A Financial Poise column highlighting the tips, tricks and tools you need to know to successfully invest in real estate.
A loan may cover the gap between the purchase price and available equity or provide funds to make capital improvements to a property (as a construction loan or a line of credit). Buyers may also leverage a property strategically to improve cash flow. This occurs when income generated from operating the property exceeds the cost of the loan.
The smart real estate investor’s checklist for Deal Sponsor diligence. When considering investing in a passive real estate deal, the qualities of the sponsor are arguably more important than the underlying real estate:
No matter the property type, some diligence items will always be on your checklist. That said, it is critical to understand that your due diligence requirements depend on the type of asset you are investing in. Here is a short list of investment property categories to consider; each comes with a unique set of inquiries necessary to fully understand its risks and opportunities.
Investing in a real estate syndication enables you to acquire a diversified portfolio of properties with the same amount of capital, and without having to undertake managerial or financial burdens.
The current election cycle has generated a high volume of articles about the virtues or vices of real estate investment, depending on your political leanings. Unfortunately, the pundits’ understanding of the tax laws has proven lacking. Perhaps the most prevalent misconceptions surround the like-kind exchange rules found in § 1031 of the Internal Revenue Code. That provision allows taxpayers to defer paying certain taxes when they exchange a business or investment property for a similar property of greater or equal value rather than selling for cash.
The internal rate of return, or “IRR,” is the percentage that reflects what any individual investment is expected to yield from inception to sale. It takes into account anticipated cash flow and appreciation, as well as the time value of the capital invested.
When you select a residential property for investment, your criteria will be different than when you decide where you want to live personally. This is because investors care about cash flow and tax benefits, such as depreciation deductions that do not apply to a home.
A common concern many individuals have about buying real estate for investment is the potential time and cost of maintaining the property. Not everyone has the tools, expertise or inclination to fix leaky faucets, clean soiled carpets or plow a snow-filled parking lot in the wintertime.
When purchasing real estate for personal use, such as your home, you select the neighborhood you want to live in, determine your budget, and begin looking at houses in your price range, perhaps with the assistance of a realtor. Major factors impacting prices in a given neighborhood include the square footage of the home, its age, the quality of the construction and finishes, and amenities.
One of the consequences of selling an appreciated investment, be it a stock, collectibles or investment real estate, is the assessment of taxes on any capital gains. In the case of real estate or personal property, tax liability upon disposition may also include depreciation recapture.