By Ryan Squires
One of the biggest allures of investing in rental properties stems from decreasing an individual’s taxable income through rental property depreciation.
As we all know, building wear and tear has real costs. As structures wear out over time, the usable life and value of that property decreases. Those decreases can be accounted for using the IRS’ guidelines on the depreciation of rental property.
For savvy real estate investors and landlords, accounting for a rental asset’s decreased usability minimizes tax liability by shrinking taxable income. If done right, landlords can keep more money in their bank accounts.
However, accounting for depreciation costs, while a wise financial move, can be a time-consuming and complex process. With that in mind, we’ll examine rental property depreciation, how to calculate it, and some tools investors can use to alleviate stress during tax times.
What is rental property depreciation?
Rental property depreciation is a tax law concept that allows rental property owners to deduct a portion of the cost of a property and any improvements they make over a set period, generally 27.5 years, as defined by the General Depreciation System (GDS), which we discuss in further detail below.
The total number of years, 27.5, represents a key figure because that’s what the IRS deems as the usable life of a residential rental property when using GDS. Instead of taking one large deduction for the entire cost of the property in the year you buy it, depreciation allows investors to deduct a smaller amount each year to account for wear and tear.
Note: While GDS is the most widely used system, the IRS also employs the Alternative Depreciation System (ADS), which we explain in our Calculating Depreciation section.
Is your property a depreciable asset?
Your property must meet four essential criteria to be eligible for depreciation based on IRS guidelines.
- Landlords and real estate investors must own the property, and they’re still considered the owners if they owe on it.
- Investors must use the property to generate income.
- The property must have a “determinable useful life.” The IRS defines properties as having a useful life if they can “wear out, decay, get used up, become obsolete, or lose value from natural causes.”
- Investors can only claim depreciation on properties with a useful life of more than one year.
For properties that fit these parameters, investors can then determine how to calculate their depreciation values to factor into deductions.
Calculating Depreciation
One of the biggest aspects of rental property depreciation is determining when to start depreciating a property, which is when it’s placed “in service.” When buying a new property, investors often face many challenges related to making it habitable or appealing to potential tenants.
That could mean fixing broken fixtures, repairing structural components, or upgrading appliances. Suppose an investor purchases rental property on February 1, but it requires them to put some work into it, which delays advertising the property until March 15.
In this case, the in-service date would be March 15. However, landlords can still depreciate the property from that date, even if they don’t have a tenant.
Now that you know when to begin depreciation, you must determine which depreciation system to use. Don’t worry — it’s not that hard.
Depreciation Methods
Investors whose rental properties were placed in service after 1986 will use the Modified Accelerated Cost Recovery System or MACRS.
MACRS uses two depreciation methods — the GDS and the ADS — which we briefly mentioned above. Let’s examine the two systems in more detail to determine how they apply to rental property depreciation tax accounting.
General Depreciation System
GDS is the most commonly used depreciation method, so investors will likely use it when depreciating their rental properties. It outlines some fundamental principles.
As previously explained, depreciation for residential rental properties is commonly spread over 27.5 years. In effect, this implies that investors and landlords can benefit from significant tax deductions at the early stages of ownership. Commercial properties, on the other hand, use a 39-year depreciation window.
Second, GDS primarily uses the straight-line method of depreciation. That means investors will always deduct the same amount from their taxable incomes based on the cost basis, which we discuss below.
While the straight-line method is the most commonly used, it isn’t the only one landlords can use in this system. Investors can also use the declining balance method, which allows for larger deductions in the early years.
Alternative Depreciation System
Fewer landlords will use ADS. The IRS stipulates that real estate investors and landlords must use the ADS rental property depreciation system if certain conditions are met.
You must use the ADS system in the following cases:
- The property has a tax-exempt use
- The property uses tax-exempt bond financing
- The property is used primarily for farming
- The property is used for business purposes for 50% or less of the year
If your property fits those descriptions, you‘ll employ ADS. ADS uses a longer depreciation schedule of 30 years. This schedule lowers depreciation deductions and spreads them out over a longer period.
Keep in mind: Landlords and investors can opt to use ADS for their properties on a unit-by-unit basis, but once they select the ADS method, they cannot change it.
Check out the IRS documentation linked above for more information on either schedule.
Calculating Cost Basis
Now that we’ve specified which depreciation method applies to a given property, finding the cost basis of a property will give you all the information needed to determine the values you can deduct from your taxable income.
The first step is to determine the property’s cost. For example, say you find a property listed for $418,000. Often, that’s not the final price. You may need to add in settlement costs or fees directly incurred at the time of purchase, such as legal fees, transfer taxes, title insurance, and any additional fees you agree to pay. Let’s ascribe a value of $15,000. You capitalize or add these to your depreciable cost basis in the property.
Now, suppose you renovated the kitchen for $30,000 to make the property more appealing. You can add these costs to the basis to help offset the initial investment. In short, the total cost of acquiring the property and renovation is $463,000 ($418,000 property price + $15,000 in fees + $30,000 renovation).
You can’t depreciate the entire $463,000 because the building sits on land, and that can’t be depreciated. The IRS states that land isn’t a depreciable asset as it has an indefinite use life, so you’ll subtract the land value from the total purchase price. When you segregate out the cost of the land and tally up the other values, you arrive at your depreciable cost basis. You’ll use this figure to calculate your depreciation expense each year.
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Establishing Land Value
Investors can find the value of land from a number of sources to help in their rental property depreciation calculations, including:
- Property tax card or bill: Local governments often assess the value of the land and the building separately for property tax services. This information is readily available through your assessor’s website or office.
- Assessed values: Your property tax documentation should show the value assigned to the land and the building improvements separately.
- Professional appraiser consultation: Hiring an appraiser can help streamline the process and ensure a property appraisal if the tax assessment seems inaccurate.
Final Calculation
Say the appraiser values the land at $40,000. If using GDS, subtract $40,000 from the cost of acquiring and renovating the property ($463,000) and divide it by 27.5 years.
For example: $463,000 – $40,000 = $423,000. Divide that by 27.5 years, and you get $15,381.82 which you can now deduct from your annual income. However, for the first year you put the property in service, you’ll consult the MACRS percentage table to calculate the depreciation deduction based on the month you placed the property in service.
According to the percentage table, if you put the property in service in July, you’ll depreciate at 1.667%. Here’s the total for the first deduction: $423,000 (cost basis) * 1.667% = $7,051.41. This is because you’re only allowed to claim a half-year worth of depreciation on this first year.
When Depreciation Stops
Once the property changes hands, the 27.5-year clock starts anew. However, there are other circumstances when investors can no longer deduct rental property depreciation from their taxable income.
The first is when the property has fully recovered its cost. That means an investor has deducted the property’s entire cost basis.
The other is when the property no longer generates income. For example, an investor could move into the property, taking it off the rental market altogether and ceasing income generation.
Recapture Considerations and Capital Gains
While depreciating properties comes with substantial tax deductions, you must pay some back via recapture taxes, which the IRS levies at tax time each year after the year of sale. Also, if you don’t plan on reinvesting your gains via a 1031 exchange, you’ll have to pay capital gains tax.
Let’s look at an example to see how the numbers work out.
Assume you purchased the property above six years ago and sold it at the end of the sixth year for $700,000. In our example, we determined the property had a cost basis of $423,000. Because you sold the property after six years, the depreciation deductions you’ve taken amount to $92,290.92. Now, you’ll have the figures necessary to calculate the property’s adjusted basis.
To calculate that amount, subtract the $92,290.91 in accumulated depreciation deductions you’ve claimed on your taxes from the original cost basis of $423,000 for a total of $330,709.09. Now, subtract the adjusted cost basis from the sales amount of $700,000 ($700,000 – $330,709.09 = $369,290.91).
Of that $369,290.91, $92,290.91 is taxed at your ordinary income tax rate, which is not to exceed 25% as outlined in the Tax Cuts and Jobs Act. The remaining $277,000 is then taxed at your long-term capital gains tax rate of 0%, 15%, or 20%.
Long story short, while investors benefit from tax reductions during their property ownership, it’s vital to account for recapture and capital gains taxes to understand your finances following the sale of a property.
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Navigating the complexities of property management includes dealing with fair housing claims, a task that becomes even more challenging when a claim of retaliation is added to the mix. This article aims to provide strategies and insights to help property managers and staff prevent fair housing retaliation claims, ensuring a harmonious living environment for all residents.
Understanding Retaliation in the Housing Sector
Retaliation occurs when a resident, having filed a fair housing claim, alleges that they are being mistreated in response to their claim. Retaliatory actions can vary widely but are united by their potential to exacerbate an already sensitive situation. For instance, consider a resident who has filed a fair housing claim and subsequently submits a maintenance request. Prioritizing this request lower than others out of spite could escalate the situation, demonstrating apparent retaliatory behavior.
It’s crucial to remember that retaliation is unacceptable, regardless of the outcome of the original fair housing claim. Effective training on fair housing laws can play a significant role in preventing both the initial claim and any retaliatory actions that might follow.
Best Practices to Promote Prevention of Retaliation Claims
The cornerstone of avoiding retaliation claims lies in maintaining standard operating procedures for all residents without discrimination. Here’s how to approach a situation where a resident, perhaps feeling emboldened by their claim, starts to breach property rules or policies:
1. Enforce Rules Fairly: Do not disregard rule violations. Every resident must adhere to the property’s policies. The delicate nature of these circumstances may necessitate consulting with a fair housing attorney to ensure that any actions taken do not seem retaliatory.
2. Fair Housing Training: Continuous education on fair housing regulations for all staff members is essential. This not only helps in avoiding initial claims but also in handling any situations that arise without turning into retaliation.
3. Documentation and Communication: If a complaint does arise, minimize direct interactions between the complainant and involved staff members. Document all interactions meticulously to provide a clear record of your response to the issue.
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Proactive Measures to Help Prevent Fair Housing Complaints
The most effective strategy to avoid fair housing complaints is to create an environment where residents feel respected and valued. This involves:
– Ongoing Staff Training: Ensuring that every staff member, including property managers, understands fair housing laws and how to apply them in daily operations.
– Transparent Communication: Maintaining open lines of communication with residents about their rights and how to address grievances.
– Responsive Management: Showing a willingness to address and resolve issues promptly and fairly can prevent many complaints from escalating.
Retaliation Claims – Summary
Property management is indeed a complex field, rife with challenges that demand both tact and diligence. However, by adopting these best practices and dedicating themselves to continuous training, property managers can adeptly navigate the intricacies of resident relations with poise and assurance. This approach not only aims to circumvent potential legal pitfalls but also to cultivate an inclusive and welcoming community atmosphere.
In such an environment, every resident is not only afforded their rights but is also encouraged to engage and contribute, thereby fostering a sense of belonging and mutual respect. The ultimate objective extends beyond merely avoiding disputes; it’s about creating a living space where every individual feels valued, understood, and integral to the community fabric.
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By Anna K. Cottrell
The 15-minute city as a concept has been around for a while now. First introduced by the Colombian-French scientist Carlos Moreno and eventually implemented as an official urban planning policy by the City of Paris, the 15-minute city promises its residents access to amenities without the need for a car.
The idea is that you should be able to go to work, do your grocery shopping, visit the local medical center, and pick up the kids from school, all within a 15-minute walking radius of where you live. This all sounds wonderful, but what matters from an investor’s point of view is whether there is demonstrable demand for it—and whether it will continue growing.
So, are 15-minute cities worth factoring into your real estate investment decisions, or are they just a temporary fad?
Beyond Walkability: Why the 15-Minute City May Be a Useful Concept
Most real estate preference surveys focus on walkability as a growing demand factor. The National Association of Realtors (NAR) is the most robust source of data on the subject and has been running its Community and Transportation Survey every three years. The results of the latest one, completed in 2023, are actually pretty mixed if we take walkability as a stand-alone measure of a location’s attractiveness.
In fact, only 48% of respondents rated walkability as a high priority if they were planning to move. Instead, people prioritized high-quality public schools in the area (62%), a short commute (61%), and having a large yard (56%) and a large house (54%). Note that the majority of those respondents (53%) were homeowners, and only 36% were renters.
It’s not that being able to live in a walkable community doesn’t matter. It’s just that, for current homeowners, it doesn’t matter enough to move the needle in their decision-making.
Does that mean that the 15-minute city idea is of no value to a real estate investor? Au contraire. In fact, it may be a more valuable tool for investors than surveys about walkability.
What matters isn’t just walkability on its own but where and what people would be walking to. The 15-minute city concept is about more than building more sidewalks and bike lanes; its core principles are sustainability, solidarity, and citizen participation.
In other words, it’s about people building meaningful connections and supporting each other within the community. This is quite a different setup from your typical suburban residential neighborhood, with a sidewalk for jogging.
What Renters Want
Recent research that zooms in on renters’ preferences shows that their values increasingly align with this concept of a supportive, friendly neighborhood where people can connect.
One in-depth survey of 1,500 renters in multifamily apartment units across the U.S. by a resident experience company called Venn found that the vast majority favor three things:
1. The chance to live in a place with thriving local businesses (4 out of 5 respondents)
2. The ability to grow their social connections and socialize with neighbors (three-quarters of respondents)
3. Opportunities to volunteer in the local community (3 out of 4 respondents)
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The Venn survey emphasizes that many landlords don’t understand what renters actually want, mistakenly assuming that they’re attracted to the latest smart home technologies and free subscriptions to services like Netflix. But these things factor very little into people’s decisions about where to rent—and even less into their decisions about whether to renew their lease. Instead, the survey found that renters who were satisfied with their local communities were twice as likely to renew their leases than those who were “amenity-rich” but didn’t feel like they belonged where they were.
On a purely psychological level, this makes a lot of sense. Renters know that where they’ll be living likely won’t be their dream home. Most renters have to compromise a lot on space, furnishings, and even the type of housing they end up living in. No amount of Netflix will fix that. However, making friends and hanging out at a great local café may just take the edge off some of the downsides of the renting experience.
The survey even found that people reacted more positively to apartment ads that showed communal spaces with people in them, as opposed to just images of empty apartments.
Doing Your Neighborhood Research the Right Way
As is so often the case with doing successful market research as a real estate investor, the trick here is to switch on your nonlinear thinking. It’s not that walkability doesn’t matter to renters; it’s just that taken as an isolated factor, it’s not very useful. Instead, what pays off is assessing the whole neighborhood. Walkability is not a bad place to start this kind of assessment because highly walkable neighborhoods also tend to be the ones that have thriving businesses and communities.
Antoine Bryant, Detroit’s director of planning and development, described growing up in a walkable Brooklyn neighborhood in an article about 15-minute cities: “I looked out the window, and across the street was a bodega, which is like a mini-grocery store. Fish market, dry cleaner, meat market, pizza, another dry cleaner, liquor store, hardware store and then another bodega.”
This is the sort of thing the modern renter wants. The success of cities like Portland, Oregon, Boston, and Baltimore is not just due to these places drastically improving walkability. It’s the whole urban regeneration package, with communities transformed by sustainable green spaces, thriving small businesses, and an overall friendly and inclusive environment. Not only do renters like this setup in theory, but they are also prepared to pay more for it.
A cursory look at recent rental market trends in Portland, for example, shows that it really pays to do your research on a granular, neighborhood-by-neighborhood level. Don’t look at overall rent statistics.
Portland’s average one-bedroom rents are showing a 4% annual increase. But look at the annual rent price increase for the popular King’s Hill Historic District (full of restaurants, cafés, daycare centers, etc.)—it’s a whopping 31%. Oh, and by the way, King’s Hill has a walkability score of 94. Food for thought?
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We’re well into tax season now, and that means it’s time to start prepping those tax returns.
While it’s typically not a fun task, there’s actually a silver lining this year: Many taxpayers can expect higher-than-average refunds. There are several reasons, but adjustments to federal tax brackets, larger standard deductions, higher interest rates and other factors all play a role.
“Inflation is actually helping taxpayers when it comes to their taxes,” says Lawrence Sprung, a certified financial planner and founder of Mitlin Financial. “The standard deduction, which is used by most, saw a significant increase for 2023. Tax brackets also saw a generous 7.1% increase. These two things combined will make it a more forgiving tax season for many.”
Want to boost your tax refund even more than these conditions allow? Below, we’ll break down how how experts say to do it.
4 easy ways to boost your tax refund, according to experts
Here are four simple ways to get a bigger tax refund according to the experts we spoke to.
Contribute more to your retirement and health savings accounts
If you’re looking for a way to maximize your tax refund after the tax year has already ended (like right now), one of the best ways is to contribute more to certain tax-deductible accounts — most notably traditional IRAs and health savings accounts (HSAs).
“Those contributions will reduce your taxable income and hence your tax bill,” says Lei Han, a certified public accountant and professor of accounting at Niagara University.
You have until April 15 (tax day) to contribute to these accounts and write those contributions off on your 2023 tax returns. And while this approach will cost you cash upfront, the payoff is two-fold, says Wenyao Hu, a chartered financial analyst and professor at the New York Institute of Technology. “These actions not only support your future financial security but also can significantly reduce your taxable income,” Hu explains.
Choose the right deduction and filing strategy
While the standard deduction did increase this year, that doesn’t necessarily mean it’s the best choice for everyone. For some, itemizing your deductions may be a better way to go.
It’s important to run the numbers for both options to be sure you’re making the right choice. When doing so, make sure you’re factoring in often-forgotten deduction options, like student loan interest, medical expenses, and child and dependent care, too.
You should also carefully evaluate your filing strategy — particularly if you’re married.
“For married couples, there can be times when filing separately may yield a larger total net refund to the household than filing jointly,” says Rob Burnette, a professional tax preparer at Outlook Financial Center in Troy, Ohio. “Splitting returns will also impact state tax returns, so do the math on all of your returns.”
According to David Johnston, managing partner of Amwell Ridge Wealth Management in Flemington, New Jersey, your tax professional can help with these comparisons. And, if they don’t? “They’re not doing their job correctly,” Johnston says. “It should never be overlooked.”
Donate to charity
If you have a favorite charity, Hu recommends donating to them to increase your deductions. You can write off charitable contributions on your tax returns — up to 50% of your adjusted gross income — as long as you itemize.
These contributions can be monetary (as in you write a check to the charity), or they can be in the form of physical goods, too. For example, donating clothes or furniture to the Salvation Army could qualify you for a deduction. Just make sure you keep the donation receipt, as you’ll need it when filing your returns.
If you’re over 70.5 and have a traditional IRA, you can also use the IRS’s Qualified Charitable Distributions to reduce your taxable income and increase that refund. This lets you donate up to $105,000 of your IRA funds to a charity of your choice, rather than taking the agency’s required Qualified Minimum Distributions.
“The charity receives the full value of the donation, and the taxpayer avoids paying income tax on the distribution,” Burnette says. “This reduces Adjusted Gross Income and potentially lowers the amount of Social Security income that is taxable.”
Be organized and thorough
Finally, go into the tax filing process with all your ducks in a row. Have your income documents, receipts for any deductions, and statements from bank accounts and investments on hand.
“Don’t start doing your taxes until you have everything you need to file them, organized and ready to be entered,” Sprung says. “Missing just one piece of information could cause you to pay more taxes than you need to.”
You can also call in a pro for help. While they’ll certainly come with a fee, they’ll also be able to help you spot refund-boosting opportunities you might not have thought of. They can help you plan your future tax strategy, too.
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What not to do
While there are several ways to increase your tax refund, there’s one all experts agree you should avoid: Adjusting your W-4 to pay more taxes on each paycheck. This would result in a bigger refund come tax season, but “you won’t have that money to live on during the year,” Johnston says.
It also amounts to giving the government an “interest-free loan,” experts say, and doesn’t serve to grow your wealth either. As Johnston puts it, “Overpaying Uncle Sam is not part of a sound financial plan.”
A better option? Put the extra money you considered withholding into something that earns you interest — like a certificate of deposit or high-yield savings account.
Tax preparation software can help
If you have a simple tax filing situation (you’re a W-2 employee, essentially), then tax preparation software — like TurboTax or TaxSlayer, for instance — can help you file your returns electronically come tax season. If you have more than one income source, own your own business, or are otherwise in a more complicated financial scenario, you’ll likely want a tax professional’s help. They can also help you handle any tax debt or explore options if you’re unable to cover your tax bill.
Source: CBS News
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The promise of financial returns, stability, and the thrill of ownership often fuels real estate investment decisions. While various real estate options exist, few capture the essence of smart investing as aptly as multi-family properties. Multi-family properties offer a unique blend of convenience, profitability, and scalability. Let’s delve deeper into why you should make it a priority to invest in multifamily real estate.
The Allure of Multifamily Properties
Understanding the multifaceted benefits of these investments can pave the way for a secure financial future.
1. Strong Reasons for Investing in Multifamily Properties
Steady Cash Flow: One of the most attractive pros of multifamily real estate investing is the consistent rental income from multiple units. This predictability can significantly ease financial planning and provide a sense of security for investors.
Easier Property Management: Managing one building with several units is convenient and cost-effective. It’s often easier and more efficient than handling multiple single-family homes spread across different locations. Additionally, centralizing operations can lead to better oversight and management.
Economic Efficiency: Multifamily properties spread out the risk, ensuring you’re not reliant on a single income source. If a few units are vacant, the rental income from occupied units can offset potential losses. This buffer can prove invaluable, especially in fluctuating market conditions.
2. Understanding the Value: How Are Multifamily Properties Valued?
Multifamily properties are typically valued based on their income-producing potential. Factors like rental income, location, condition, and local real estate market conditions play a vital role. Furthermore, recognizing the property’s specific amenities and unique selling points can adjust its valuation. This deeper understanding is pivotal not just for purchase decisions but also when gauging how often real estate doubles in value. Remember, it’s not just about current value but potential future worth and the property’s growth trajectory.
3. The Buying Power: How Many Properties Can You Buy at Once?
While there’s technically no limit, the intelligent approach emphasizes quality over quantity. Don’t merely chase numbers; search for properties that offer immediate returns and long-term growth potential regarding appreciation and rental income. Moreover, consider the ease of management, potential demand in the area, and the sustainability of these investments. The key lies in balancing ambition with practicality.
4. Long-Term Benefits of Multifamily Investments
Investing in multifamily properties transcends the allure of immediate profit. It’s a journey of building lasting wealth and creating a legacy. When approached with foresight, it can provide benefits that ripple through time.
Appreciation Over Time: Real estate, especially multifamily properties, often see steady appreciation over the years. Beyond the tangible metrics, this appreciation signifies a neighborhood’s growth, enhanced amenities, and socio-economic development. As these factors converge, they promise increased rental income and raise the overall property value should you opt to sell in the future.
Tax Advantages: The realm of multifamily real estate offers a plethora of tax incentives. Depreciation stands out, allowing you to offset a portion of your rental income. Add to that the mortgage interest deductions and other tax breaks, and you’ve got a recipe for significantly reducing your taxable income, thus amplifying your overall returns on investment.
Equity Buildup: As you pay the property mortgage, you simultaneously build equity. This can be leveraged for future investments or cushion in financial downturns.
Scalability: Starting with one multifamily property can set the stage for further real estate acquisitions, enabling a more rapid portfolio expansion than single-family units.
5. Mitigating Risks in Multifamily Real Estate
Every investment comes with risks, and multifamily properties are no exception. However, there are effective strategies to mitigate these.
Diversification: By its very nature, a multifamily property is diversified. If one or two units become vacant, others remain occupied, ensuring a steady income stream.
Research & Education: Continuously educate yourself about the latest market trends and dynamics. Knowledge is a potent tool against potential pitfalls.
Professional Networking: Building relationships with real estate professionals, from agents to property managers, can provide invaluable insights and early warnings about market shifts.
Insurance: Ensure your property is adequately insured. This can protect your investment against unforeseen damages and liabilities.
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The Process Demystified: How to Buy a Multifamily Property
Investing in multifamily properties is undeniably a strategic move. Understanding the process of buying a multifamily property is essential to navigate this landscape. Every step requires attention to detail and a commitment to due diligence.
Market Research: Begin by identifying where to buy multi-unit properties. Prioritize emerging markets characterized by job growth, infrastructural development, population growth, and potential for rent increases. Economic and social indicators can significantly influence an area’s real estate prospects.
Financial Assessment: Determine your budget by evaluating your financial health. Factor in potential mortgage rates, property taxes, insurance, and the necessary down payment. An exhaustive financial review can safeguard against unforeseen expenses.
Property Search: Use platforms focusing on multifamily investments or collaborate with a seasoned real estate agent familiar with multifamily properties. An expert’s insight can sometimes unearth opportunities you might overlook.
Due Diligence: Once you’ve pinpointed a property, dive into a thorough inspection. Understand its occupancy rates, maintenance history, and potential repair costs, and scrutinize its financial statements. Being meticulous at this stage can prevent potential pitfalls.
Secure Financing: Approach traditional banks, credit unions, or private lenders. With the dynamic landscape of real estate financing, options are aplenty. A well-prepared business plan and a clear strategy can significantly improve your loan approval chances.
Closing the Deal: Ensure all legalities, like title checks and property liens, are in order before finalizing. Close the deal when you’re convinced of the property’s merit and all checks are satisfactory. Remember, it’s a marathon, not a sprint.
Widening Your Perspective: Beyond Single Units
The charm of investing in real estate doesn’t lie just in the bricks and mortar but in the strategy you employ. By focusing on multifamily properties, you adopt a strategy for consistent income, scalable growth, and mitigated risks.
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By David Pickron
If you’ve ever purchased a gift for someone, you’re familiar with those three dreaded words you must be on the lookout for: “batteries not included.”
Most of us have experienced that moment on a holiday morning or birthday when the excitement of receiving something new is dashed as the recipient realizes that without power, they just have an empty box and a lifeless gift.
Knowing what is and is not included in any transaction is critical to achieving the end goal of both parties; this is especially true for housing providers.
I recently had a potential tenant who was going through some life challenges ask me if there was any way that I could include a washer and dryer as part of the rental.
Questions like these set off all sorts of alarms in my head. I’ve been at this for more than 20 years and situations like this have rarely ended well for me… but I reluctantly gave in and provided the washer and dryer at move-in.
Here’s why I entered into this agreement reluctantly: If they own the equipment and it breaks, they never call, but if I own the equipment and it breaks, I am the first call and end up playing repairman. Ideally, I avoid these situations, but under certain circumstances I do go that way and when I do, I always do these two key things that will also help to protect your investment.
No. 1 – Establish Your Ground Rules
When it comes to rental property, the number of items a tenant may ask for is unlimited.
In your business, determine in advance what and what will not even be a possibility to include with the property. When it comes to appliances, those that are attached to the property are usually included. I’m talking about items like a dishwasher or oven.
You might include a refrigerator if it is the built-in variety. Usually not included is anything related to laundry, microwaves, BBQ grills, etc. And speaking of grills, if you decide to provide one, make sure you establish that you are not responsible for providing fuel.
I’ve taken the brunt of an angry phone call from a tenant whose dinner party plans were destroyed when the propane ran out halfway through cooking their meal. Same goes for things like yard equipment if you decide to leave a lawn mower for the tenant who wants to maintain the yard. Each of these items present different challenges that require different rules, and it is best to lay out those rules in your lease.
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No. 2 – Put it in the lease
The lease is your first (and best) line of defense when it comes to items you have included in your property. I would recommend always using language that references the following categories:
- Ownership: Clearly state who owns the equipment that is included in the lease. This ensures that if something “walks” off at the end of the lease period, all parties know whom it legally belongs to.
- Responsibility: If something breaks, it is critical to know who bears the financial and physical responsibility for its repair. For example, if I were to include laundry units in the property, I include language like, “If the laundry units become non-functional, you are responsible for all repair costs. If you do not want to cover those costs, the units will be removed from the property and you will be responsible for procuring your own units. If, when the lease is terminated, the units are in place and non-functioning, all repair costs will be covered by your security deposit.” Clear and concise, the tenant knows exactly what to expect and you can look back on this if these situations arise.
- Terms of Use: The final piece of protection is having them understand the terms by which you are providing any item in the property. This might include a term similar to this, “As the housing provider I am not responsible for any damages to your personal items created by using the laundry units provided.” Or this fun one, “Use of the provided BBQ grill is at your own risk and expense. Housing provider is not responsible for providing fuel for grill and/or for any damage or loss of food associated with use of the grill.” It sounds like overkill, but I’ve seen and heard it all.
Being in this industry is a gift.
I can’t think of another place that would allow me to the opportunity for challenge and growth as much as being a housing provider.
Knowing if and what to include in a lease is paramount to finding success; but without fail, the satisfaction that comes from helping others is definitely “included” in every transaction.
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Over the years, a slew of reality TV shows that glamorize the real estate industry have popped up on networks like HGTV and Netflix. But just how realistic are they?
To find out, we evaluated eight popular shows that may appeal to investors. While most are focused on redesign efforts and fail to consider the practical aspects of investing, a few offer realistic tips and relatable challenges that make them worth watching.
Flip or Flop
Flip or Flop ended in 2022 after airing for 10 seasons on HGTV. The series follows formerly married real estate agents Christina Hall and Tarek El Moussa, who began flipping houses in Orange County, California, after the 2008 real estate crash. They typically make all-cash offers on foreclosures, which they renovate and sell for a profit.
The 70% rule of house flipping is a guideline house flippers use to ensure sufficient profits—it says you shouldn’t spend more than 70% of the home’s expected after-repair value, less any repair costs, on a distressed home. But Tarek and Christina tended to take bigger risks when choosing a property, which is likely to make things interesting.
For example, an episode in the final season, “Red Hot Flip,” shows the duo making a $500,000 offer on a home they hope to sell for $700,000, with quoted repair costs of $120,000. They note that low inventory in 2022 leaves them with few choices.
Several obstacles come up, including necessary repiping, which pushes their repair costs to $140,000. But they manage to get a $856,500 offer on the house because of the hot market, leaving them with $187,025 in profit after closing costs. That’s a 27.9% return on investment (ROI), which is just slightly below the average of 27.5% for home flips completed in the second quarter of 2023, according to Attom Data.
Most house flippers who aren’t also reality TV celebrities might turn away from a project with such slim profit margins, rather than hoping to get lucky with an offer above asking.
Stay Here
Stay Here was only around for one season in 2018 on Netflix, but it’s one of the few highly rated reality TV shows that showcases the optimization of vacation homes for added revenue potential. Designer Genevieve Gorder joins real estate expert Peter Lorimer to help property owners across the country boost their occupancy and average daily rates.
While the show offers some research-backed tips for increasing the cash flow on a short-term rental property, it’s mostly focused on the design aspect. The show doesn’t provide the budget for renovations or ROI.
In the episode “Austin Pool Pad,” a rare pool property in the desirable South Congress neighborhood suffers from old furniture, a sad-looking outdoor space, and a wasted bedroom used as an office. The team converts the office to a bedroom, adds a game room, creates a “social media moment” in the pool area with an eye-catching mural, and updates the listing description with a title to highlight the selling points. They also set up a partnership with a local pitmaster to provide private brisket-smoking classes to guests using the new smoker.
Ultimately, the new listing aims to capture $400 per night—but the episode ends there. Without a before-and-after comparison of monthly revenue for the vacation home, it’s tough to know if the extensive renovations and design updates paid off.
Selling Sunset
Emmy-nominated Selling Sunset is one of the most popular real estate reality TV shows, and it’s not because the show realistically depicts the homebuying process, at least not in most parts of the country. Instead, the Netflix show focuses on relationship drama at The Oppenheim Group, a cutthroat Los Angeles brokerage where the real estate agents carry $10,000 handbags and sell luxurious mansions to affluent homebuyers.
The episodes sometimes include real estate market insights, but they’re often quick and oversimplified, leaving plenty of room for viewers to focus on the attractive real estate agents and the intimate details of their personal lives, from pregnancy test results to backstabbing behavior to new agent gossip.
Investors looking to learn something should avoid this unrealistic reality show. On the other hand, anyone with an appetite for interpersonal drama in wealthy social circles should probably binge all seven seasons.
Buy My House
The Netflix series Buy My House premiered in 2022 and is one of the more investor-focused real estate shows. Homeowners are given the chance to pitch their homes to four expert real estate investors: Redfin CEO Glenn Kelman, football player Brandon Copeland, Corcoran CEO Pamela Liebman, and commercial real estate agent and business owner Danisha Danielle Wrighster. The show offers insight into the investors’ thought processes as they evaluate a variety of investment properties with the intent of making an all-cash, commission-free offer.
Buy My House includes properties at a range of price points from rental markets across the country, including some under-the-radar markets alongside tourist hubs. For example, in one episode, Glenn Kelman offers $170,000 for a starter home in the Detroit area with strong rental metrics, which is $5,000 above asking. But when a couple pitches a house near Disney World for close to $1 million, all four investors pass, pointing out that the price is too high, given the expected revenue.
Newbie investors can definitely pick up some tips from this show, from the nuances of how to run comps to the value of a unique property.
Vacation House Rules
This HGTV show premiered in 2020 and follows real estate and renovation expert Scott McGillivray as he updates vacation homes to optimize their revenue potential. Vacation House Rules mostly focuses on the renovation and design process in detail, which isn’t always practical from a business perspective.
For example, in the season 4 episode “Cottage on a Cliff,” Scott works on a friend’s cliffside cabin that is so distressed that it may be a money pit. The team essentially rebuilds the entire house, with no mention of the cost. While it’s fun to watch the transformation, it probably wouldn’t be feasible for investors who don’t have the budget of a TV show.
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Property Brothers
In Property Brothers, which ran for a whopping 14 seasons, twin brothers Jonathan and Drew Scott assist homebuyers with finding a fixer-upper, making an offer, and renovating the property according to their budget and needs. Unlike some other renovation shows, Property Brothers details the cost of planned updates and unexpected necessary repairs, along with the timeline, and the brothers are cognizant of the family’s budget.
For example, in the episode “Island Getaway,” the brothers discover a termite problem in the house. Due to the added expense, the brothers need to find ways to cut corners in order to remain within the family’s $650,000 budget. Investors who have rehabbed homes will relate to the challenge of staying within budget in the face of obstacles that pop up.
The Deed
This CNBC reality series began in 2017 and ran for two seasons. The Deed follows real estate developer Sidney Torres as he steps in to help other developers get their projects back on track.
For example, in an episode titled “Don’t Fall in Love with Your Flip,” Torres encourages a friend to look at his flip from a business perspective, abandon some of the high-end details, and sell the home for a profit to pay off his debt and potentially buy other cash-flowing properties.
To do this, Torres structures a deal with a penalty clause to discourage his friend from keeping the home. He offers $200,000 to complete the home in 120 days in exchange for 15% of the net profit from the sale. The penalty clause entitles him to the same profit, plus interest, should his friend decide to hold on to the home.
Investors who are new to house flipping may gain valuable insights from this show in addition to entertainment value. For example, Torres redirects his friend to choose aesthetic elements that will appeal to buyers instead of himself. He points out that time is money and stresses the importance of having a plan and sticking to a budget.
Beachfront Bargain Hunt
With hundreds of episodes over the course of 30 seasons, Beachfront Bargain Hunt is one of the most popular shows on HGTV. It follows homebuyers seeking budget-friendly homes in beach markets across the country. Waterfront homes tend to earn more revenue, so finding a budget home on the water can be a good investment. The show stays true to homeowners’ budgets and provides estimated rental income for buyers hoping to offset their mortgage payments.
But there are challenges and risks to owning a beachfront home, which the show fails to caution against. For example, beachfront homes tend to have higher insurance costs and may even be difficult to insure. Higher maintenance and repair costs can also impact homeowners’ budgets. Though it’s not the most realistic, it can be fun to watch homebuyers compare potential beachfront properties in different markets.
The Bottom Line
Most real estate reality TV shows have nothing to do with reality. But a few may be instructive, or at least interesting, to people with careers in real estate. Overall, we found Buy My House and The Deed to be among the most engaging and provide the most practical applications for real estate investors.
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By Justin Gesso
Whether you’re taking your first steps or fine-tuning your strategy, understanding the fundamental language of real estate is paramount. In this post, I’ll cover the top 5 real estate investment terms that are essential for every investor’s toolkit. From cash flow to leverage, these terms form the bedrock of successful investing. I think it is also important to know the right meaning for these terms and many people stretch the meanings or completely change them!
So, let’s dive in and equip ourselves with the knowledge that will shape our journey towards financial prosperity.
1. Cash Flow – The Foundation of Financial Success
Let’s start with a term close to every investor’s heart – cash flow. Beyond the straightforward inflow and outflow of funds, it serves as the cornerstone of financial success in real estate. It is one of the primary metrics I use to make purchase decisions. I also look at how good the deal is and how much value I can add.
Many people will tell you that cash flow is simply the rent minus the mortgage and insurance. However, if you want to know the true cash flow you will need to know all of your expenses. Here is an example of what true cash flow looks like:
- Rent: $2,000
- Mortgage: $1,100
- Taxes: $200
- Insurance: $200
- Hoa: $50
- Vacancies: $100
- Maintenance: $200
- Property management: $180
One investor might tell you the cash flow is $500 a month but they are leaving out many of the expenses the property will incur over time. The true cash flow would be -$30!
2. Cap Rate – A Metric for Strategic Decision-Making
Cap rate, a metric mostly used on commercial properties and multifamily housing gives an idea of what the property will make without financing and what the property is worth based on the NOI or net operating income. The basic formula is:
net income / price = cap rateThe Cap Rate formula may seem simple enough, but it can be manipulated very easily. Investors may not include all the expenses in the NOI, or they may use projected income instead of actual income. Never take these numbers as absolute without digging into them.
3. ROI – Evaluating Investment Performance
Return on Investment (ROI) serves as the scorecard for your property’s performance. As a pair to cash flow, ROI helps you determine what the property will make based on many factors like loan pay down, appreciation, and value add. Cash flow looks at what the property makes on a monthly basis and ROI looks at the big picture.
ROI is not easy to figure because some years may have a huge increase in value thanks to adding tenants or making repairs while other years may have much more modest returns. You would figure ROI on an annual basis and may want to separate out first-year ROI from the later years’ ROI because of those jumps in value.
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4. Leverage – Maximizing Potential While Mitigating Risks
Leverage is the prime weapon of real estate investors if you are looking to scale quickly. With leverage, you only invest a fraction of the total purchase price, which can cause your returns to be significantly higher than investing in something like stocks. To achieve leverage, you use financing. Financing is one of the most important aspects of investing in real estate. You can make more money with loans than by paying cash.
On this site, I talk about the many different, creative ways you can finance real estate investments.
5. Equity – The Silent Wealth Builder
Equity, an often-underestimated force in wealth accumulation, goes beyond property values, embodying true ownership.
equity = current market value - amount financedEquity can be built slowly through market appreciation and loan pay down. You can also build equity by adding value and getting great deals on properties. I prefer to use both! Many people may say equity does not matter because it is not cash in hand, but it can become cash in hand by using a cash-out refinance, or selling. You can even use a 1031 exchange to sell and not pay taxes on the profit.
Thanks to leverage and equity, my net worth has skyrocketed to over $10 million just from real estate.
Even better, you can use equity and leverage together to purchase additional properties and scale up your business using the BRRRR method.
Conclusion
This primer serves as a solid foundation for fundamental real estate investment terms. As you navigate real estate, I invite you to explore the extensive resources on InvestFourMore, where a wealth of data-driven insights and strategies await.
Feel free to engage with the community, sharing your experiences or seeking guidance. Here’s to your continued success in the world of real estate investment – stay informed, stay strategic, and keep building your path to financial prosperity!
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Aly J. Yale
Cash-out refinancing is pretty common in real estate investing. An investor will cash in on the equity they have on an existing property and then use those funds toward a down payment on their next property. Rinse and repeat.
That complicated process may soon be unnecessary thanks to a new fintech company.
Downpayments, a Miami-based financial tech startup, has come up with a way for investors to tap their existing property equity to buy new properties—no refinancing required. Here’s how it works and what investors need to know about it.
How the Program Works
Downpayments essentially gives investors a loan, which they can use toward their down payment. There are two options:
- An interest-free loan of up to 10% of your next investment’s purchase price
- A 20% down payment at a “competitive” interest rate (currently 7%)
In both cases, the loan must be paid off within four years of closing.
The program can benefit investors with a number of goals. As the company explains on its website:
Depending on your circumstances, this may mean different things; it might mean preserving your savings or avoiding having to go through a cash-out refinance in order to access the capital, which often means breaking a low fixed-interest rate. It might also mean you can buy your next investment property sooner, or without an equity partner, so you can control your own destiny and have the freedom to grow your property portfolio on your own terms.
Downpayments.com
Of course, nothing comes for free. While using Downpayments won’t require you to refinance your loans, you will need to put your property up as collateral. You’ll also need to use Downpayments’ brokerage services as you shop for your next investment.
As your registered in-house brokerage, Downpayments will curate your listings, provide on-demand showings, comparable sales, and guide you to the closing table.
Downpayments.com
Essentially, you won’t pay Downpayments directly, but it will get a commission from your eventual property purchase (just as any real estate agent would).
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Is Downpayments Right for Your Portfolio?
Right now, Downpayments is only available to investors purchasing properties in Florida, but the company says it’s expanding to other states later this year. (No word on what those states will be, though.)
Still, even if the program’s available in your area, think carefully before proceeding. While it’s billed as an alternative to cash-out refinancing, Downpayments doesn’t help you avoid financing altogether. In fact, it just adds another loan to your mix—meaning extra monthly payments to balance and an even further leveraged property.
If you do use it, make sure you’re on a good budgeting system and are prepared to make your payments—on time, every time. As with any loan against your property, there’s a risk of foreclosure if you’re unable to make your payments.
You’ll also want to consider the brokerage requirements, especially if you have an agent you typically use when vetting new investments. Using Downpayments could mean forgoing that agent’s guidance or, potentially worse, doubling down on commissions if you decide to use both services.
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Renters are increasingly ditching their families and roommates to live alone, according to a report from RentCafe.
The number of solo renters increased 6.7% between 2016 and 2021, reaching 16.7 million people. Because of the pandemic and social distancing, there was a peak in 2020, reaching a record 17.7 million. Living alone is now the most popular living arrangement.
While the number of lone renters grew, renters with roommates became less common. After a 6.3 million peak in 2019, that number sat at 5.8 million in 2021. The number of people renting with family followed a similar path, dropping from 71.3 million in 2016 to 68.1 million in 2021.
Among the metros RentCafe analyzed, the city with the largest increase of lone renters between 2016 and 2021 was Salt Lake City, which saw a 24.9% boost. The report said cost of living and healthcare were key factors in the area’s migration.
These factors were also present for the next three cities on the list, all in Texas: McAllen and San Antonio, where the share of solo renters grew 24.2% and 21.7%, respectively, and Austin, where the demographic grew 23.9%. Dallas also made it into the top 10. Texas’ affordable housing crisis is leading more people to be long-term renters, a position many across the nation are in.
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While apartment construction reached a 40-year high in the third quarter, renters are still experiencing skyrocketing rents. Earlier this month, the Supreme Court declined to hear a case on rent control in New York City that could have affected rent control laws nationwide and made a pathway for rent-stabilized housing. In July, the Biden administration called on landlords to eliminate surprise fees for tenants. As a result, a number of states passed legislation on the matter.
Baby boomers and millennials make up the largest proportion of people living alone, representing a cumulative 61% of solo renters. RentCafe reported that because of accessible shopping and services, as well as smart home tech, aging in place is becoming increasingly feasible.
Income is also a factor. Baby boomers need an income of about $50K to be a solo renter, which is $16K more than what an average renter would need to afford rent. Millennials represent 29.5% of Americans renting alone, and solo renters in this generation earn $56K on average, $22K above the average renter’s income.
These two groups are followed by Generation X, who make up 21.3% of solo renters; the Silent Generation, representing 12.8%; and Gen Z, with 3.9%, or 640,000 people.
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