Another aspect to consider when investing in property is whether you, the investor, are skilled and can do repair work in a home.   Today there are thousands of REO properties for sale, real estate owned properties – another term for bank owned properties.  Many of these properties need work. 

    I have often thought a consortium of tradespeople would be an ideal investment group;  a person who knows drywall, a plumber, an electrician, a tile person, and maybe a roofer.   Between these people and someone to put up the initial amount of money, the group  purchases property, fixes it up, and then puts it on the resale market.  (This would have to be an LLC, limited liabiity corporation, with exit strategies defined for group members and legally enforceable.  Consultation with an attorney is advisable.)

    The key is to purchase the property at the correct price, and with today’s pricing, making offers would be the name of the game.  Doing the repairs in a timely manner is critical. The sooner repairs are done, the sooner the property can be put back on the market.  If you buy correctly, the property can be priced in the mid range for the area so the property does not languish on the market.  The sooner the profit can be made the quicker the group can move to the next property.

    A 1031 Tax Deferred Exchange may not work in this instance because the property has not been held for any appreciable period of time.  Short term capital gains tax would have to be calculated prior to determining profit.  Again, here is where a good accountant who also understands the workings of 1031 tax deferred exchanges is necessary.

   Think about a team and who you need on your team to make investing in property profitable and fun! Check professional people with good credentials, too many properties have been fixed up by rank amateurs.  Your goal is to have your property stand out and sell immediately!

    As a potential investor, you have thought about the type of property you want to purchase, “A”, “B” or “C” property.   You know the area in which you would like to concentrate your investment(s).  Find a good Realtor who is familiar with 1031 tax deferred exchanges, who can suggest a good lender to provide financing for investment properties.  Your aim is to create a relationship which will last for years.  

    Ask your Realtor to sit down with you in a meeting with a 1031 Tax Deferred Exchange Facilitator.  There are companies which specialize in faciliating 1031’s, and often Title Companies have departments that are knowledgable about 1031’s.

    Talk with your accountant about 1031 Tax Deferred Exchanges.   The impetus for these exchanges comes from Section 1031 of the Tax Code.  A reliable team is extremely important because any mis-step in timing can trigger big tax liabilities.

    How does a 1031 work?

    Let’s say you purchase a multi family unit for $200,000.  You put the requisite 20-25% down.   That is $40,000 to $50,000.  In a nutshell, you hold that property for five years, and each year it appreciates 5%. In five years, the property is now worth $256,671.  You have a gain of more than $11,000 a year.   Additionally, you have had the rent on the units as well as the tax deduction of interest and depreciation, plus the costs to maintain the property. 

     With a tax deferred exchange, you must  take your proceeds and reinvest them in another property within the required period of time.  You now  have the initial $40,000 or $50,000 plus the gain of $56,671.  Adding the initial down payment to the capital gain, you would have between $96,671 and $106,671 to reinvest depending upon your initial investment.

    Using a 20% formula for down payment on the next property, you can now purchase a property between $386,684 and $483,355, or $426,684 to $533,355 for the 25% figure. 

    If you were not to defer the taxes, you would pay long term capital gains tax on the proceeds of $56,671.  That is now 20%.  Uncle Sam would take $11,334 right off the top.  That $11,000 plus can purchase $44,000 to $55,000 more property!   Ideally you want to defer taxes until you are dead and allow your heirs pay the tax,  or at least defer the taxes until you are not working.

   Create a long term plan.  Within a hypothetical 20 years, you would do this four times.   Each time, you will have more cash to purchase a property.  At the end of 20 years, you will have property valued at million dollar levels. 

   Adhering to the timing is imperative.  Putting  a competent and professional team together and having all work synchronistically is paramount.  Deferring the taxes on the sale of these properties is what maximizes the leverage so you can purchase more property.  You must eventually pay the taxes, and if you want to pull some cash out, you can also do that, but be aware, taxes will be due!

Resources:  Internal Revenue Service

    http://www.irs.gov/newsroom/article/0,,id=179801,00.html

National Association Realtors:

     http://www.realtor.org/library/library/fg408

 1031 Faciliatator:

       Brigitte Echave
Leverage Exchange Group LLC
7840 E Broadway Blvd Ste 209
Tucson AZ 85710
 866-988-1031 
 520-722-2578 
520-465-8690 520-979-8256

 brigitte@leverageExchange.com

http://www.LeverageExchange.com

       I often look at people who are slim and trim … people who can speak another language…or people who seem to know so much about a particular subject. Then I realize, it is all slow but steady.  Most of these people developed some kind of plan:  eating and working out in a healthy manner; learning new vocabulary and verb conjugations; or studying a particular subject.

   The same is true for that person who owns a 120 unit apartment complex.  It’s a plan.  Generally it does not happen overnight.  It requires homework.  But advanced planning may make it a bit easier.

     In a previous post, I talked about the power of a 1031 Tax Deferred Exchange combined with a good plan of action purchasing investment properties.   Real estate can generate cash flow for your retirement.   And with today’s low interest rates and the numbers of properties on the market, the time is ripe to make a long term plan and begin to implement it for your future.

    People often say they want an investment property which generates good cash flow.  That’s all they know.  They have no philosophy of investing.    As a potential investor, your first decision should be:  What types of properties do you want to purchase?  This may be determined by your price point.

     “A” properties are those properties which are usually the most expensive; townhouses, condos, single or multi family homes in the most expensive areas of town.  They generally command the highest rental prices.

    “B” properties are mid priced properties; townhouses, condos, single and multi family homes in middle class neighborhoods. 

     “C” properties are properties in lower income neighborhoods, but managed properly, can be a solid investment.

      There will always be people who are eager to rent in each type of property.  In a down market, people may move from an “A” property into a “B” property, and people in a “B” property, may move to a “C” property to save money.  Think about the area in which you live and where “A” properties, “B” properties, and “C” properties are located.  Check the areas and the price points of these properties.   

     Condos, townhouses, and single family homes all present different investment strategies.  Often these properties have association fees.  What the fees cover and the management company is important.  Some management companies do a far better job than others and surveying the area for deferred maintenance is important.

   As an investor, do you want to maintain the grounds?  How much are the association fees?  Can you buy a different type of property without association fees and maintain the property yourself or hire a groundskeeper for less than the association fee?      How much time do you want to devote to managing property?  These are important questions for the potential investor to answer honestly.

     I am a firm believer in purchasing properties in the same general area.   When you drive by one property, you can drive by all.   Problems arise when landlords do not know what is transpiring with their property.  Seeing aluminum foil on the windows may tell you something other than the tenant is a day sleeper. Mileage and drive times are costs of owning property and it is important to check your asset on a regular basis.

Tomorrow:  The power of a 1031 Tax Deferred Exchange

Resource:  Qualified 1031 Tax Deferred Exchange Facilitator

http://www.leverageexchange.com/pdf_files/1031%20exchange%20info.pdf

Business Brokerage, Commercial Agent:

http://www.sonoitaproperties.com/