cost data for that year or unexpected seasonal business can drastically increase income, causing an inaccurate cap rate that may not actually be the typical amount year to year.

What is Cash-on-Cash Return?

The cash-on-cash return of an investment property is a measurement of its cash flow divided by the amount of capital you initially invested. This is usually calculated on the before-tax cash flow and is typically expressed as a percentage.

Cash-on-cash returns are most accurate when calculated on the first year's expected cash flow. It becomes less accurate and less useful when used in future years because this calculation does not take into account the time value of money (the principle that your money today will be worthless in the future).

Therefore, the cash-on-cash return is not a powerful measurement, but it makes for an easy and popular “quick check” on a property to compare it against other investments. For example, a property might give you a 7% cash return in the first year versus a 2.5% return on a bank CD.

The cash-on-cash return is calculated by dividing the annual cash flow by your cash invested:

Annual Cash Flow / Cash Invested = Cash-on-Cash Return

Calculate the annual pre-tax cash flow for the property.
Determine how much you'd put down on the property from the down payment to rehab costs. Total these expenses to find your total cash investment.
Divide the annual pre-tax cash flow by the total cash invested.
The result is the cash-on-cash or CoC return.

Let's make sure we understand the two parts of this equation:

The first-year cash flow (or annual cash flow) is the amount of money we expect the property to generate during its first year of operation. Again, this is usually cash flow before tax.
The initial investment (or cash invested) is generally the down payment. However, some investors include their closing costs such as loan points, escrow and title fees, appraisal, and inspection costs. The sum of which is also referred to as the cost of acquisition.

Let's look at an example. Let's say that your property's annual cash flow (before tax) is $3,000. And let's say that you made a 20% down payment equal to $30,000 to purchase the property. In this example, your cash-on-cash return would be 10%.

$3,000 / $30,000 = 10%

Although the cash-on-cash return is quick and easy to calculate, it's not the best way to measure the performance and quality of a real estate investment.

Let's look at one more example taking into account repairs and renovations:

Suppose you want to put 20,000 dollars down on a $100,000 house. This is 20 percent down. You'll have to pay 2,000 dollars in fees. You're renting it out for a thousand dollars a month to a tenant. This yields 12,000 dollars a year in rental income per year. And you've got an ultra-cheap 3000 dollars a year or 250 a month.

The annual cash flow is $12,000 – $3,000 or $9,000.

The total cash invested is the down payment and fees. In this scenario, it is the 20,000 dollar down payment and 2,000 in repairs for a total of 22,000 dollars.

The cash-on-cash return is 9000 divided by 22,000 or 0.41. This translates into a 41 percent return.

What if the property had no additional repairs necessary? Then the total cash invested is 20,000. The cash flow is unchanged at 9,000 dollars.

The cash on cash return is then 9000/20000 or 0.45 or 45%.

If the property needed 10,000 dollars in repairs and renovations, the cash invested hits 30,000 dollars. Divide 9,000 by 30,000 and the cash on cash return is 0.3 or 30%.

You can use the cap rate to estimate the NOI. The NOI is going to be the market value of the property multiplied by the capitalization rate. If they're selling a property for 150,000 dollars and say it has an 8 percent cap rate, then the NOI is 12,000 dollars a year. For comparison, it is reasonable to assume an NOI of roughly one-third of the rental income.

And the fair market value of any property can be estimated using the cap rate. Divide the NOI by the cap rate. A property with a 12,000 dollar NOI and an 8 percent cap rate is worth 150,000 dollars in the scenario above.

You can use the cash on cash return to gauge the return on renovations that allow you to raise the rent. Add the renovation or upgrade costs to the total cash investment number, and determine how much more you could charge in rent for the nicer property.

The ratio compares the total cash earned on an annual basis (pre-tax) to the amount of cash invested. Cash-on-cash ratios are used instead of return on investment since ROI calculations are skewed when you buy a property with a large amount of debt.

Difference Between Cap Rate and Cash-on-Cash Return

The capitalization or cap rate is often confused with the cash on cash or COC return. That problem is compounded by the fact that the cap rate and cash on cash returns are the two main metrics used to assess individual real estate deals. As discussed above, Cash on cash or CoC return calculates the cash income earned on cash returned on investment.

Cash on cash return excludes debt and only looks at the cash amount invested; this is generally the down payment on the property. If you pay all cash for a property, the Cash-on-Cash rate will be the same as the cap rate. However, most property investors don't pay 100 percent of the cash for properties. Yet the cash on cash calculation can still be of benefit to them.

You need the cash-on-cash calculation to properly compare projects that will require significant investment in the form of loan fees, rehab costs, and closing costs in addition to a down payment or cash purchase. Anything you need to pay to get the property ready for tenants falls into this category.

The cap rate can be used to gauge how good of an investment the property is, while cash on cash calculations allow you to determine which deals have the highest returns.

How to Use Cap Rate as a Rental Property Investor?

The cap rate can be used to compare your relative success as a real estate investor or the value of a given property. For example, you can calculate the cap rate for your entire portfolio and identify under-performers. Or you can learn the average cap rate for a given neighborhood and then gauge the value of a property based on its cap rate. If it has a lower cap rate, then it is worth less than a comparable home with a higher cap rate.

Know that you don't have to go into high cap areas to find profitable investments. A low cap area may have room for significant improvement. Look for areas where there are rapidly increasing rental rates because these are the places where the cap rate will be better next year than this year. And that higher cap rate will lead to property values increasing in a year or two.

The ideal properties will have rising rents combined with unchanged expenses. However, if the operating expenses are skyrocketing, NOI will go up and kill that great cap rate for the current calendar year. This is a risk with older buildings that need major work. If you can find properties in good condition and even rehabbed older ones, you could create long-term value by buying something through NOI increases.

Estimating Property Value With The Capitalization Rate

The Cap Rate merely represents the projected return for one year as if the property was bought with all cash. But since we don't normally buy property using all cash we would use other measures, such as the cash-on-cash return, to evaluate a property's financial performance.

The Cap Rate is calculated by taking the property's net operating income (NOI) and dividing it by the property's fair market value (FMV). The higher the Cap Rate, the better the property's income and market value. The Cap Rate is calculated as follows:

Capitalization Rate = Net Operating Income / Value

Let's look at an example. Let's say your property's net operating income (NOI) is $50,000. And let's say that the market value of your property is $625,000. Your Cap Rate would be 8%.

Capitalization Rate = Net Operating Income / Value
Capitalization Rate = $50,000 / $625,000
Capitalization Rate = 8.0%

As another example, let's suppose you are looking at purchasing a property that has a net operating income of $20,000. From doing a little research you know the average Cap Rate for the area is 7.0%. By transposing the formula we can calculate the estimated market value as follows:

Value = Net Operating Income / Capitalization Rate
Value = $20,000 / 7.0%
Value = $285,715

An advantage of the Cap Rate is that it provides you with a separate measure of value compared to appraisals where value is derived from recently sold comparables (which are primarily based on physical characteristics). This is especially true when comparing commercial income properties.

Note that a small difference in the Cap Rate may not seem like much but it can make a large difference in your valuation. For example, the difference between a 7.0% and 7.5% Cape Rate, a mere 0.5% difference, on a property with a $50,000 net operating income is a $47,619 difference in value! So be sure to double-check the accuracy of your numbers.

As always, you want to look at multiple financial measures when evaluating income property including the cash-on-cash return, debt coverage ratio, and internal rate of return.

Commonly Asked Questions About Cap Rate

Below are a few additional clarifying answers to some of the frequently asked questions about cap rate calculators.

What is a Good Cap Rate?

The capitalization rate for real estate can range from a negative number to a double-digit return. A standard cap rate is typically between 4% and 8%, according to CBRE’s 2019 North American Cap Rate Survey. However, there is no such thing as a “good” cap rate. It all depends on the level of risk the property owner is comfortable with and how the cap rate compares to similar properties in the area.

Some investors say they won't buy anything with less than an 8 percent cap rate. It is difficult but possible to find properties with a 20 percent cap rate.

A high cap rate is generally caused by a low purchase price (including distressed sellers) or a high NOI. The key is knowing why the cap rate is higher than normal, not rejecting a property because the CAP rate is much higher than average.

A low cap rate is less risky, while a high cap rate is riskier but there is an opportunity to make more income. As we mentioned earlier, an unusually high or low cap rate (compared to other properties in the area) can indicate that something is “off” with the property.

What Does a 7.5% Cap Rate Mean?

A 7.5% cap rate doesn’t mean much by itself. Rather, it indicates the ratio between a property’s net operating income and its market value, in this case, 7.5%. Cap rate is a way of displaying how much the property is expected to make in a year using the relationship between revenue, operating costs, and market value for the property.

What this means in terms of good or bad investment or dollar amounts depends on the situation. For example, let’s say you want to buy a home that costs $1 million, with an expected net operating income (AKA yearly revenue) of $75,000. Using the cap rate equation of NOI (75,000)/property value (1,000,000,) you would get a cap rate of 7.5%. You can then easily compare to other cap rates in the area to evaluate your investment.

What is an Acceptable Cap Rate?

An acceptable cap rate varies depending on the situation. An average cap rate is typically between 4% and 8%, but what is acceptable varies on how much risk the investor is comfortable with.

Is Higher Cap Rate Better?

A higher cap rate is not necessarily better. Again, it depends on the level of risk the property owner is willing to deal with. A wealthy investor looking to make some quick income by flipping a property may be happy with a higher cap rate because of its greater earning potential, while the associated risk isn’t a concern. On the other hand, a young couple who wants to settle in a home and raise kids there for the foreseeable future will likely want a low cap rate, which has a correspondingly lower risk and will likely increase slowly over time.

Why is a Higher Cap Rate Riskier?

Not always. Capitalization rates in real estate are not necessarily an indicator of risk. This is in sharp contrast to stocks and bonds, where the rate of return is proportional to the risk. However, the cap rate can only be used with income-producing property. The formula just doesn't work if you're going to buy property now to sell it later, such as when you're looking for a fix and flip.

Note that the cash on cash return doesn't take taxes into account. High taxes can wipe out any potential investment return. This means that the actual returns you see after-tax are lower than the cap rate. The cap rate will vary based on several things, not all of which directly affect the property's value.

The age of the property, the desirability of the area, and the demand for rental properties in the neighborhood are a few such factors. If there is a greater demand for rentals than the market supplies, rental rates, and NOI may be relatively high despite the moderate home values.

And if there is an oversupply of luxury rentals in the area, you're going to see a low NOI and de facto ROI via the cap rate, because your property may sit empty for a long time or not rent for enough to cover your operating expenses.

There are other issues with the cap rate that explain why you need to know additional values like the cash on cash return. For example, the CAP rate is an annual figure. It will crash if the property was vacant for several months through no fault of the current owner. Yet the metric will rise automatically with inflation if the rents have kept up with market rates.

The cap rate does not tell you how the property has performed over time; vacancy rates and income statements will do that. A higher cap rate is riskier for the same reason that any high percentage investment is riskier. It all has to do with probability and potential uncertainty, something called the Risk-Return Tradeoff, a well-known investment principle.

The math behind the Risk-Return Tradeoff is a bit complicated, but this guide from Model Investing breaks things down into easily understandable sections if you want to get into the nitty-gritty.

Is Cap Rate the Same as ROI?

No, the cap rate is not the same as ROI. Though both metrics use NOI in their calculations, they’re measuring different things. Cap rate is used to evaluate how profitable a piece of property should be in comparison to the market, regardless of buyer, while ROI (return on investment) is a more concrete calculation showing how much a specific owner will make each year. ROI incorporates mortgage payments while the cap rate does not.

The equation for ROI is the annual return/total investment. For example, a person living in a $200,000 home with an NOI of $12,000, an annual mortgage payment of $5,000, and a down payment of $40,000 would calculate ROI as follows: $7,000 annual return ($12,000 NOI – $5,000 mortgage)/$40,000 total investment (down payment) = 0.175 or 17.5% ROI. The cap rate for the same home would be 6% ($12,000 NOI/$200,000 property value).

How to Calculate Property Value using Cap Rate & NOI?

Using the cap rate and net operating income to determine the real estate value is known as the income approach to valuation. The Net Operating Income equals all income from the property minus all reasonable operating expenses. This is a before-tax figure. It doesn't include amortization, depreciation, capital expenditures, and mortgage payments. The NOI is equivalent to the earnings before interest and taxes if you're comparing the capitalization rate of a business that's for sale.

Find the annual net operating income or NOI.
Divide the net operating income by the cap rate.

For example, a rental property in Dallas with a net operating income of $30,000 and a cap rate of 7 percent is valued at $428,571. The same property with a 10 percent cap rate would have a value of $300,000. In other words, the higher the cap rate, the lower the property’s value.

We hope that the following explanations were helpful for any agent looking to provide a more holistic view of property options to their clients.

Now that you understand how cap rates work, here is an easy calculator that you can use.

13 Tips For Buying a Rental Property in the US 2023

May 18, 2023 by Marco Santarelli

Looking to purchase and profit from a rental property? In this article, we're going to give you some important tips on how to buy a rental property. These are the steps every budding property investor should take to pick a good cash-generating rental property. By following these steps, you’ll be well prepared to buy your first rental property. As a form of real estate investment, buying a rental property is considered to be a very good one.

You should buy a rental property if you want to diversify your holdings beyond stocks and bonds. The biggest advantage of buying a rental property is that it's a passive investment that required very little day-to-day management from owners or landlords. The other advantage is that you start earning a return on your capital investment immediately in the form of rent. Imagine this – After you make the down payment and pay all closing costs, the renter pays off your mortgage. How good is that?

However, it requires due diligence, on your part, to ensure you get the best return on your investment. Just like any business, purchasing a rental property to earn monthly income can be a bit risky too. Remember, choosing the right property, maintaining it, dealing with tenants—all that takes work. Investing in a rental property is not as easy as investing in stocks. From the first decision to get into the landlord's biz to buying a building, the idea may be daunting for the first-time investor. Real estate is a tough business so you need careful planning before putting down your money in rental properties.

Finding good rental property deals can be a difficult task to accomplish. A bad rental property deal will make you no profit or even worse, it can lead to a financial loss. Therefore, as a naive real estate investor, you should opt for buying off-market rental properties from turnkey real estate companies. A rental property should be turnkey and rent-ready. A good rental property is fully refurbished or a new construction residential property. The property must be in growth markets and must produce a positive cash flow. The property must have a good appreciation potential.

Norada Real Estate Investments helps take the guesswork out of real estate investing. By researching top real estate growth markets and structuring complete turnkey real estate investments, they help you succeed by minimizing risk and maximizing profitability. Our investment properties for sale are at or below fair market value – which means there is a potential for more returns on your investment.

For beginners looking to invest in a rental property, it is frequently placed in the category of income sans work. However, it’s not like that at all. Although it qualifies as passive income, that doesn’t mean you’re not going to buckle down. If you choose to manage the property yourself, you must know that unlike stocks it is not hands-off management. You will be required to do a lot of work for managing the rental property as well as your tenants.

Making money in real estate is not necessarily as easy or as simple as you’ve been told. Even if you hire property managers to help you manage your rental properties, you still have to manage them. Buying rental property is not for everyone. It should be an investment option you consider only once you’ve achieved a certain level of financial independence. If you do it right, you can put yourself on the road to success with cash regularly flowing into your bank account.

13 Tips On How To Buy Your First Rental Property

When seeking to buy a rental property, you must tread cautiously. This will help you to avoid common risks in rental property investing. Investment real estate, although a highly profitable business, is also equally a very tricky one. There’s a lot to be wary of including con agents and dealers, substandard properties, and exorbitant charges among others. It’s just important that you exercise caution before buying anything. Here are the 13 tips that you must follow when buying a rental property for passive income generation.

1. Buy Rental Property In The Best Location

As you already know, “Location, Location, Location” still rules and remains the most important factor for profitability in any form of real estate investment whether it is “fix and flip” or rental property investing. Before you get your heart set on a specific location, bring your rental property’s location into serious consideration.

Find out what is the crime rate in that location.
Are there schools close by and how are they rated?
How far are the amenities like parks, supermarkets, transport hubs, and restaurants?
How good is the rental property market in that location? What are the comparable rents and purchase prices?
How is the economic development of the area?
How the locality is expected to evolve over the investment period? If the area develops, the rent price will increase and so will your income and vice-versa.

2. Choose The Right Rental Property Markets

When choosing a rental market, it is always best to select one that is best aligned with your investing goals. For example, an investor who only wishes to go in it for the cash flow (and not appreciation) should probably opt for a more stable market. These markets won't fluctuate upwards or downwards, and they won’t be growing at a very rapid pace. The strength of the overall economy significantly impacts the real estate market. With the population, jobs, economy and industries, and mortgage availability moving upwards, the growing markets are always booming.

In growing markets the number of properties available to the population will be less, hence the demand for housing will increase. The increased demand leads to a rise in home prices. Strong real estate markets and increased job growth go hand in hand. Demand for all types of real estate increases with the number of local jobs, as during periods of economic development or boom. Additions to the local labor force tend to drive rents and prices upon rental properties in the vicinity. So, you get both a good property appreciation and a rent increase.

Population growth is also an indicator of a strong real estate market. When people from out of state move in, the rental property market gets boosted. Such increases in the population of renters and employment trigger a rise in the demand for housing. The market entered into a phase that favors sellers and it takes many years for supply and demand to become balanced again. Now as a rental property owner it means that you have an opportunity to capitalize on a unique investment opportunity.

Our picks are affordable and growing markets like Houston, Dallas, Oklahoma City, Memphis, Dallas, etc. However, it’s difficult to tell whether a given market is wise to invest in, and there is certainly no guarantee that anyone can give you. Timing a rental property market is also important. When it comes to buying rental properties, location is important but so is timing to a certain extent. The general rule is – Buy in a Buyer's Market. Sell in a Seller's Market. You should not buy near the top of the housing market cycle and see the value of your property fall and then wait several years for the market to rise again.

3. Buy Rental Property Using Leverage

tips for buying a rental property — Credit: Andrea Piacquadio from Pexels

As important as location, location, location is to buying, so is leverage, leverage, leverage. *David Reiss, a Professor of Law at Brooklyn Law School believes understanding the mortgage market helps keep costs low and reduces market cash flow uncertainty. Having a mortgage can also free up cash for repairs if needed for your potential investment. He goes on to say consulting a professional can save you time and money. Caveat Emptor. When going for leverage to finance rental properties, no lender will lend you money with no money down, and no seller will carry a note without you putting some money down even if it’s a promise to do money in the future.

There is no such thing as no money down in any type of real estate investment because the money is going to come from somewhere. In regards to buying investment properties with no money down, one of the best options you can try out is that of borrowing. There is a good deal of banks, financial firms, and private lenders out there who can readily loan you the amount you need to buy a rental property.

Importance of Leverage – If you do it right, you will be able to add more and more rental properties to your investment portfolio. If you wanted to buy $100,000 worth of stocks, you need to invest $100,000 out of your savings. But, if you want to buy a rental property that costs $100,000, you can use other people’s money to make this purchase. A bank or other lender will generally give you 80% of the purchase price. You just need to make a down payment of the remaining 20%. In this way, you can save 80% of your savings through leverage.

4. Choose a Single-Family House When Buying a Rental Property

Single Family Rental Property — Photo Credit: Binyamin Mellish from Pexels

New real estate investors should start with single-family rental homes. Why? Upkeep is easier as you only deal with a single tenant. Should something break and needs repair you only have to fix the problem once. Wear and tear on your investment are also reduced with single-family tenants. Following the housing market decline in 2007, single-family real estate investing became a favorable option for investors, saving on construction or refurbishment prices. The quick turnaround for an owner to rent out their property means cash flow is almost immediate.

Single-family rental homes have grown up to 30% within the last three years. Almost all the housing demand in the US in recent years has been filled by single-family rental units. The overall supply of single-family rental homes is flat, though demand isn’t. That is why rental rates were steadily increasing in 2019. Affordable rentals or those renting for 75 percent of the median rate saw rents go up 4 percent in 2019. That is due to the low supply of single-family rental homes in that price range. Given the growing price of land and materials, developers choose to build more luxury homes and condos than cheap affordable homes.

The higher-end single-family rental homes renting for 125 percent of the median rate only appreciated 3 percent in 2019. The growing returns for single-family rental investment have led investors to flood in, snapping up foreclosures and properties in need of major repairs. While fix and flip are popular on TV, fix, and rent out is a standard way to acquire discounted single-family rental investment properties. It has also forced real estate investors to compete with other investors for fixer-uppers.

5. Screen Tenants For Your Rental Property

Do a background check of your tenants before signing up for a lease agreement. Check their court records, credit rating, historical landlord-tenant disputes, etc. Doing so ensures you have a qualified tenant for your rental property. Failure to do so can cause a multitude of expensive problems and personal stress to name just a few. Landlords need to thoroughly vet their tenants to be on the safe side. Finding and screening tenants, doing paperwork, and ensuring low vacancy rates is not an easy job. This leads to losses especially if such rental property was your sole investment. The losses add up more if you have bought the rental property through a mortgage.

6. Learn About Short Term Rental Restrictions

Welcome to the world of VRBO and Airbnb. These short-term rental companies can turn buying a rental property into a nightmare. Some cities have legislated short-term restrictions on rentals. Roh Habibi, the Founder & Principal of TheHabibi Group suggests potential investors need to be aware of HOA and condo laws that may apply to your purchase. Before buying, you need to be sure it can be used as a short-term rental.

7. Do the Math For Your Rental Property

Why overcomplicate your life? Ask yourself this, will the rental payment cover your monthly mortgage cost? Maybe even make you a few hundred dollars. Experts believe that inexperienced investors should let the numbers speak for themselves. If you meet your mortgage payments, you probably have a good deal. Overanalyzing when buying a rental property is a complication you don’t need. The cost of borrowing money might be relatively cheap, but the interest rate on your rental property will be higher than traditional mortgage interest rates.

The 2% rule says that for a rental property investment to be “good”, the monthly rent should be equal to or higher than 2% of the purchase price. For a $100,000 property, the monthly rent collected needs to be $2,000/month or higher to meet this guideline. You need a low mortgage payment that won't eat into your monthly profits too significantly. If you live in a city like San Francisco or Los Angeles or Seattle, rent will likely be your biggest monthly expense.

It may eat up a good chunk of your paycheck. Follow the 50% rule for operating expenses on your rental property. If the rent you charge is $2,000 per month, expect to pay $1,000 in total expenses. Operating expenses on your new property will be between 35% and 80% of your gross operating income. The normal operating expense ratio range is typically between 60% to 80%, and the lower it is, the better.

8. Buy Rental Property With A Good Rate of Return

profitable rental property — Image by PublicDomainPictures from Pixabay

Owning rental properties can provide investors with steady rental income or capital gains when sold for a lump sum profit. Profit is made on investment as a percentage of the cost of the investment. A cap rate of 7% or north of that number is considered very good for a profitable rental property. Generally, the average rate of return on investment is anything above 15%. When calculating the rate of return on a rental property using the cap rate calculation, many real estate experts also agree that a good ROI is usually around 10%, and a great one is 12% or more.

Amazing deals can be found by wise investors. To do so involves shopping the areas for what houses are selling for. Areas that are expected to transition to a more gentrified neighborhood should be prime investment targets. The biggest disadvantage of buying a rental property that you could face is the lower yield. While not always the case, most rental properties are priced much higher than the fair market value in that neighborhood, and that is because of the convenience they offer since they are already renovated and come with a tenant in place.

9. Consult Real Estate Finance Professionals

When buying a rental property, it’s important to deal with recognized professionals. Opportunity cost and leverage are needed to be known, in the financing world. These experts will help you understand the cost benefits and potential opportunity costs when using all cash. They will advise you on the actual revolving cost and true margins on the financial side of things.

10. Get A Written Lease Agreement For Your Rental Property

lease agreement for rental property — Image by Gerd Altmann from Pixabay

When renting your new property, having a proper lease is very important. With one in place, you can eliminate potential misunderstandings between you and the tenant. Some of these include rental payment and due date, termination fees, are pets allowed, insurance, ensuring the living space is clean, and even the heating temperature setting in winter.

When you have a written lease agreement, if there is a dispute at a later date, it can help clarify what was agreed to by both sides. On the other hand, if there is no lease agreement, then there is no authority for the landlord to make any deductions from the tenancy deposit – no matter how dreadful the condition of the property when the tenant moves out.

If he tries to make any deductions, any challenge made by the tenant will succeed at adjudication. Fortunately, when you have a lease agreement in place, there are several steps you can take as a landlord to mitigate any further damage and even cover the expenses to repair them.

11. Outdoor Space is a Bonus

outdoor space in a rental property — Image by Gretta Blankenship from Pixabay

And an appealing outdoor space helps a rental property attract and retain tenants. To rent to good tenants, consider buying a rental property with outdoor space. Most renters will enjoy having family and friends over for backyard BBQs, relaxing, and just spending time outdoors. If the area is private that’s a big plus to consider. Renters can then add personal touches to make the space an outdoor oasis to enjoy.

Outdoor space is desirable to prospective tenants, even if it is a patio, balcony, or fenced backyard. A usable outdoor space can be used for the kids to play or for pets to run free. If you can provide a small space to enjoy the sunshine and some fresh air, you'll be able to attract more tenants and select the very best. Having an outdoor space is always a bonus when it comes to renting.

12. Balance Your Risk

People will still need places to live even in a flat economic cycle. Your rental can be a steady income generator during a downturn. Choosing the correct rental property helps balance risk. Areas with a high demand for rentals will continue to generate income even when the economy is in a downturn.

13. Buy What You’re Familiar With

Like all your major investments in life, buy what you know. When buying a rental property, use your life experience to help you gain a competitive edge. Experts suggest looking for investment properties near your college campus. Another life experience to mine would be retired military near a military base. Properties near hospitals can provide rental opportunities for nurses. Your real-life experiences can make you a good investor.

Let Us Help You In Buying Your First Rental Property

The American Dream used to include real estate investing. If chosen carefully, real estate investing is likely to give steady returns in the long run. Buying a rental property, like most things in life, once you know the rules of the road it’s not as difficult as you first imagine. Fortunately, experienced real estate professionals or advisers are either a referral away or after some sleuthing on your own, added to your preferred supplier list. Go for reputed turnkey real estate companies and buy rent-ready properties.

A turnkey rental property is a great option for investors searching for passive income that requires as little active management as possible while still accomplishing a modest return on investment. Then, hire a good property management company that would find qualified tenants as well as manage the property on your behalf. When shopping for expertise remember, there are no stupid questions. But lots of stupid answers.

Consult with one of the investment counselors who can help build you a custom portfolio of turnkey cash-flow rental properties in the various growth markets across the United States. All you have to do is fill up this form and schedule a consultation at your convenience. We’re standing by to help you take the guesswork out of real estate investing. By researching top real estate growth markets and structuring complete turnkey real estate investments, we help you succeed by minimizing risk and maximizing profitability.

References For Further Reading:

http://www.fitsmallbusiness.com/buying-your-first-rental-property-tips
http://www.sdfcapitalllc.com
http://www.thehabibigroup.com
http://www.losangelesemploymentattorney.org
http://www.caponeforyourhome.com
http://www.freddybaezcalderon.com
http://www.roomtobreathe.us
http://www.homeunion.com
http://www.aehomegroup.com

Top 10 Features of a Profitable Rental Property

May 18, 2023 by Marco Santarelli

If you're considering a long-term investment in real estate, rental property can be a great option for you. We will be discussing the best features of a profitable rental property which can assure great returns with stability. Rental property investment (or simply buy-to-let investment) is a very viable form of investment. As an investment avenue, it more often than not guarantees you a steady return on your investment. This, alongside forming a fairly strong protective hedge around your financial future.

Rental property investment continues to grow in the US. This growth is attributed to rapid urbanization and changes in per capita income alongside other socio-economic factors such as the unaffordability of homeownership. Young Americans are delaying home purchases due to steep prices that remain out of reach for many, which is expanding the rental housing market.

Homeownership is in decline after a few years of modest gains. The decline is seen among all age groups, with people under 35 seeing the largest decline. Therefore, rental demand is expected to increase significantly over the next five years, with many high-population locations currently facing rental housing shortages. As of now, 40.7 million or 34.6% of occupied housing units are renter-occupied. This suggests that demand for rental housing is on the rise, and that supply is failing to keep up with it.

In 2021, the nationwide homeownership rate declined 3.7% year-over-year (YoY) and the number of owner-occupied units declined 4.0% YoY. Homeowner vs. renter statistics reflects a decline in homeownership, with 36% of American households renting their home. 78.7 million out of a total of 122.8 million households are homeowning. 44.1 million households rent their homes. 2.7% of occupied housing units are second homes. 11% of all housing units are vacant. In the first financial quarter of 2021, the homeownership rate was 65.4%.

The Census Bureau counted nearly 20 million rental properties, with 48.2 million individual units, in its 2018 Rental Housing Finance Survey, the most recent one conducted. Individual investors owned nearly 14.3 million of those properties (71.6%), comprising almost 19.9 million units (41.2%). For-profit businesses of various sorts owned 3.7 million properties or 18.8%, but their holdings totaled 21.7 million units or 45% of the total. Entities such as housing cooperative organizations and nonprofits owned smaller shares of the total.

Individual investors are more likely to own single-family and duplex rental homes while big institutional investors own multi-family rental properties. The surveys show that 28% of renter-occupied homes are detached single-family units and 42% of renters live in single-family homes. The majority of the largest owners of apartments in the U.S. are real estate investment trusts (REITs), which are companies that own (and usually operate) income-producing real estate. In 2018, there were 226 REITs in the United States, who owned a combined 821 billion U.S. dollars of assets, and who had a combined market capitalization of one trillion U.S. dollars.

The rental returns in the U.S. have been steadily climbing in recent times. However, when seeking to invest in a rental property as a beginner, you must tread cautiously. This will help you to avoid common risks in rental property investing. Real estate although a profitable field is also equally a very tricky one. There's a lot to be wary of including con agents and dealers, substandard properties, and exorbitant charges among others. It's just important that you exercise caution before buying anything.

Talking about being careful, there's one mistake that every rental property investor must seek to avoid. What is this? Well, it's the mistake of buying an unprofitable rental property. Purchasing such a rental property is like taking all your hard-earned money and throwing it away. The property will just be sitting there with you barely earning anything from it. Worse still, it may even take from you in the form of repair and maintenance expenses.

Top 10 Features of a Profitable Rental Property

Investors seeking to invest in rental properties should always first ascertain a property's viability. There's only one way to know if a given property is indeed profitable, this is by checking if it meets the profitable rental property criteria. Below is a list of the top 10 features of a profitable rental property that you shouldn't ignore.

1. A Property Worth Your Money

Before anything else, a real estate investor should be convinced that the given rental property is financially worthwhile. Ask yourself whether the property in its current or improved state is worth spending your money on. How much rent is it likely to earn you per month?

What's the cost of repairs and refurbishment? Is it worth it? These are the kind of questions you should be asking yourself beforehand. An ideal rental property should earn you an annual gross rent of at least 12% of the purchase price. Apply the one percent rule to help you determine this.

The monthly rent you'll be collecting should at least be 1% of the house's value. This is one of the best features of a profitable rental property considered by seasoned real estate investors. Additionally, you can also involve a financial expert to help you determine the cap rate. This too will help you decide on whether the property is worth it.

2. A Neighborhood With Favorable Clients and Low Vacancy Rates

There isn't any other way, a rental property owner needs tenants. This is the only way he or she can earn income from the property they've invested in. The amount of income you make from a rental property is directly proportional to the neighborhood it's located in.

Neighborhoods with high rent rates will earn you more money than those with less. Likewise, neighborhoods with a higher caliber of clients will also earn you more. A perfect illustration of this is a case where there're two neighborhoods, one dominated by college students and the other with working-class family occupants. It goes without much saying that the latter will earn you more profits.

Too many vacancies could also mean the area is unattractive due to crime or other factors. Investigating the area with a local real estate agent can give you insight into the safety of the neighborhood and the reasons for the abundance of rental properties. This is also one of the features of a profitable rental property that you should always keep in mind.

3. A Safe And Secure Neighborhood

Security is very key when it comes to rental property investing. No tenant can knowingly want to live in an insecure neighborhood where crime or burglary rates are high. This holding true, your rental property business is unlikely to thrive in an unsafe and crime-infested area.

One of the features of a profitable rental property is that it should be located in a very safe neighborhood. Burglaries and theft are the most reported crimes in the U.S., so renters want to know that their families and items are secure. Areas, where vandalism and crime rates are high, are areas to avoid when considering purchasing a rental property.

Therefore, choose a neighborhood with adequate security when purchasing a property. Check things like street lighting, patrol police presence, proximity to sheriff departments, and crime data reports among others.

4. Presence of Schools With High Ratings

The availability of highly-rated schools is another key indicator of a rental property's potential profitability. The presence of educational facilities greatly determines whether tenants choose to settle in one place or not. It's all parents' wish to give their children a high-quality education that can spur them forward in life.

Parents can therefore never wish to live in an area that lacks quality schools and educational hubs. There should be elementary, middle, and high schools of good standards in the neighborhood.

This is also one of the best features of a profitable rental property. You can check the school ratings from sites like Greatschools.org. Using their school quality information, you can check the ratings of all the schools in your community. As an investor, take care, therefore, to pick a location with the best schools and learning abilities.

5. Presence of Physical and Social Amenities

Rental property investment thrives in areas with adequate amenities. Tenants want to be able to always access the facilities and services they require. These include things like shopping malls, gyms, medical facilities, and restaurants. They also include services such as telephone, water, electricity, and internet. Tenants will readily occupy your house if they can conveniently access these amenities – another great feature of a profitable rental property.

6. Adequate Transport Facilities

Related to socio-economic amenities, adequate transport also plays a significant part in rental property investment. The rental real estate business can only do well in areas with adequate transport. It’s smart to figure out the time you’ll spend commuting from home to the places that are important to you. Do you have quick access (within a few blocks) to a transportation system?

Ask yourself these questions:

Does your would-be neighborhood have a good network of roads?
Are the roads tarmacked?
Do they have potholes or get flooded when it heavily rains?
Is there enough public transport?
Are there other means of transport aside from road – Airports, Buses, and Tubes?

These questions will help you choose a profitable rental property.

7. Adequate Sanitation

You can't talk of the features of a profitable rental property without also talking about sanitation. There's a need that the rental property you intend to buy to be in a place with adequate sanitation. Tenants tend to shy away from places with want hygiene and sanitation.

Picture this, no one would wish to live in a place where flies dash in and out at will or where drains lie open, or where there is a badly managed sewage system.

Try and pick a property with sufficient sanitation. Check on things like waste disposal, toilets, sanitary facilities, septic tanks, water and sewerage, stormwater drainage, etc. The cleaner the house and the neighborhood are, the higher the number of profits you can make from it.

8. Favorable Climate

Climate too plays an important part in the success of a profitable rental property investing business. Houses located in places with inclement weather usually struggle to attract clients. It's, therefore, necessary that you choose a location with the right climate for your property.

In line with picking the right climate, avoid cities that tend to have extreme and harsh weather. Also, avoid areas that are prone to floods and even fires.

9. Areas Devoid of Natural Disasters

Another important feature of a profitable rental property is that it should not be located in an area prone to natural disasters. With natural disasters and calamities, you really can't say whether a place is immune to destruction or not. It's just a matter of hoping for the best. Anywhere, there are places that from past occurrences have been known to be highly prone to natural disasters.

These include disasters such as tornadoes, hurricanes, windstorms, wildfires, storms, and even earthquakes. Places such as these are not very suitable location choices for rental properties. In the event of such disasters, one loses all their investment. This can be quite unfortunate if you also didn't have insurance cover against such eventualities.

10. Favorable Property Taxes

Property taxes on property in a given city or state also determine the profitability of rental property investment. The higher the taxes and charges levied by the government in a given area, the less you'll earn from investing in that area. Try and choose an area with attractive state levies.

Depending on where you live, you may qualify for a property tax exemption offered by your state, county, or local jurisdiction. Several other states have property tax rates under 1%, many of which are located in the south region of the country.

As an example, Alabama has both a low tax rate (0.40%) and home prices that are well below the median home value in the U.S. You can find high-quality investment properties at reasonable market prices in the Birmingham real estate market.

How To Find A Profitable Rental Property For SALE

Investing in a rental property can be a hugely profitable venture or a financial mistake. It all depends on how you go about it. You will not make money in real estate unless you buy a profitable rental property in a growing real estate market. Try and take your time before putting your money on any property. Check carefully and be sure that it is worthwhile. Depending on your situation, you can go about the property purchase on your own or involve a real estate agent. Whatever the case, you should be able to reek in some profits from the right property.

Go for reputed turnkey real estate companies and buy rent-ready properties. Then, hire a good property management company that would find qualified tenants as well manage the property on your behalf. When shopping for expertise remember, there are no stupid questions. But lots of stupid answers. Consult with one of the investment counselors who can help build you a custom portfolio of turnkey cash-flow rental properties in the various growth markets across the United States.

Here are some of the growing real estate markets where you can invest in a rental property and get good returns:

All you have to do is fill up this form and schedule a consultation at your convenience. We’re standing by to help you take the guesswork out of real estate investing. By researching top real estate growth markets and structuring complete turnkey real estate investments, we help you succeed by minimizing risk and maximizing profitability.

We offer investors fully refurbished as well as new construction residential properties ranging from single-family homes up to fourplex multi-units.
Our properties make sense the day you buy them.
There is nothing that needs to happen for the property to be a good wealth-building investment.
We select markets based on several factors.
At a high level, we consider economic factors that include job growth, unemployment, population growth, as well as the condition of the local housing market such as inventory, home price trends, etc.
Some of our properties come with a rent guarantee ranging from three months to one year.

References:

http://www.nmhc.org/Content.aspx?id=4708
https://ipropertymanagement.com/research/renters-vs-homeowners-statistics
https://www.investopedia.com/articles/mortgages-real-estate/08/buy-rental-property.asp
https://www.baymgmtgroup.com/blog/the-top-10-features-of-a-good-rental-investment
https://wealthmasteryacademy.com/top-10-features-of-a-profitable-rental-property
https://money.usnews.com/investing/real-estate-investments/articles/2017-08-23/a-guide-for-investing-in-rental-property

The Important Tax Benefits of Real Estate Investing

May 18, 2023 by Marco Santarelli

If you are planning on increasing your wealth, the best investment to deal with is real estate. Investing in real estate has some incredible tax benefits. Other benefits are an increase in property value due to appreciation and good cash flow in the form of rental income. It is easy to find the lists of these tax benefits of real estate investing, like the ability to deduct nearly every expense associated with the real estate or how to qualify to exclude from your income all or part of any capital gain from the sale of your main home.

However, it is equally easy for someone to inflate or conflate various tax benefits given by the IRS. Investors dealing in real estate get the maximum tax benefits in the name of deductions, which we'll discuss in detail. Deductions that are accounted for can be depreciation, property tax, repairs, or any other form of expenses. These breaks in taxes are helpful to a lot of people dealing with real estate as their full-time business. Let’s look at the top tax benefits of investing in real estate using hard numbers. This is the basic introduction to how tax benefits in real estate work.

The average home in the United States costs around 220,000 dollars. Yet many people don’t need a three or four-bedroom single-family home. Nor should you pay that much for an investment property. A good rule of thumb for investors is to pay no more than 70 percent of the ARV or After Repair Value of the property.

We’re going to use a property purchased for 130,000 dollars. This may be a small starter home in an average neighborhood or a full-sized home in a working-class neighborhood. The house would then be worth around 185,000 fixed up if we were going to pay cash for the repairs. You don’t want to overpay for the property.

Determine how much the property would rent for it after repairs.
Divide that by the property value.
You want a 1 percent rate of return at a minimum.
This means that if you can rent the property for 1600 dollars a month and have 300 dollars a month in expenses, your net revenue is 1300 dollars a month.
On a 130,000 dollar starter home, this is a 1 percent ROI and makes it a good deal.
If the property costs 130,000 dollars now but requires 20,000 in repairs, it probably isn’t worth it unless you’re going to sell it soon to capture the increased equity.
Don’t forget to factor in expenses like property management fees, property taxes, and insurance if you’re going to hold onto the property in addition to expenses like the mortgage.

Suppose you want to buy a 130,000 dollar house with 20 percent down. That means the down payment is 26,000 dollars. This results in a mortgage of 104,000 dollars. We used a mortgage calculator assuming a 104,000 dollar mortgage at 5 percent over 30. This results in a monthly payment of 558 dollars a month. As a real estate investor, your mortgage interest becomes tax-deductible, while payments toward the principle are not. This makes nearly all of the roughly six hundred dollar house payment a business expense you can write off.

Because you put 20 percent down on the property, there is no PMI or private mortgage insurance.

However, property insurance will be tax-deductible, too. Homeowner's insurance ranges from 1 to 2 percent a year. If we assume a 1 percent homeowner's insurance policy, the premiums are 1200 to 1300 dollars a year. Property management fees are tax-deductible business expenses. If the rent on our 130,000 investment property is 1300 dollars a month, you’ll pay roughly 130 dollars a month or 1560 dollars a year for someone else to collect the rent.

All the costs associated with property acquisition can be written off. This list includes title insurance, legal fees, real estate agent commissions, transfer taxes, back taxes, and closing costs. Don’t be afraid to hire a real estate attorney if it helps you avoid major mistakes. The cost of asking a professional about the tax benefits of investing in real estate is tax-deductible, too.

Property taxes vary wildly across the country. Some states lack a property tax, while the rate may be negligible on rural properties. The average property tax rate in the US is 1.2 percent. This translates to a $1,560 property tax bill for homeowners. Unfortunately, that’s factoring in the homestead exemption property tax investors don’t get.

Assume a $2,000 to $2,400 a year property tax bill. The property taxes you pay offset the potential income taxes you would owe if your real estate properties are held by an LLC. Or they’re treated as a business expense for you as a private investor, reducing the taxable income you’ll owe on the property. Note that you’ll still enjoy the same tax benefits of real estate investing if it is held in a private LLC as held in your name.

What Are Tax Benefits of Real Estate Investing?

Everyone pays property taxes, but how much tax you pay can be reduced by utilizing certain tax breaks available in real estate. Let's now discuss each of these tax benefits in detail and how to use them to maximize your savings.

Depreciation

What is Depreciation?

One of the greatest tax deductions real estate investors enjoy is depreciation. Like any other asset residential real estate is also an asset that breaks down over time. Depreciation is a deduction taken on materials that break down. The IRS uses depreciation to acknowledge that an asset wears down over time. It is like an allowance given for exhaustion or wears and tear of the property, including a reasonable benefit for obsolescence. Depreciation is charged in different years for residential and commercial property. For residential properties, it is calculated in 27.5 years, and for commercial, the same is 39 years.

It is an incredible benefit given by the IRS to real estate investors. Even though anything that breaks down on the property can be deducted, we all know that property values generally go up over time. Therefore, depreciation on real estate is often known as a “phantom deduction” because although we deduct the cost, the actual loss never really occurs.

How is Depreciation Calculated?

Depreciation is charged by the method named (MACRS) Modified Accelerated Cost Recovery Method. In MACRS the residential rental property and structural improvements are depreciated over 27.5 years, while appliances and other fixtures are depreciated over 15 years. Whatever is the cost of your residential property (excluding the cost of the land), it will be spread out over 27.5 years and deducted every year.

Note that you can only depreciate the building, not the land.

For simplicity’s sake, we’ll say the land is worth 30,000 dollars while the house is worth 100,000 dollars, which will be spread out over 27.5 years.

This means you would divide $100,000 by 27.5 = 3636.36. Hence, you can deduct $3636.36 every single year for the next 27.5 years on your investment property.

And that much of the profits from the property are shielded from income taxes because it is offset by the presumed losses from depreciation. This is separate from the tax-deductibility of actual repairs like replacing the roof or dead air conditioner.

If you made major improvements to the property, such as the fixer-upper scenario, those improvements are included in the depreciation. If you bought the house for 130,000 dollars and made repairs and renovations that made it worth 180,000 dollars, you have an additional 50,000 dollars of cost basis to use for depreciation purposes.

Note that minor repairs like a new hot-water heater or patched roof don’t count in depreciation.

Important Tips About Using Depreciation as a Tax Benefit in Real Estate

Depreciation will start the moment the property is officially available for occupancy.
This means depreciation doesn’t start the day you bought the property but the day you started trying to sell it or find a renter.
Conversely, it means you can claim depreciation even if the property is vacant for several months.
Depreciation ends if you sell it, exchange it or retire it from service as a rental property.
For example, you can’t claim depreciation if you move into it and make it a permanent residence.
The catch in depreciation as a tax benefit of real estate investment is that when you sell the property, that entire deducted amount may be taxed at a 25% rate, in addition to any other capital gains taxes.
However, if you didn’t make money on the sale, then IRS will not tax your old depreciation amount.

Lower Capital Gains Tax

Capital gains are the profits you make when you sell a property. One of the tax benefits of real estate investing is that there are lower taxation rates on your capital gains. The gains that investors get from selling their investment property for sale are termed capital gains which are of two types as mentioned below.

Low tax rates on capital gains are an advantage if you build your long-term investment strategy around strategically selling real estate for growth or living expenses. Generally, in all tax brackets, capital gains taxes are considered better than the equivalent income tax on your ordinary income.

Short-Term Gains: The gains that are received from investment properties that are held for less than one year are called short-term gains. Investors have to pay tax according to the bracket under which they fall. There is no special tax benefit in real estate for short-term capital gains.
Long-Term Gains: The gains that are received from investment properties that are held for more than one year are termed long-term capital gains. The tax rate is lower in the long-term capital gains because of which investors prefer the latter over the former. The long-term capital gains tax is either 0%, 15%, or 20%, depending on what income tax bracket you are in.

1031 Exchange

As a real estate investor, you can use this tax code called 1031 Exchange to sell a property and use the profit to buy a new one that is of equal or greater value. In this way, you can defer paying taxes until that next property is sold or you can opt for another 1031 Exchange. When you choose to sell your property, you are required to pay taxes for your capital gains.

With the help of section 1031 of the Internal Revenue Code, you are permitted to postpone paying taxes when you reinvest those gains in another property. IRS considers that you are exchanging your old property for another real estate property. This is one such type of swap in which there is no tax paid; it is deferred legally.

Here are some of the factors which the 1031 exchange must meet.

The property which has been replaced and the property or properties bought in its place must have the same or greater value.
The IRS requires that you identify the property you plan to buy within 45 days and you also must close on that property within 180 days.
The properties included in the transaction must be similar. A real estate property cannot be exchanged for some other type of asset, such as a real estate investment trust (REIT).
The exchanged properties should be used for any productive purpose in business such as for investment.
Any cash or property received through the transaction that is not considered like-kind property is considered boot and is subject to taxation. Therefore, you can touch the cash. You must use an intermediary who will hold onto the cash while you wait to close on the new deal. If you do want to take out some of the profit, that amount will be taxed.

No FICA Tax

The Federal Insurance Contributions Act helps in the splitting of tax between the employee and the employer, and the rate of tax is 15.3%. If you are self-employed and have no employer, you are responsible for the full 15.3%, which is known as Self-Employment Tax. Now you might be thinking what is the tax benefit here for real estate investors?

The US Government does not currently look at rental real estate as a job or self-employed business. Therefore, a rental property income is not generally taxed as “earned income” and does come under FICA. Remember, it depends on how you earn from real estate. If you own a holding company and draw a salary, you would come under FICA.

Tax Benefits From Refinancing Your Mortgage

Refinancing is also considered one of the tax benefits of real estate investment. Exchanging your old mortgage with a new one at a new interest rate is known as Refinancing your Mortgage. Refinancing provides the borrower with fresh money at lower interest rates due to which the homeowner can lower his/her monthly payment amount.

As he/she obtains the loan at a lower rate of interest and consolidates all the debts, he/she now has to pay only one loan amount, which is obtained at a lower rate of interest and is left with some cash in hand. You don’t need to pay taxes on this. You’ll need to pay taxes when you sell the property, but you can use that money right now with no tax at all. The cash in hand after refinancing is non-taxable.

How Do You Take Advantage of These Tax Breaks?

The simplest approach is to document all of your expenses from property repairs to ongoing maintenance to insurance to taxes. Track one-time expenses like the cost of listing it for rent or sale. Your accountant will total up these expenses to determine your total business expense write-off. More importantly, what you pay your attorney or accountant to manage your business is also a tax-deductible business expense. The costs of acquiring and fixing up a property occur on a case-by-case basis.

Let’s jump to the tax calculations for the second year of ownership. We’ll use conservative estimates, though you might keep costs down.

Property taxes – $2000 a year

Depreciation – $4000 a year

Mortgage interest – $6000 a year

Property management – $1560 a year

Repairs – $2000 a year

Insurance – $1300 a year

Legal and tax preparer fees – $500 a year

That totals up to $16,860 a year in expenses. We already estimated an income of $1,300 a month every month or $15,600 a year. In this case, you’d owe no income tax on the property. If you were charging $1,500 a month in rent, you’d pay a little more in property management fees but only have to pay income taxes on $2,000 a year. In reality, you’re clearing closer to $6,000 a year, because you aren’t paying for the property’s depreciation. Know that these are rough, back-of-the-envelope calculations regarding the tax benefits of real estate investing. The costs and benefits of owning a particular property should be done on a case-by-case basis.

How Can You Lower Your Tax Bill as a Real Estate Investor?

Hold the property for more than a year to reduce capital gains taxes on the property’s appreciation. This makes a fix and rents a better strategy than flipping houses. You could even buy run-down properties, fix them up, manage them for 13 months, and then sell them to another investor. Just don’t get yourself classified as a dealer instead of an investor, because the self-employment category will double your FICA taxes.

Another option is owning the property as a legal liability corporation. You can receive the profits from the LLC, but you are personally shielded from lawsuits. You have some control over when you sell the property or pay the property taxes. Run the numbers. You might want to delay paying the property tax bill until January next year to offset the profits if you had a major repair bill this year.

If you sell the property, you’ll owe capital gains taxes. A like-kind exchange under Section 1031 of the tax code allows you to defer paying these taxes. Always work with a good real estate tax advisor to handle such a rollover. Another option is selling the property to the tenant or another investor under an installment deal. It lets you write off the value of the property with each installment, though you run the risk of only owning half a house if they default.

In theory, you can reduce your tax bill by borrowing against properties you own to buy new properties rather than selling them, too. On the other hand, you don’t want to pay more for repairs, services, or financing to get a tax write-off. For example, you’re not saving money if you pay the bank an extra 1000 dollars to get a 250 dollar tax write-off.

Set up a dedicated home office that you only use for work. Then you can deduct part of your mortgage and utilities as a business expense. Get organized. For example, you should keep track of mileage and travel costs, so you can include them as business expenses on your taxes. Document what you pay to attend real estate investing seminars or software you buy to run your business.

For simplicity’s sake, set up a bank account that is only used for managing rental properties. Rent is deposited into the account, and you only pay expenses for the rental properties out of that account. Then you don’t accidentally try to write off personal home repairs. However, this approach does make it difficult to write off a home office.

Concluding Thoughts on Tax Benefits of Real Estate Investment

Real estate investing enjoys many tax benefits. It is one of the most tax-advantaged investments compared to other investments. It depends on the investors and how they utilize these investments to the best of their advantage. It requires careful planning and effort to maximize your tax deductions while remaining in compliance with the complex regulations involved. One can attain financial freedom by learning the right way to invest in the real estate industry. It is wise to hire a good CPA or tax expert who will save you more money than they cost. They will help you in plotting your tax strategy because the US tax code is quite complex and it is difficult to understand all the rules and regulations.

Tax Benefits of Real Estate: Places Where You Can Reap Maximum Benefits

Here are some of the best states in the U.S. for owning a property. This list takes into account median home values as well as state and local tax rates, including income tax rates, and property taxes as a percentage of market value or assessed tax value (whichever is applicable). If you buy a property or live there, it’s an excellent investment. We have listed each state's effective property tax rate, median home value, and calculated annual taxes on median home values —for an easier understanding of these tax rates.

The tax rates have been taken from Smartasset.com and median values have been taken from Zillow.com.

1. Alabama

Alabama has both a low tax rate and home prices that are well below the median home value in the U.S. For residential property, the assessed value is 10% of the appraised (or market) value. So, for example, a home with an appraised value of $100,000 would have an assessed value of $10,000. We have taken the median home value as an assessed value without any exemptions.

Median Home Value: $143,072
State Income Tax Rate: 2% – 5%
Avg. Effective property tax rate: 0.42%
Annual Property Taxes: $600

2. Nevada

Nevada's average effective property tax rate is just 0.69%, which is well below the national average of 1.08%. There are numerous tax districts within every Nevada county. County Assessors are required to reappraise all property at least once every five years. The assessed value is equal to 35% of that taxable value. Thus, if your County Assessor determines your home’s taxable value is $100,000, your assessed value will be $35,000. Tax rates apply to that amount. We have taken the median home value as a taxable value without any exemptions.

Median Home Value: $309,730 (Zillow)
State Income Tax Rate: 0%
Avg. Effective Property Tax Rate: 0.69%
Annual Property Taxes: $2,137

3. Florida

The state of Florida's average effective property tax rate is 0.98%, which is slightly lower than the U.S. average of 1.08%. Property tax rates are applied to the assessed value, not the appraised value. The most widely claimed exemption is the homestead exemption. Let’s say you have a home with an assessed value of $100,000. The first $25,000 would be exempted from all property taxes.

The next $25,000 (the assessed value between $25,000 and $50,000) is subject to taxes. Then, the next $25,000 (the assessed value between $50,000 and $75,000) is exempt from all taxes except school district taxes. Finally, the remaining $25,000 is also taxable. We have taken the median home value as an assessed value without any exemptions.

Median Home Value: $252,309
State Income Tax Rate: 0%
Avg. Effective Property Tax Rate: 0.98%
Annual Property Taxes: $2,472

4. Louisiana

Louisiana has the third-lowest effective property tax rate of any U.S. state. Only Alabama and Hawaii residents pay less on average than residents of Louisiana. For residential property in Louisiana, the assessed value is equal to 10% of the market value. So if your home has a market value of $100,000, your assessed value would be $10,000. It offers a homestead exemption on the first $7,500 of the value of a person’s primary residence (does not apply to city taxes). We have taken the median home value as an assessed value without any exceptions.

Median Home Value: $170,388 (Assessed Value)
State Income Tax Rate: 2% – 6%
Avg. Effective property tax rate: 0.52%
Annual Property Taxes: $886

5. Texas

The average effective property tax rate in Texas is 1.83%, well above the national average of 1.08%. A property appraisal is done annually by county appraisal districts. Tax payments are based on the current market value of a property. However, some exemptions help lower property taxes in Texas. Most popular are homestead exemptions which reduce property taxes for all homeowners by removing part of their home's value from taxation. Only a homeowner's principal residence qualifies for it. It exempts at least $25,000 (for school districts) of a property’s value from taxation. We have taken the median home value as the current market value with Homestead Exemptions of $25,000.

Median Home Value: $211,199
State Income Tax Rate: 0%
Avg. Effective Property Tax Rate: 1.83%
Homestead Exemptions: $25,000
Annual Property Taxes: $3,407

You can also click on this link to read our blog on how to be a successful real estate investor. This blog will teach you how to succeed in your first real estate investment, going with a moderate pace, learning much, and being ready to leave any enticing opportunity that comes your way.

REFERENCES

Median home values
https://www.zillow.com

Effective tax rates
https://smartasset.com

Tax advantages
https://www.investopedia.com/articles/investing/060815/how-rental-property-depreciation-works.asp
https://www.fool.com/millionacres/taxes/real-estate-tax-deductions/top-5-tax-advantages-real-estate-investing
https://www.usatoday.com/story/money/personalfinance/2017/04/16/comparing-average-property-taxes-all-50-states-and-dc/100314754

How to take advantage or maximize tax benefits
https://www.moneycrashers.com/lower-taxes-real-estate-investor
https://www.homeunion.com/how-to-claim-real-estate-taxes-and-deductions
https://smallbusiness.chron.com/calculate-value-investment-property-4122.html
https://finance.zacks.com/much-spend-investment-property-vs-potential-rental-income-10487.html

Commercial vs Residential Real Estate Investing in 2023

May 18, 2023 by Marco Santarelli

In the debate between residential vs commercial real estate investment, many ask, “Which is better?” The answer depends on a variety of factors such as your budget, your existing area of expertise, and your risk tolerance. We’ll explain how each of these factors can help you decide which is better in your case.

Residential or commercial real estate investing is more than just buying a home or looking for an investment property. Do you think it is easy to predict success in a real estate business, where circumstances keep fluctuating now and then? To some extent, the possible hindrances can be controlled with a set of ground rules which you need to implement on your next residential or commercial real estate investing deal.

Benefits of Residential Real Estate Investment

It is far easier to get a loan for residential real estate than commercial real estate because the residential real estate market is considered much more stable. Individuals and families always need a place to live. Businesses can more easily move, and you can lose far more money by picking a bad commercial tenant than a family that misses the rent one month. This means residential vs commercial real estate investing favors residential real estate if you don’t have experience vetting tenants.

People will forgo credit card bills and cut their budgets to avoid being evicted. Commercial tenants may miss the rent for months, and it is difficult to evict them. Furthermore, you could lose commercial tenants whose bankruptcy costs you months of back rent. This means you’re more likely to continue seeing rental income from financially stressed apartment dwellers than commercial tenants.

This makes residential real estate safer than commercial real estate during a financial downturn. It may go down in value and see more skipped payments than before, but it won’t go down in value or cash flow as much as an empty strip mall. Residential real estate may be filled quickly when someone is evicted. Perhaps you put the rental property on a short-term rental site to cater to tourists coming next weekend.

Or you lower the deposit to get a tenant in at the start of the next month. It can be hard to find a new commercial tenant. Residential real estate thus comes with less risk to the landlord that they’ll go months without cash flow from the property. Residential real estate has better long-term average growth. The property value automatically increases with inflation, and rents are easily increased at the rate of inflation, as well.

With commercial tenants, you may be locked into a set rental rate for years based on the contract you signed. In the residential vs commercial real estate investing debate, residential wins if you have limited cash. You can buy one or two houses for less than it takes to buy a strip center or store. The residential vs commercial real estate investing debate is often moot if you end up renting out your old house or inherited property.

The residential vs commercial real estate debate tends to focus on cash flow numbers. However, when you’re deciding between residential vs commercial real estate, recognize that you probably have more expertise transferable to residential real estate investing. Many contractors know how to renovate homes. This makes them qualified to buy fixer-uppers, repair them and sell them for a profit.

All they have to do is get a handle on the financial side and the marketing of property for sale. An apartment manager is better suited for the residential side of the residential vs commercial real estate debate. You already know how to vet tenants, collect rent and handle late-night calls for plumbing repairs. In general, new investors can find more resources for investing in residential real estate over commercial real estate.

You have to be careful not to renovate a property to look like a dream home that’s more expensive than what the market would bear. However, as a resident, you have more understanding of the residential real estate market than the commercial one. You would also be better able to understand the business fundamentals when you loan someone money to rehab a house or invest in a real estate investment trust over buying shares in a new commercial property.

Residential real estate is generally more liquid than commercial real estate. You’ll always have more buyers for a single-family home than a storefront. You’ll have more potential investors for a small triplex or ten-unit apartment building than for a strip center.

Tax Benefits of Residential Real Estate Investment

Property taxes do affect profit but it highly depends on whether you are a professional or a passive investor. If you are a professional investor, your losses are fully deductible against all income; otherwise, it is only deductible up to $25000 against your rental income. This incurred loss which exceeds $25000, can be carried forward to the following year.

Operating expenses such as mortgage interest, property management fees, property taxes, and repair & maintenance can all be claimed as deductions against rental income.

Real estate profits are not taxed until you sell the property. For example, if you purchase a home for $150,000 and it appreciates to $200,000, the $50,000 gain is protected from taxes until you sell the property.

Rental property owners may assume that anything they do on their property is a deducible expense, but that is not true according to the IRS. The money you receive for rent is generally considered taxable in the year you receive it, not when it was due or earned; therefore, you must include advance payments as income.

Benefits of Commercial Real Estate Investment

Commercial real estate investment can be much more profitable than residential real estate. For example, you can charge much higher rents per square foot in desirable properties, because the tenants are generating revenue from the property. You may be able to reduce your expenses by offering a modest discount on the rent in exchange for a triple net lease.

If they pay the insurance, property taxes, and rent, you’ve dramatically reduced your bookkeeping labor and your expenses. Just make sure they actually pay the insurance and property taxes. If you already run a commercial business, the commercial side of residential vs commercial real estate investing is the better choice for you. You could start by subleasing offices or a corner of your storefront.

You might lease half of the store to a complementary business. If you move into a larger building, you may get experience in commercial real estate by subleasing space before you use it. This sets you up for success on the commercial side of the residential vs commercial real estate investing debate. Buy your building and sublease it out, and you’re on the commercial side of the residential vs commercial real estate investing argument.

Commercial properties tend to be expensive, whether someone is building an office building or mega-mall. This leads many commercial property developers to issue shares. This is why you find as many or more commercial property real estate investment trusts than residential ones. Residential real estate investment trusts exist, though they tend to focus on apartments over single-family homes.

Commercial REITs typically have a higher rate of return, and this form of commercial real estate investing is more liquid than either shares of a commercial property or ownership of a single-family home. Commercial real estate investment can often give you more flexibility. When you buy commercial REITs, you can choose funds that specialize in medical real estate, office space, or other niches.

And you can choose to focus on a particular niche, as well. Upgrade a storefront and aim at a particular industry when seeking renters. Rehab offices near a hospital and cater to medical service providers. Conversely, you could snap up a building that has a particular purpose such as a restaurant, revamp it, and rent it out to a more successful chain in the same industry. You can choose which industry you cater to by choosing the property.

Should You Invest in Residential or Commercial Real Estate?

If you don’t have experience in real estate investing, we recommend residential real estate. If you have experience managing commercial properties, then commercial wins over residential real estate investing. If you have limited cash or low-risk tolerance, then we recommend residential vs commercial real estate.

Let’s go through the two main guidelines which are inevitable if you wish to succeed in residential real estate investing.

1. Look For a favorable Growth Market

If you are a seasoned real estate investor, you will definitely have importance for a healthy market environment, but if you are a newer investor, you will need to shed some light on this factor. It can go even worse if you have purchased a property with an adjustable-rate mortgage because sometimes the interest rates keep rising and you will end up paying more even if you can’t afford it. Such situations alleviate the demand for the entire real estate market in particular locations.

2. Always Be Particular About The Location of Investment Property

If you find a location with falling interest rates, manageable GDP growth, and good employment rates, then you can start looking for a smart property to invest in. Analyze and research the location before investing in any residential real estate property.

Types of Residential Real Estate Investing

Well, the desired investment is found in an ideal city that is expanding in many different factors related to the real estate market. If after proper analysis, you find the market conditions look vague, it is recommended to play safe by sticking to a particular location that is familiar to you.

1. Fix and Flip

Fix and flip is a great choice if you have been in the business for a long time, or consider consulting a real estate investment adviser to get proper guidance. You need to cherry-pick the best deals from real estate auctions, hire contractors to rehab the properties, and sell them for top dollar to an investor. Rehabbing a property adds value to it.

When you buy a property to fix and flip, the increase in its value is significant and you can profit by selling it immediately. Renovating the property will reap great profit (when you sell it). Most investors don't have the ability or time to take every necessary step an accomplished fix and flipper can, and will happily pay more to get a property that doesn't require rehab.

2. Rental Property Investment

Yes, you should go for a single-family rental home if you are looking for a small and affordable investment. It is easy to exit, unlike a multi-family rental property which will make you think twice due to heavy investment. Managing a rental property is quite simple if you hire an efficient property management team around the city.

They not only maintain your property but also help you in finding the best-suited tenant who is vetted and would less likely default on timely rent payment. Click on the link to know How To Buy Rental Properties With No Money Down.

Location is an inevitable factor in the residential real estate investing business it is further linked to various factors like employment opportunities, population, and affordability (which determines profit). Below listed are few locations which will justify this statement and further motivate you to look out for the best location to invest in residential real estate.

Your first investment property can be quite lucrative if you prepare adequately. Before starting in Real Estate Investment, do research all about the property and location a lot. Using a real estate agent can help you a lot in real estate investing. The benefit of using a real estate agent is that they have a formal education, years of experience, and neighborhood knowledge.

An agent will help in price negotiation, give you market conditions and forecasts. A real estate agent will help the buyer in finding the right property at a good price which is a critical factor to succeed in real estate investment. While hiring an agent you must find out how many transactions do they close a month/year. How much is the commission? (If you are a seller. Buyers aren't charged commission.)

How popular is their website and where do they usually get their leads? How long have they been a realtor/agent? It's also very important to check if they can respond to your questions/requests within a reasonable amount of time. Another tip, look at different Realtors in your area and compare them.

You will find their reviews on sites like Zillow.com and Realtor.com. Most real estate agents stay in business because satisfied clients refer them to friends, family, neighbors, and coworkers. Ask the people around you who they have used and ask them to describe their experiences with that real estate agent.

For 2021, real estate market analysts agree that the outlook is very bright, particularly in certain markets. Different experts will give you different opinions on which market is the best, but most top ten lists have many of the same cities listed. For instance, some experts list expensive markets like Sacramento and San Jose Metro Areas as their top picks while some have Las Vegas at the top of its leader board.

Other cities that are lucrative for investing include Dallas, Nashville, Raleigh-Durham, and Salt Lake City. Each city has assets that make it attractive to new residents and new investors. Those assets add up to a very bright future for the real estate market in their specific area. The market information for these cities is based on predictions and forecasts for 2021.

If you are interested in buying rental properties and portfolios at this time, you can choose the Houston Housing Market. Houston has everything: the people, the diversity, the business climate, being world-renowned in energy, medicine, space, and manufacturing, and above all a booming real estate market.

1. Benefits of Residential vs Commercial Real Estate Investing in Las Vegas

Las Vegas is a much lower cost of living area and features very good investment potential as well. Median home prices are at $285,045 with sales growth rising at 4.9% and prices increasing at 6.9%. The economy in Las Vegas is growing at 8.7% compared to 6.4% growth for the rest of the top 100 cities.

The high demand was followed by an increase in population, as well as an overall improvement of the economy in the area. All these factors have had a huge impact on the Las Vegas housing market, which is considered one of the hottest markets in the US at the moment.

Some of this growth is being fueled by California residents who have sold more expensive homes, maybe due to retirement, and are looking to move to a lower cost of living area. They have a lot of cash from the sale of those more expensive homes that they can spend in the Las Vegas real estate market.

2. Benefits of Residential vs Commercial Real Estate Investing in Seattle

Seattle housing market is another area with continued strong growth. Amazon has plans for expansion projects that would occupy 12.8 million square feet by 2022. Other large-scale projects either newly completed or under construction, help explain the 100,000 new residents since 2010, with most of those coming in the last four years.

Those factors help position Seattle with 102,212 job openings to go along with a median household income of $78, 623 and a home value growth forecast of 5.4%. Median home prices are at $650,000, up $200,000 since 2014. Filling those job openings will continue to bring new residents to the Seattle area, which is a good sign for the residential real estate market.

Seattle home prices rose faster in October 2019 than they have for a year. In Seattle, October prices rose 3.3% from a year ago, to $775,000 — the largest percentage increase in 12 months. Tacoma was crowned the nation’s hottest housing market in May. Since then, other midsize cities in Washington state have overtaken their growth.

3. Benefits of Residential vs Commercial Real Estate Investing in Denver

Denver housing market shows attractive investment potential. The Denver real estate market hasn’t fully transitioned into a buyer’s market yet. But it’s shifting in that direction. Despite the big gains in housing stock, the Denver area is still very much a seller’s market. Denver-area home prices are holding steady year-over-year and inventory is increasing significantly.

The number of homes for sale in the Denver metro area was up significantly in April 2019 and the median sold price remained unchanged year-over-year, according to the latest data from the Denver Metro Association of Realtors. The tech industry continues to expand, attracting well-paid employees to fuel the growth of the real estate market. Any time you have an expansion of this nature, it drives residential real estate purchases and helps increase property values.

The median home value in Denver is $422,400. Denver home values have gone up 1.4% over the past year and their Denver real estate market prediction is that the prices will fall -0.3% within the next year. The median list price per square foot in Denver is $375, which is higher than the Denver-Aurora-Lakewood Metro average of $268.

The median price of homes currently listed in Denver is $475,000 while the median price of homes that sold is $420,900. The median rent price in Denver is $2,195, which is higher than the Denver-Aurora-Lakewood Metro median of $2,100.

4. Benefits of Residential vs Commercial Real Estate Investing in Portland

Portland comes in with a median household income of $68,676 and 44,845 job openings. The median home value is at $370,700 with an increase of 3.7% forecast. One of the things that will fuel Seattle’s growth is the development of the Zidell yards.

This 33-acre industrial site in the South Waterfront district is set for redevelopment. Plans include several parks, plazas, 2200 residential units, and a waterfront. Nike is planning a 1.3 million-square-foot expansion and there are other expansion products in the city.

5. Benefits of Residential vs Commercial Real Estate Investing in Dallas

The population of Dallas is expected to double in the next 15 Years. It is one of the leaders in the U.S. for employment and population growth. 52.9% of Dallas rents vs. 33% nationally. You will find newly remodeled REOs (2004 or newer). Turnkey rental properties are available at 5% – 15% below market value with a 3-year appreciation forecast of 11.4%.

You should invest in Dallas real estate because Zillow.com ranked Dallas at number 12 on the list of the best places to live in the country in 2017. Dallas housing market is shaping up to continue the trend of the last few years as one of the strongest markets in the United States.

According to Zillow.com, the median home value in Dallas is currently $213,400. Dallas home values have risen by 8.1% over the past year and their Dallas real estate market forecast is that the prices will continue to rise by 4.5% within the next year.

Dallas’s local economy is a mix of aerospace, computer chips, telecommunications, transport, energy, and healthcare sectors and the Finance and Business Services. These sectors are all providers of good wages which allows for a strong market for Dallas investment properties. For a more in-depth review of the Dallas Real Estate Market, click the link.

6. Benefits of Residential vs Commercial Real Estate Investing in Atlanta

Located in the state of Georgia, the city of Atlanta is a hotspot for any type of real estate investment. Atlanta has shown promising population growth and employment, which are two signs of a healthy real estate market. You can purchase investment properties in Atlanta for as low as $127,000. Comparing that to the national average, which is $152,000, that’s a pretty significant deal!

Atlanta is one of the top rental markets in the U.S. You can get newly rehabbed properties with tenants. The price of the properties starts at $70,000 with up to $750/mo cash flow. 500 people move to Atlanta every day! 2 million more people are expected by 2030. Real estate properties have a 3-year appreciation forecast of 9.3%. For a more in-depth review of the Atlanta Real Estate Market, click on the link.

7. Benefits of Residential vs Commercial Real Estate Investing in San Jose

San Jose looks to have a median household income of $110, 040 and a median home value of $1,128,300 with an increase of 8.9% in home value. Unemployment is extremely low and there is a lot of job availability, making this a very attractive real estate market.

If you are an investor, San Jose real estate has a proven record of being one of the best long-term investments in the country. Based on the last twelve months, real estate investors in San Jose, CA have found very good returns. Any housing market will see a large and generally well-funded population of renters if there is a university in town.

San Jose has several that attract students from around the world. Investors in the San Jose real estate market could buy up properties to rent out to the thousands of engineering and computer graduate majors attending the University of California Berkley campus, UC Santa Cruz, Stanford University, Santa Clara University, and California State University.

8. Benefits of Residential vs Commercial Real Estate Investing in Orlando

Orlando has added more than 1,73,900 jobs since the recession with a growth rate of 3.2% every year for the next 10 years. Over the past 5 years, it has grown 217% faster with the increasing job opportunities. Even if this place is one of the most popular locations which is in demand for real estate, you can still find affordable and spacious houses.

Orlando housing market is shaping up to continue the trend of the last few years as one of the strongest markets in the United States. The Orlando real estate market forecast is that the prices will rise by 8% to 10% in 2021. Orlando is the new hub for many young professionals especially those with various types of technological expertise, including engineers and IT professionals.

This city has experienced annual job growth of around 4.4% and is also one of the fastest-growing metro areas in the country. The city is also set to experience its highest job growth rate in the 10 years to come. A market with high job growth is a great market for real estate investment as well within the next year.

9. Benefits of Residential vs Commercial Real Estate Investing in Tampa

Tampa metro area is considered among the top-performing cities in the US. It is listed in the top 20 fastest-growing metros in the US. It has 4 million people and has the potential to cater to more migrants. Tampa real estate may look a bit pricey, but if you make a detailed analysis before investing you can get hold of deals as low as $90,000. There are several nature parks, landmarks, museums, and eateries for tourists to visit in Tampa.

Tourist influx also means an increase in short-term residential contracts, which is a selling point of the Tampa real estate market in 2018. Main tourist attractions include Big Cat Rescue, Busch Gardens Florida, Eureka Springs Park, and Tampa-Bay History Center among many others. Growing tourism has a tremendously positive effect on the real estate in Tampa FL.

10. Benefits of Residential vs Commercial Real Estate Investing in Jacksonville

Jacksonville, Florida is ranked 3rd in Forbes magazine in terms of job availability. The population has increased 24% since 2000 and continues to grow 2% every year. Here the price is too reasonable and as low as 23% compared to the national average. Hence, Jacksonville is highly recommended for investing in residential real estate.

Commercial vs Residential Real Estate: The Conclusion

Buying or selling real estate, for a majority of investors, is one of the most important decisions they will make. Choosing a real estate professional/counselor continues to be a vital part of this process.

They are well-informed about critical factors that affect your specific market areas, such as changes in market conditions, market forecasts, consumer attitudes, best locations, timing, and interest rates.

NORADA REAL ESTATE INVESTMENTS strives to set the standard for our industry and inspire others by raising the bar on providing exceptional real estate investment opportunities in the U.S. growth markets. We can help you succeed by minimizing risk and maximizing profitability.

This article aimed to educate investors who are keen to invest in residential real estate in 2021. Investing in real estate requires a lot of studies, planning, and budgeting. Not all real estate is solid long-term investments. We always recommend doing your own research and take the help of an expert counselor.

References

https://www.biggerpockets.com/blog/NNN-deal
https://www.investopedia.com/articles/mortgages-real-estate/10/real-estate-investment-trust-reit.asp
https://www.biggerpockets.com/member-blogs/1395/11003-triple-net-lease-properties-returns-are-more-favorable
https://www.forbes.com/sites/marcprosser/2017/07/19/data-proves-reits-are-better-than-buying-real-estate/#3fe75799d6b7
https://www.investopedia.com/articles/mortgages-real-estate/09/residential-real-estate-invest.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

Archives for May 2023

What Is The Capitalization Rate?

Cap Rate Calculation Example

Using a Cap Rate Calculator in Real Estate

Benefits of Using a Cap Rate Rental Property Calculator

Drawbacks of Using a Cap Rate Rental Property Calculator

What is Cash-on-Cash Return?

Difference Between Cap Rate and Cash-on-Cash Return

How to Use Cap Rate as a Rental Property Investor?

Commonly Asked Questions About Cap Rate

What is a Good Cap Rate?

What Does a 7.5% Cap Rate Mean?

What is an Acceptable Cap Rate?

Is Higher Cap Rate Better?

Why is a Higher Cap Rate Riskier?

Is Cap Rate the Same as ROI?

How to Calculate Property Value using Cap Rate & NOI?

13 Tips On How To Buy Your First Rental Property

1. Buy Rental Property In The Best Location

2. Choose The Right Rental Property Markets

3. Buy Rental Property Using Leverage

4. Choose a Single-Family House When Buying a Rental Property

5. Screen Tenants For Your Rental Property

6. Learn About Short Term Rental Restrictions

7. Do the Math For Your Rental Property

8. Buy Rental Property With A Good Rate of Return

9. Consult Real Estate Finance Professionals

10. Get A Written Lease Agreement For Your Rental Property

11. Outdoor Space is a Bonus

12. Balance Your Risk

13. Buy What You’re Familiar With

Let Us Help You In Buying Your First Rental Property

Top 10 Features of a Profitable Rental Property

1. A Property Worth Your Money

2. A Neighborhood With Favorable Clients and Low Vacancy Rates

3. A Safe And Secure Neighborhood

4. Presence of Schools With High Ratings

5. Presence of Physical and Social Amenities

6. Adequate Transport Facilities

7. Adequate Sanitation

8. Favorable Climate

9. Areas Devoid of Natural Disasters

10. Favorable Property Taxes

How To Find A Profitable Rental Property For SALE

What Are Tax Benefits of Real Estate Investing?

Depreciation

Lower Capital Gains Tax

1031 Exchange

No FICA Tax

Tax Benefits From Refinancing Your Mortgage

How Do You Take Advantage of These Tax Breaks?

How Can You Lower Your Tax Bill as a Real Estate Investor?

Concluding Thoughts on Tax Benefits of Real Estate Investment

Tax Benefits of Real Estate: Places Where You Can Reap Maximum Benefits

Benefits of Residential Real Estate Investment

Tax Benefits of Residential Real Estate Investment

Benefits of Commercial Real Estate Investment

Should You Invest in Residential or Commercial Real Estate?

1. Look For a favorable Growth Market

2. Always Be Particular About The Location of Investment Property

Types of Residential Real Estate Investing

1. Fix and Flip

2. Rental Property Investment

1. Benefits of Residential vs Commercial Real Estate Investing in Las Vegas

2. Benefits of Residential vs Commercial Real Estate Investing in Seattle

3. Benefits of Residential vs Commercial Real Estate Investing in Denver

4. Benefits of Residential vs Commercial Real Estate Investing in Portland

5. Benefits of Residential vs Commercial Real Estate Investing in Dallas

6. Benefits of Residential vs Commercial Real Estate Investing in Atlanta

7. Benefits of Residential vs Commercial Real Estate Investing in San Jose

8. Benefits of Residential vs Commercial Real Estate Investing in Orlando

9. Benefits of Residential vs Commercial Real Estate Investing in Tampa

10. Benefits of Residential vs Commercial Real Estate Investing in Jacksonville

Commercial vs Residential Real Estate: The Conclusion

Real Estate

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