Effective tax year , you lose some of the capital gains tax exclusion if you sell your home and you had rented it out for a portion of the five year period prior to selling it. Also be aware that when you sell a home previously rented and are accounting for the sale on your tax return, you have to recapture the depreciation taken during the rental period. Note that many states also allow you to avoid state income taxes on the sale of your personal residence, using many of the same requirements as the federal tax laws.
Now, some cautions are in order here. This strategy is clearly not for everyone interested in making money from real estate investments. The expenses involved with buying and selling property — such as real estate agent commissions, loan fees, title insurance, and so forth — can gobble up a large portion of your profits. With most properties, the long-term appreciation is what drives your returns. Consider keeping homes you buy and improve as long-term investment properties.
Purchasing a vacation home Many people of means expand their real estate holdings by purchasing a vacation home — a home in an area where they enjoy taking pleasure trips. For most people, buying a vacation home is more of a consumption decision than it is an investment decision. They enjoyed taking trips and staying in various spots in northern New England and eventually bought a small home in New Hampshire.
Their situation highlights the pros and cons that many people face with vacation or second homes. The obvious advantage this family enjoyed in having a vacation home is that they no longer had the hassle of securing accommodations when they wanted to enjoy some downtime. Also, after they arrived at their home away from home, they were, well, home! Things were just as they expected — with no surprises, unless squirrels had taken up residence on their porch. A pipe can burst, for example, and the mess may not be found for days or weeks.
Unless the property is close to a kind person willing to keep an eye on it for you, you may incur the additional expense of paying a property manager to watch the property for you. If your second home is in a vacation area where you have access to plenty of shortterm renters, you or your designated property manager can rent out the property.
However, this entails all of the headaches and hassles of having many short-term renters. But you do gain the tax advantages of depreciation and all expenses as with other rental properties. Oftentimes in marriages, one spouse likes the vacation home much more than the other spouse or one spouse enjoys working on the second home rather than enjoying the home itself. The current tax code permits you to rent the property for up to 14 days a year — and that income is tax-free! Yes, you read that right.
And you can still deduct the costs of ownership, including mortgage interest and property taxes, as you do for all other personal properties. Before you buy a second home, weigh all the pros and cons. Also consult with your tax advisor for other tax-saving strategies for your second home or vacation home. And please see Chapter 18 for more tax related information on rental properties. Paying for condo hotels and timeshares Timeshares, a concept created in the s, are a form of ownership or right to use a property.
A more recent trend in real estate investing is condo hotels, which in many ways are simply a new angle on the old concept of timeshares. A condo hotel looks and operates just like any other first-class hotel, with the difference that each room is separately owned. The guests have no idea who owns their room.
Both timeshares and condo hotels typically involve luxury resort locations with amenities such as golf or spas. The difference between the traditional timeshare and condo hotel is the interval that the unit is available — condo hotels are operated on a day-to-day availability, and timeshares typically rent in fixed intervals such as weeks.
You can also find many foreign condo hotel properties in the Caribbean and Mexico, and the concept is expanding to Europe, the Middle East, and Asia. Two types of individuals are attracted to investing in condo hotels and timeshares.
One group is investors who believe that the property will appreciate like any other investment. The other group is people who use the condo hotel or timeshare for personal use and offset some of their costs.
When this unit is carved up into weekly ownership units, the total cost of all those units can easily approach four to five times that amount! To add insult to injury, investors find that another problem with timeshares is the high maintenance or annual service fees. Is it worth buying a slice of real estate at a to percent premium to its fair market value and pay high fees on top of that?
Many owners of timeshares find that they want to vacation at a different location or time of year than what they originally purchased. To meet this need, several companies offer to broker or sell timeshare slots. However, timeshare availability and desirability have so many variables — including location, time of year, and quality of the particular resort — that it has been difficult to fairly value and trade timeshares.
As a result, resort rating systems have been developed Resorts Condominiums International and Interval International are two of the most well known to compare resort location, amenities, and quality. The developers and operators of condo hotels love the concept because one of the most consistently successful principles of real estate is increasing value by fractionalizing interests in real estate.
As with timeshares, the developers are able to sell each individual hotel room for much more than they could get for the entire project. Condo hotel operators are able to generate additional revenue from service and maintenance fees to cover their costs of operations. Condo hotels allow their owners to stay in their units but often impose limits on the amount of personal usage.
Read on. Timeshares are packaged in a multitude of ways — some resorts offer fixed units where you vacation at the exact same unit every year either on set dates or set numbered weeks though the actual calendar date may vary. Some timeshares are available as biennial every other year so you can have some variety. Some offer fixed weeks, where you have the same week every year but may be in a different unit. The actual fee simple title of the real estate remains with the resort developer or management company.
The timeshare industry typically uses a colorcoded pricing system to denote the seasonal demand for a particular timeshare property. Although the concept is pretty consistent, the designation of particular colors can vary from one resort to another.
The reputable is a key and elusive term here. Among companies to consider for reselling timeshares are RCI, Interval International, and Trading Places International The purchaser of the condo hotel unit sees this type of investment as an option to direct ownership of a second home and likes the ability to generate income.
The professional management is another one of the attractions to investors. Chapter 2: Covering Common Real Estate Investments These properties are often hyped, and the expectations of the condo hotel investor are often much greater than the reality.
Investors are lured to condo hotels by the potential for appreciation and cash flow as well as professional management. Many investors find themselves being pressured into pre-sale offering presentations even before the units are built. These events can be tempting, but savvy investors need to do their own due diligence. These offers usually come from individuals contacting you in known tourist locations or when you check into a hotel that just happens to offer condos as well.
However, timeshares may make sense for you if you like to vacation at the same resort around the same time every year and if the annual service or maintenance fees compare favorably to the cost of simply staying in a comparable resort. Remember, though, that if the deal seems too good to be true, it is too good to be true.
As with timeshares, the only folks who generally make money with condo hotels are the developers, not the folks who buy specific days of ownership. In this section, we provide an overview of each of these properties and show how they may make an attractive real estate investment for you.
From an investment perspective, our top recommendations are apartment buildings and single-family homes. If you can afford a smaller single-family home or apartment building rather than a shared-housing unit, buy the single-family home or apartments. Regardless of what you choose to buy, make sure that you run the numbers on your rental income and expenses see Chapter 12 to see if you can afford the negative cash flow that often occurs in the early years of ownership.
Single-family homes As an investment, single-family detached homes generally perform better in the long run than attached or shared housing. Focus on markets where the rent exceeds or comes close to equaling the cost of owning and shun areas where the ownership costs exceed rents. Single-family homes that require just one tenant are simpler to deal with than a multiunit apartment building that requires the management and maintenance of multiple renters and units.
The downside, though, is that a vacancy means you have no income coming in. Look at the effect of 0 percent occupancy for a couple of months on your projected income and expense statement! You can hire someone to do the work, but you still have to find the contractors and coordinate and oversee the work. The first rule of being a successful landlord is to let go of any emotional attachment to a home. We discuss the proper screening and selection of tenants in Chapter Making a profit in the early years from the monthly cash flow with a singlefamily home is generally the hardest stage.
Also remember that with just one tenant, you have no rental income when you have a vacancy. Attached housing As the cost of land has climbed over the decades in many areas, packing more housing units that are attached into a given plot of land keeps housing somewhat more affordable. In this section, we discuss the investment merits of three forms of attached housing: condominiums, townhomes, and co-ops.
One advantage to a condo as an investment property is that of all the attached housing options, condos are generally the lowest-maintenance properties because most condominium associations deal with issues such as roofing, gardening, and so on for the entire building and receive the benefits of quantity purchasing. Condominium buildings may start out in life as condos or as apartment complexes that are then converted into condominiums. Be wary of apartments that have been converted to condominiums.
Our experience is that these converted apartments are typically older properties with a cosmetic makeover new floors, new appliances, new landscaping, and a fresh coat of paint. However, be forewarned: The cosmetic makeover may look good at first glance, but the property probably still boasts year-old plumbing and electrical systems, poor soundproofing, and a host of economic and functional obsolescence.
Within a few years, most of the owner-occupants move on to the traditional single-family home and rent out their condos. You may then find the property is predominantly renter-occupied and has a volunteer board of directors unwilling to levy the monthly assessments necessary to properly maintain the aging structure. Within 10 to 15 years of the conversion, these properties may well be the worst in the neighborhood.
Townhomes Townhomes are essentially attached or row homes — a hybrid between a typical airspace-only condominium and a single-family house. Like condominiums, townhomes are generally attached, typically sharing walls and a continuous roof. As with condominiums, you absolutely must review the governing documents before you purchase the property to see exactly what you legally own. Generally, townhomes are organized as planned unit developments PUDs in which each owner has a fee simple ownership no limitations as to transferability of ownership — the most complete ownership rights one can have of his individual lot that encompasses his dwelling unit and often a small area of immediately adjacent land for a patio or balcony.
The common areas are all part of a larger single lot, and each owner holds title to a proportionate share of the common area. Chapter 2: Covering Common Real Estate Investments Co-ops Co-operatives are a type of shared housing that has elements in common with apartments and condos. When you buy a cooperative, you own a stock certificate that represents your share of the entire building, including usage rights to a specific living space per a separate written occupancy agreement.
Unlike a condo, you generally need to get approval from the co-operative association if you want to remodel or rent your unit to a tenant. In some co-ops, you must even gain approval from the association for the sale of your unit to a proposed buyer.
Turning a co-op into a rental unit is often severely restricted or even forbidden and, if allowed, is usually a major headache because you must satisfy not only your tenant but also the other owners in the building. Co-ops are also generally much harder to finance, and a sale requires the approval of the typically finicky association board. Therefore, we highly recommend that you shun co-ops for investment purposes. Apartments Not only do apartment buildings generally enjoy healthy long-term appreciation potential, but they also often produce positive cash flow rental income — expenses in the early years of ownership.
But as with a single-family home, the buck stops with you for maintenance of an apartment building. You may hire a property manager to assist you, but you still have oversight responsibilities and additional expenses. Attached housing prices tend to perform best in fully developed or built-out urban environments. For higher returns, look for property where relatively simple cosmetic and other fixes may allow you to increase rents and, therefore, the market value of the property.
Then you can develop the punch list of items with maximum results for minimum dollars — for example, a property with a large yard but dead grass, a two- or three-car garage but peeling paint or a broken garage door. You can also add a garage door opener to jazz up the property for minimum cost. You can also really add value to a property with a burnt-out, absentee, or totally disinterested owner who is tired of the property.
One way to add value, if zoning allows, is to convert an apartment building into condominiums. Keep in mind, however, that this metamorphosis requires significant research on the zoning front and with estimating remodeling and construction costs. Considering Commercial Real Estate Commercial real estate is a generic term that includes properties used for office, retail, and industrial purposes.
You can also include self-storage and hospitality hotels and motels properties in this category. We discuss more on this point in a moment. Residential real estate is generally far easier to understand and also usually carries lower investment and tenant risks. With commercial real estate, when tenants move out, new tenants nearly always require extensive and costly improvements to customize the space to meet their planned usage of the property.
And you usually have to pay for the majority of the associated costs in order to compete with other building owners. Fortunes can quickly change — small companies can go under, get too big for a space, and so on. Change is the order of the day in the business world, and especially in the small business world.
So how do you evaluate the state of your local commercial real estate market? You must check out, over a number of years, the supply and demand statistics. How much total space and new space is available for rent, and how has that changed in recent years? Also, examine the rental rates, usually quoted as a price per square foot. We help you cover this ground in Chapter 8. One danger sign that purchasing a commercial property in an area is likely to produce disappointing investment returns is a market where the supply of available space has increased faster than demand, leading to higher vacancies and falling rental rates.
A slowing local economy and a higher unemployment rate also spell trouble for commercial real estate prices. Each market is different, so make sure you check out the details of your area. Buying Undeveloped Land For prospective real estate investors who feel tenants and building maintenance are ongoing headaches, buying undeveloped land may appear attractive. This is called buying in the path of progress, but of course the trick is to buy before everybody realizes that new development is moving in your direction.
Check out Chapter 8 for a full discussion on the path of progress. If you buy the land with cash, you have the opportunity cost of tying up your valuable capital which could be invested elsewhere , but most likely you will put down 30 to 40 percent in cash and finance the balance of the purchase price instead.
Obtaining a loan for development of land is challenging and more expensive than obtaining a loan for a developed property. The dangers of downzoning Robert owned raw land for many years in an area where a recent government action effectively downzoned his property from 4 acres to 2 acres. This story illustrates the dangers of buying and owning vacant real estate in areas where conservation activists are prevalent. Chapter 2: Covering Common Real Estate Investments On the income side, some properties may be able to be used for parking, storage income, or maybe even growing Christmas trees in the Northwest or grain in the Midwest!
Take your time to really know the area. Nor should you buy raw land just because you heard that irresistible opening bid price advertised on the radio for the government excess land auction down at the convention center this Saturday. Tally up your annual carrying costs ongoing ownership expenses such as property taxes so that you can see what your annual cash drain may be.
What are the financial consequences of this cash outflow — for example, will you be able to fully fund your taxadvantaged retirement accounts? Running utility, water, and sewer lines; building roads; landscaping; and so on all cost money. If you plan to develop and build on the land that you purchase, research these costs. You need to check with the planning or building department for their list of requirements.
Some people foolishly invest in landlocked properties. The value of land is heavily dependent on what you can develop on it. This advice also applies to environmental limitations that may be in place or that may come into effect without warning, diminishing the potential of your property with no compensation. This potential for surprise is why you must research the disposition of the planning department and nearby communities. Attend the meetings of local planning groups, if any, because some areas that are antigrowth and antidevelopment are less likely to be good places for you to buy land, especially if you need permission to do the type of project that you have in mind.
Other folks have found that the best way to quickly become a real estate investor is to purchase income-producing properties in a more unconventional manner. In this chapter, we take a brief look at some of the most common of these methods of acquiring real estate investment properties or participating in the real estate market, and we tell you what we think about whether you should pursue these options. We start off with foreclosures, REOs, and lease options.
We also cover some other, even more unusual ways to acquire real estate at below-market prices, such as probate sales and auctions. And besides REITs discussed in Chapter 4 , other avenues allow you to passively invest in real estate, including triple net properties, notes and trust deeds, and limited partnerships, which we also discuss. Such investments are generally a better value than a conventional purchase but not without some increased risk!
And of course, other real estate investors are also scouring your local real estate market for great deals. Foreclosures are simply properties for which the owner has failed to meet his loan payment or other loan term obligations, forcing the lender, if they want to get some of their money back, to take over legal ownership and control of the property or foreclose and take title. Although more formal in a legal sense and more time consuming, a real estate foreclosure is similar to a lender repossessing the car from an owner who fails to make her monthly car payments.
After completing the foreclosure process, the lender takes title, at which point it owns the property. Some major lenders, like Bank of America, call the department holding their repossessed properties owned real estate operations OREOs. No matter what the name, the savvy real estate investor willing to do the extensive due diligence required to find the rare diamonds in the rough will be rewarded. Typically these properties are spruced up and then sold quickly for as close to the appraised value as possible.
However, with the number of foreclosures so significant in certain areas of the country, unloading these properties will really hit lenders hard. Robert is seeing a growing trend towards lenders holding on to these properties and hiring local property management firms to not only spruce up the properties but also rent them for one to three years with the expectation that the market will improve and the lenders will recoup much of their loan values. This trend is particularly true with private lenders.
Real estate investors may find fewer fire-sale bargains in Chapter 3: Considering Foreclosures, REOs, Probate Sales, and More the short run, but actually the recovery will be spread out over several years, and thus there will be a steady supply of reasonably priced rental properties as various lenders spin off some of these held assets.
Be careful to rule out environmental concerns. Foreclosures The term foreclosure actually describes a process by which a lender takes title to a property on which a loan is in default. The recent trend towards no-documentation or stated-income loans also greatly contributed to the real estate mess of this period. The flawed theory was that real estate values only increased, so these folks were simply tapping their future equity.
However, one slight stumble with a loss of a job or a drop in income, a serious illness, death, or divorce can lead to a missed mortgage payment or two and ultimately, foreclosure. The three most popular piggyback loan programs are the ; the ; and the loans.
In each of these loan programs, the first number is an percent first mortgage, the second number is the amount of the second mortgage, and the last number is the percentage of the purchase price the buyer paid in cash. The loan 80 percent first, 10 percent second, and 10 percent down was especially popular because it was designed to save the borrower the added cost of private mortgage insurance PMI. Examples include not maintaining proper insurance coverage or not keeping the property in good physical condition.
Good property managers regularly visit and inspect their properties. This category of foreclosures is extremely prevalent in many of the most popular real estate investment markets for out-of-town speculators such as Las Vegas and Phoenix. Some properties fall into foreclosure because the property has serious and irreversible problems that are so bad that the current owner chooses to walk away rather than deal with them.
Environmental hazards and serious physical problems where the cost of repair can exceed the value of the property such as cracked slabs often top the list. In Chapter 12, we cover research you can perform to help avoid these types of problems. Many foreclosure properties also fall into this category because some real estate investors felt that the market was so strong that literally any property they bought would increase in value.
Chapter 3: Considering Foreclosures, REOs, Probate Sales, and More Before you pursue foreclosure properties, determine the type of foreclosure process commonly used in your state. Making informed trading decisions regardless of the market's conditionSavvy traders can make money in both up and down m Determine the strength of any business with fundamental analysis Have you ever wondered the key to multibillionaire Warr Want to take control of your finances once and for all?
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