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Investing
In South Bay Real Estate
There
are many ways to invest your money, and each has it's
own levels of risk and reward. Among one of the best
investments is in real estate. Whether the investment
is in a single family home, or a 12 unit apartment building,
owning real estate has a number of advantages, and often
not the same levels of risk.
As
with any investing, investing in real estate takes a
lot of time, education, and, of course, risk. But the
rewards can be the difference between barely getting
by and financial independence.
There
are plenty of benefits in real estate...see also Buying
your first investment property in the South Bay.
Cash
flow
Cash flow is the difference between your income and
your expenses on a piece of property. You can have a
positive or negative cash flow. Obviously, you'll feel
a lot better if the cash flow is positive.
My
advice on cash flow is this: Never use all of your positive
cash flow for rapid debt reduction. You will be walking
a thin line. By keeping a strong positive cash flow,
you will have more options and space to maneuver.
Appreciation
Appreciation is the increase in value of a property.
There are two kinds of appreciation. The first is from
economic conditions beyond your control, such as inflation.
The
second kind is market appreciation, which you can control.
When you improve a property (through renovations), you
force its value higher. You can purchase a piece of
property in need of repairs and bring it back up to
neighborhood standards or slightly higher; this will
give you a property that is much higher in value. In
addition, the South Bay has long been a very strong
real estate and investment market. The simple truth
is that there are only so many homes near the beach,
and the demand is generally high. The market tends to
appreciate more, and is less likely to drop in a down
market.
Leverage
Leverage is the ability to borrow a percentage of the
value of a piece of property. Real estate, in comparison
to other investments, offers a very high degree of leverage.
In some cases, a couple buying a single-family home
can obtain 95% financing. This allows individuals to
purchase real estate with little, if any, of their own
money, and it is this ability that allows the savvy
investor to develop a real estate portfolio by using
the appreciation of one property as the down payment
on another.
Amortization
With leverage, or the use of other people's money, comes
a repayment schedule. Your outstanding balance is reduced
with every payment you make. Part of each payment goes
to interest (applied first) and the rest goes to pay
off the principal. The principal reduction is called
amortization -- reducing debt. Hence, amortization can
make you wealthy, slowly and steadily.
Tax
advantages
Owning real estate with the goal of making a profit
allows you to deduct interest payments and other expenses
come tax time. But don't be fooled into buying real
estate for the tax advantages; rather, purchase it because
it makes economic sense to do so.
7
Important Questions Every Investor Needs to Ask
Are you effectively managing your investment portfolio
to make the most of its potential?
Here
are 7 good questions to ask:
- How
can I maximize the equity I have gained in recent
years and leverage it into a much greater real estate
portfolio with greater cash flow?
- How
can I reduce my investment risk factors by diversifying
my portfolio should the market adjust?
- How
can I reduce the stress and time I spend managing
my properties without sacrificing income or growth
potential?
- How
can I minimize or defer the tax burden for myself
and my heirs, and still grow my asset base?
- How
can I utilize the same strategies employed by large
institutional real estate investment firms?
- Am
I holding Title to my properties in a way to protect
me and my estate?
- Am
I utilizing the maximum amount of depreciation?
If you're not sure of the answers, please feel free
to call. As a real estate professional, I am here to
provide you and direction in these areas. In most situations,
investment properties amount to our most important and
lucrative investments. Doesn't it make sense to maximize
their growth and potential?
You
May Have Already Purchased Your First Income Property
With
the equity homeowners have built up over the last few
years, many begin to look toward “income property”
to expand the real estate portion of their portfolio.
There are many forms of “income property”,
residential, retail, commercial, industrial, lodging,
etc.. Let’s focus on the residential portion of
1-4
units.
- South
Bay Rental Market: One of the great aspects
of the South Bay residential real estate market is
the strength of the rental market. A residential “income
property” in our area is not just a 30-unit apartment
building. It could be an older duplex, it could be
a cute 950’s single family home or it could be
a brand new construction on The Strand. The demand
to enjoy the lifestyle of the South Bay will remain,
regardless of the interest rates and home prices.
Whether one buys or rents is the bottom line question.
- Low
Cost Basis: Those homeowners who are considering
moving and keeping their first home as a rental, many
times have low enough cost-basis on their current
home to make that happen. The lower cost-basis and
taxbasis often can be offset with current market rents.
With a plan for a long-term hold, a rental that barely
“breaks even” can still be a strong investment
because of appreciation (even with more normal appreciation
rates of 5%-8%).
- Depreciation:
There are other benefits to owning “income property”
such as depreciation offsetting rental income. Rental
property losses can also offset ordinary income; depending
on your tax bracket (see your CPA to see how the tax
code works for your specific situation). Income property
can be sold and “1031 Exchanged” into other
investment property tax-deferred.
- Growing
Tax Free Gains:
Continued growth of potential tax free gains is
another way use the strength of the local rental market
in your favor. Most homeowners are familiar with the
benefit of receiving up to $500,000 as a couple; $250,000
for a single person tax free from the sale of a primary
residence if you have lived there for 2 of the past
5 years. The key here is “2 of the past 5 years”.
As an example, say you have lived in your home for
more than 2 years, and have $300,000 in equity. You
can move and rent out your current home. If you sell
your original home
before the next 3 years, you would still meet the
“primary residence” requirement for the
Tax Code of living in the home for “2 of the
previous 5 years”. The potential benefit can
be nearly three more years of appreciation to increase
your equity closer to the $500,000 tax free maximum.
(ex: a current $900,000 home that appreciates 5% a
year could add @ $150,000 of tax-free equity). All
the while if you have been living in your new home,
you have begun the cycle again by starting “the
clock” on living in your new home. You are allowed
to take advantage of these tax free gains no more
than twice in five years, and no sooner than two years
apart.
Needless
to say, the long term strength of the South Bay rental
market is something that can play a positive role in
one’s portfolio. I always say, “Don’t
the landlords who have lived in the South Bay for many
years always seem to have a smile on their face”.
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