By G. Brian Davis
The Big Picture On How To Avoid Capital Gains Tax on Real Estate:
- The IRS taxes your profits on real estate and other investments as capital gains.
- The tax rate on capital gains is lower than regular income — if you owned the investment for at least a year.
- Real estate investors have many options to reduce, defer, or avoid capital gains taxes. Each method have their pros and cons, so make sure that your chosen one fits with your overall real estate investment strategy.
- The IRS taxes your profits on real estate and other investments as capital gains.
- The tax rate on capital gains is lower than regular income — if you owned the investment for at least a year.
- Real estate investors have many options to reduce, defer, or avoid capital gains taxes. Each method have their pros and cons, so make sure that your chosen one fits with your overall real estate investment strategy.
When you sell a property for a profit, you owe capital gains taxes on it. Maybe. Sometimes. If you don’t know how to avoid real estate capital taxes.
Because real estate investments come with a slew of tax advantages. While you own the property as a rental, you can take nearly two dozen landlord tax deductions. And when it comes time to sell, you can reduce or avoid capital gains taxes on real estate through another half dozen options.
Start thinking about your real estate exit strategies now, long before you’re actually ready to sell. By positioning yourself early, you can dodge the bullet of capital gains taxes on investment properties altogether.
What Are Capital Gains Taxes on Real Estate?
The IRS requires you to pay taxes on your profits when you buy low and sell high. Capital gains taxes apply whether you earn a profit buying and selling stocks, collectibles, or anything else of value — including real estate.
Uncle Sam calculates your capital gain by subtracting your cost basis (the amount you paid) from the sale price, minus any expenses such as Realtor fees. As with all income and profits, you must report these gains to the IRS.
You can sometimes increase your cost basis to lower your capital gains. For example, you can add some purchase closing costs to your cost basis. Likewise, you can add the cost of property improvements to lift your cost basis and reduce your taxable gain.
Not all capital gains are treated equally. Capital gain taxes depend on how long you owned the asset, whether you lived in the property as your primary residence, and any adjustments you can make to your cost basis. Homeowners get a special exemption from capital gains taxes, up to $250,000 per spouse (more on that shortly).
Lower capital gains taxes apply to assets you owned for at least a year, referred to as long-term capital gains.
How Much Is Capital Gains Tax in Real Estate?
If you own an asset for less than a year, you’ll owe short-term capital gains tax on it. The IRS taxes these short-term profits at the regular income tax bracket rates. For example, if you pay taxes at the 24% tax bracket, you’ll owe Uncle Sam 24% of your short-term capital gains from that year.
If you hold an asset longer than a year, the IRS taxes your gains at a lower tax rate. Expect to pay 0-20% (exact tax tables below).
Another crucial difference between how capital gains are taxed versus ordinary income: you don’t pay different tax rates for different income segments. If your total taxable income is above the threshold for paying 15% capital gains tax, all of your capital gains are taxed at 15%.
For example, say you earned $150,000 last year, of which $50,000 were long-term capital gains. You pay 15% of the total capital gains, rather than paying 0% on one portion and 15% on another (the way that ordinary income tax brackets work. You’d pay a total capital gains tax bill of $7,500 for the year.
Short-Term vs. Long-Term Capital Gains
Before diving into individual strategies to avoid real estate capital gains taxes, you first need a baseline understanding of short-term versus long-term capital gains.
If you own an asset — any asset — for less than a year and then sell it for a profit, the IRS classifies that profit as a short-term capital gain, taxed at your regular income tax rates. For example, say you flip a house and earn a $50,000 profit on top of your $85,000 salary. As a single person, you would pay taxes on that extra $50,000 in income at the 24% federal tax rate.
Regular income tax rates, and therefore short-term capital gains tax rates, read as follows in 2024:
| Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | 0 – $11,600 | 0 – $23,200 | 0 – $16,550 |
| 12% | $11,600 – $47,150 | $23,200 – $94,300 | $16,550 – $63,100 |
| 22% | $47,150 – $100,525 | $94,300 – $201,050 | $63,100 – $100,500 |
| 24% | $100,525 – $191,950 | $201,050 – $383,900 | $100,500 – $191,950 |
| 32% | $191,950 – $243,725 | $383,900 – $487,450 | $191,950 – $243,700 |
| 35% | $243,725 – $609,350 | $487,450 – $731,200 | $243,700 – $609,350 |
| 37% | $609,350 and up | $731,200 and up | $609,350 and up |
But when you own an asset for more than a year and sell it for a profit, the IRS classifies that income as a long-term capital gain. Instead of taxing it at your regular income tax rate, they tax it at the lower long-term capital gains tax rate (15% for most Americans).
Here are the long-term capital gains tax brackets for tax year 2023:
| Capital Gains Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 – $44,625 | $0 – $89,250 | $0 – $59,750 |
| 15% | $44,626 – $492,300 | $89,251 – $553,850 | $59,751 – $523,050 |
| 20% | $492,301 and up | $553,851 and up | $523,051 and up |
| Additional Net Investment Income Tax (NIIT) | |||
| 3.8% | MAGI above $200,000 | MAGI above $250,000 | MAGI above $200,000 |
And the long-term capital gains brackets for 2024:
| Capital Gains Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 to $47,025 | $0 to $94,050 | $0 to $63,000 |
| 15% | $47,026 to $518,900 | $94,051 to $583,750 | $59,751 – $523,050 |
| 20% | $518,901 and up | $583,751 and up | $551,351 and up |
| Additional Net Investment Income Tax (NIIT) | |||
| 3.8% | MAGI above $200,000 | MAGI above $250,000 | MAGI above $200,000 |
The easiest way to lower your capital gains taxes is simply to own the asset, whether real estate or stocks, for at least a year.
Capital Gains Tax on Home Sales vs. Rental Properties
The short version: homeowners get an exemption on capital gains tax (under some circumstances). Landlords don’t.
Single homeowners can avoid capital gains tax on the first $250,000 of profits; married homeowners can dodge capital gains tax on up to $500,000. They must have lived in the property for at least two of the last five years however. That means second homes or vacation homes don’t qualify (more on the Section 121 exclusion below). House hackers who live in a property with up to four units, or a single-family property with an accessory dwelling unit, do qualify for the exclusion.
Real estate investors don’t get this homeowner exclusion for capital gains tax. So how can they avoid capital taxes on real estate?
When Do You Pay Capital Gains Tax on a Home Sale?
You typically pay capital gains taxes on sold properties along with the rest of your tax return on April 15.
However the IRS may hit you with a penalty if you owe a large capital gains tax bill and fail to make estimated tax payments throughout the same tax year. Specifically, the IRS says “Generally, you must make estimated tax payments for the current tax year if both of the following apply:
-
- You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, and
- You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your current year’s tax return, or
- 100% of the tax shown on your prior year’s tax return. (Your prior year’s tax return must cover all 12 months.)”
Speak to your tax advisor about estimated tax payments if you expect a large profit on the sale of a property.
How to Avoid Capital Gains Tax on Real Estate
No one wants to pay more taxes than they have to. But as a real estate investor, you have far more options than the average American to lower your taxes, at least on the profits from your investment properties.
Beyond owning the property for at least a year, try the following tax tactics to reduce or eliminate your real estate capital gains taxes entirely.
1. Avoid Capital Gains Tax on Your Primary Residence
When you sell a property that you’ve lived in for at least two of the last five years, you qualify for the homeowner exemption (also known as the Section 121 exclusion) for real estate capital gains taxes.
Single homeowners pay no capital gains taxes on the first $250,000 in profits from the sale of their home. Married homeowners filing jointly pay no taxes on their first $500,000 in profits.
You don’t have to live in the property for the last two years, either. Any two of the last five years qualifies you for the homeowner exclusion.
Consider doing a live-in flip, where you live in the property for two years as you renovate it, then sell it for a profit. It makes for a fun way to house hack, if you’re handy and enjoy fixing up old homes.
Alternatively, you could house hack a multifamily property, then either sell it after two years or keep it as a rental. Either way, you get to live for free and pay no real estate capital gains taxes! Toy around with our house hacking calculator to plug in any property’s cash flow numbers.
You can use the homeowner exemption repeatedly, moving as frequently as every two years and avoiding capital gains taxes. But you can’t use it twice within a two-year period.
2. Check If You Qualify for Other Homeowner Exceptions
Had to move in under two years? You may still qualify for a partial exemption from capital gains taxes on your primary residence.
The IRS offers several exceptions for homeowners who were forced to move, whether for a change of job, health issue, or other unforeseeable events. If you lived in the property for less than two years and were forced to move, speak with your accountant about any partial capital gains exemptions you might qualify for.
3. Raise Your Cost Basis by Documenting Expenses
Here’s a quick terminology lesson for non-accountants: your cost basis is what you paid for a property or other asset, including renovation costs.
Say you buy a property for $100,000, put $40,000 of repairs into it, then sell it for $200,000. You’d calculate your profit by subtracting your $140,000 cost basis from your $200,000 sales price, for a taxable profit of $60,000.
(In the real world you’d have all kinds of other deductible expenses, such as the real estate agent’s commission, but they distract from the point at hand so we’re ignoring them.)
It’s easy enough to keep your receipts, invoices, and contracts when you’re flipping a house over the course of a few months. But what about when you own a rental property for 30 years? All those receipts, invoices, and contracts tend to get lost over the years, but they can help lower your capital gains tax bill when it comes time to sell.
The cost of every “capital improvement” you make to the property can add to your cost basis, reducing your taxable gains. Returning to the example above, you buy a rental property for $100,000, and over the next 30 years you pay $500 here and $1,500 there in capital improvements such as new windows, roof repairs, kitchen updates, landscaping, new driveways, and so forth. It adds up to $40,000 in total capital improvements, but it’s spread out over 30 years.
When you sell the property for $200,000, you can raise your cost basis by that $40,000 and pay capital gains on $60,000 rather than $100,000 — but only if you kept all those receipts and invoices. Save digital copies of all cost documents in a folder specifically for that property that you can pull up when it comes time to sell. It can save you tens of thousands of dollars in taxes!
4. Do a 1031 Exchange
The IRS lets you swap or exchange one investment property for another without paying capital gains on the one you sell. Known as a 1031 exchange, it allows you to keep buying ever-larger rental properties without paying any capital gains taxes along the way.
Here’s how the process goes:
| Step | Action | Timeline | Key Points |
| 1. Consult Advisor | Consult tax advisor and Qualified Intermediary (QI). | Before starting | Understand 1031 rules and select a QI. |
| 2. Sell Property | Sell the current investment property. | Varies | Proceeds must go to the QI. |
| 3. Identify Property | Identify replacement properties. | Within 45 days | Up to three properties or any number if their combined value is within 200% of the sold property. |
| 4. Declare Intent | Declare intent for 1031 exchange in writing. | During property sale | Proper documentation is essential. |
| 5. Exchange Agreement | Sign exchange agreement with the QI. | Before closing replacement | Specify property exchange and fund transfer terms. |
| 6. Close Purchase | Purchase replacement property via QI. | Within 180 days | Title transfer must match the entity that sold the initial property. |
| 7. Report to IRS | Report exchange using IRS Form 8824. | By tax filing deadline | Detailed reporting required. |
| 8. Maintain Records | Keep transaction records and monitor requirements. | Ongoing | Ensure compliance and plan future exchanges if needed. |
The Breakdown
It works like this.
You scrimp and save the minimum down payment for a rental property, buying a property for $100,000 and setting aside the cash flow for a few years. The property builds equity, appreciating in value to $120,000 even as you pay down the mortgage, and after a few years you’ve set aside more cash to boot.
You sell the property, and instead of paying capital gains taxes on the profits, you put them toward a down payment on a $200,000 multifamily rental.
A few years later you buy a $350,000 multifamily property, and a few years after that a $600,000 property, each of which produces more real estate cash flow than the last.
Eventually, you reach financial independence, with enough cash flow to live on — and you never had to pay a cent in real estate capital gains taxes.
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5. Sell in a Year When You’ve Taken Other Losses
Capital losses cancel out capital gains. So if you get hit with losses one year, that year makes a great time to sell your property so your losses offset your gains.
Imagine the stock market dips 10% and you sell off some stocks, hoping to avoid further losses from market correction or bear market. You take $20,000 in losses from selling those stocks.
Meanwhile you own a rental property that you’ve been meaning to sell. You decide to sell it now, knowing you can offset your capital gains on it with the losses you took on your stocks. You sell the property for a profit of $30,000, and you pay capital gains taxes on $10,000 after subtracting the $20,000 in losses from stocks.
Perhaps you even luck out with the timing, putting that $30,000 back into the stock market at its low point and riding the recovery upward.
6. Ladder Real Estate Syndications
When you invest in real estate syndications, you tend to show paper losses for the first few years. You can use those paper losses to offset other passive income and gains.
Why do syndications typically report losses on paper for the first few years, even as they pay you hefty distributions and cash flow? Because syndicators often perform a “cost segregation study” when they buy the property, to recategorize as much of the building as possible to other tax categories with shorter depreciation periods.
Of course, once the property sells and you get your big payday, you’ll owe both capital gains taxes and depreciation recapture. Which is precisely why it helps to keep investing in new real estate syndications every year, so you continue offsetting gains with paper losses from depreciation.
Hence the term “ladder” — the new syndication you buy this year helps offset taxable gains from the syndication you bought four years ago.
7. Harvest Losses
Sometimes, investors strategically sell for a loss, and use that loss to offset their capital gains. It’s called harvesting losses, and it makes sense when you have assets you don’t like or that underperform for you.
Say you bought a portfolio of five rental properties. You find yourself short on cash and want to raise a little capital by selling one, but don’t want to pay capital gains taxes on it.
One of the properties turned out to be a lemon, and has caused you nothing but headaches and negative cash flow. To offset the gains of selling a property with some equity, you decide to harvest some losses by getting rid of the lemon at the same time. It’s just costing you money anyway, so now makes a great time to sell it.
You sell both properties, and the loss from the lemon washes out the gains from a “good” property. You ditch the underperformer that was costing you money each month, and you avoid property gains taxes on the property you sold for a profit.
A more common example involves stocks. Say you buy a stock that consistently underperforms, and you have no reason to believe it will leap up in value in the future. Rather than letting your investing capital languish in the no-man’s-land of bad returns, you cut your losses by selling it, and put the money toward investments that will generate higher returns.
8. Convert Your Home into a Rental Property
If the homeowner exemption leaves you still owing capital gains taxes, you could always just keep the property as a long-term rental. As long as the property cash flows well, there’s no reason to ever sell it!
Let it generate passive income for you, month after month, year after year. As a buy-and-hold property, you can keep depreciating it for accounting purposes even as it appreciates in value.
Before converting your home into a rental property, run the numbers through a rental cash flow calculator. You may find your money could perform better for you by buying a property specifically as a rental, or even in the stock market, rather than sitting tied up in your ex-home.
That goes doubly when you can avoid capital gains taxes on the first $250,000 or $500,000 in profits.
9. Convert Your Home into a Short-Term Rental
No one says you have to rent the property out to long-term tenants.
Run the numbers to calculate how it would perform as a vacation rental on Airbnb instead. You might just find it cash flows better.
Just watch out for local regulations designed to restrict short-term rentals — some cities effectively ban Airbnb rentals.
10. Move to a State with Lower Taxes
Uncle Sam isn’t the only one after your tax dollars. Most state governments actually take a harder stance than the IRS on capital gains from real estate, charging income taxes at the normal tax rate.
Nine states charge a lower long-term capital gains tax rate however, similar to the federal government: Arizona, Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin.
Another seven states charge no income taxes at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Finally, New Hampshire and Tennessee don’t charge regular income taxes, but do tax investment income.
Consider moving to a state with a lower tax burden to keep more of your money where it belongs: in your own pocket.
11. Pull Out Your Equity by Borrowing, Not Selling
You don’t have to sell your investment property in order to cash out its equity. Why not pull out the equity and keep the property to boot?
When you own a rental property free and clear, it does cash flow better. But you can still take out a rental property loan or a HELOC against your investment properties to access the equity, all while the property continues to appreciate in value and generate income for you each month.
Your tenants pay off your loan for you, and all the while you keep benefiting from cash flow, appreciation, and investment property tax advantages.
12. Pass the Property to Your Heirs as Part of Your Estate
No one says you have to sell your property. Ever.
Why not keep it until the day you die, and pass the golden goose on to your heirs? It can keep generating passive income for them too.
And they probably won’t pay any inheritance taxes on your rental property either. Your heirs get a free pass on the first $13.61 million you leave them in tax year 2024, so unless you die with 30 properties, they probably won’t get hit with gnarly inheritance taxes.
Best of all, the cost basis resets upon your death. Again, cost basis is what you paid for the property plus any capital improvement costs, and it’s the “basis” on which any profits are taxed. When you die, it resets to the property value at the time of your death.
For instance, say you buy a property for $100,000, and over the next 30 years you put another $60,000 in capital improvements into it. Then you die and leave the property to your favorite child (we both know you have one).
At the time of your death, the property is worth $500,000. If your child were to sell the property, their cost basis for tax purposes would be $500,000 rather than the $160,000 in purchase price and improvement costs that you actually paid.
You avoid real estate capital gains tax entirely, your child avoids inheritance taxes, their cost basis resets so they wouldn’t owe capital gains taxes on all the equity you built, and they get an income-producing property. Win-win-win-win.
13. Buy or Transfer the Property to a Self-Directed Roth IRA
With a self-directed IRA, you get to invest in any assets you like, within a few constraints from the IRS. That makes self-directed IRAs a darling of real estate investors across the county.
And with a Roth IRA, of course, your assets grow tax-free so you don’t pay taxes on profits and returns.
Still, proceed with caution when it comes to self-directed IRAs. They come with setup and administration expenses, and add another layer of complications. Self-directed IRAs add particular challenges when you use real estate leverage to finance with a rental property loan.
Do your homework thoroughly, speak with your financial advisor, and consider leaving your IRA investments to stocks — real estate comes with plenty of its own cooked in tax advantages, after all.
14. Donate the Property to Charity
You could leave your property to your children. Or you could tell the spoiled brats to go earn their own fortune, and give your property to charity instead.
Not only do you not have to pay real estate capital gains taxes, but you also get a juicy tax deduction. For your entire equity in it, based on the current market value of your property.
As a nonprofit organization, the charity doesn’t pay any capital taxes on the property either. Again, both you and the recipient win, and the only party losing out is the IRS.
How to Calculate Capital Gains Tax on Real Estate
Long-term capital gains don’t add on to your regular income or push you into a higher income tax bracket. Instead, the IRS calculates them on a totally separate schedule.
If you earn $50,000 in regular income in 2023 and another $20,000 in long-term capital gains, the IRS taxes you like this:
For your regular income taxes, you’d pay 10% on the first $11,600 you earned, 12% on the next $33,550, and 22% on the remaining $4,850.
Because you earned more than $47,025 in total income, you’d owe long-term capital gains tax at the 15% rate.
FAQs on Capital Taxes on Real Estate
Still have questions? Here are a few common ones.
Can home sales be tax-free?
Yes, if you lived in the property as your primary residence for at least two of the last five years, you qualify for the homeowner exclusion (Section 121 exclusion). Single taxpayers are exempt from paying capital gains tax on the first $250,000 in gains, and married filers get the first $500,000 tax-free.
Do you pay capital gains taxes when you sell a second home?
Yes. Unless you utilize one of the tax strategies above, that is.
Do you pay capital gains tax if you lose money on a home sale?
No — capital gains tax applies to gains (profits). If you lose money on a bad investment, the loss can offset other investment gains. You may be able to offset up to $3,000 in active income as well (speak to an accountant!), and you can carry losses forward to future years as well.
Do house flippers pay capital gains tax?
Yes, and usually at the short-term capital gains rate, assuming they own the property for less than a year. If the renovation goes long, and they own the property for over one year, they owe capital gains taxes at the long-term tax rate.
When do I pay the capital gains tax on real estate?
You pay capital gains taxes on properties as part of your annual income tax return due on April 15.
Can you avoid capital gains by buying another home?
If you do a 1031 exchange, also known as a like-kind exchange, to buy a new investment property after selling an old investment property, then you can defer capital gains taxes. When and if you ever sell the replacement property, you’ll owe capital gains taxes at that time, unless you do another like-kind exchange.
You don’t need to buy another property to qualify for the homeowner exclusion on your primary residence.
Do I have to pay capital gains tax if I sell a second home or rental property?
Yes, unless you do a 1031 exchange, which defers it until you sell the new replacement property.
Final Thoughts On Capital Gains Tax
When you own an investment property for decades, as so many buy-and-hold investors do, you can rack up some serious equity. Equity that the IRS would love to tax you on, when you go to sell.
As a quick note on depreciation, beware that you owe the IRS depreciation recapture regardless of whether you actually deduct for property depreciation while owning it. So make sure you take depreciation on your investment properties in every tax return!
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Morgan Stanley real estate analyst Laurel Durkay appeared on CNBC recently to deliver the financial behemoth’s latest housing outlook. It was great news for property owners and a call to action for potential buyers sitting on the fence, waiting for rates to fall.
Such is the shortage of inventory; in the next decade, 2 million homes will need to be built to satisfy demand. This means the rental market is set to soar.
It’s an opinion shared among real estate number crunchers at lenders and data-heavy websites. “While inventory this May is much improved compared with the previous three years, it is still down 34.2% compared with typical 2017 to 2019 levels,” said Realtor.com‘s Sabrina Speianu.
An article in Forbes echoed Speianu’s comments: “For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher,” Keith Gumbinger, vice president at online mortgage company HSH.com, told the business website. “This additional inventory, in turn, would ease the upward pressure on home prices, leveling them off or perhaps helping them to settle back somewhat from peak or near-peak levels.”
Low Inventory Keep Renters Renting
Limited inventory—particularly away from Sunbelt markets—has caused rents to remain elevated and stopped inflation from falling as fast as economists would like. The resultant high interest rates have created a perfect storm of unaffordability. Developer AMH Homes says in its markets, the cost of buying a home is 25% more expensive than renting. This has continued to push potential buyers toward rental homes.
Rental data site Yardi Matrix reveals that the rents apartment tenants pay to renew their leases are still rising. Rents in the Northeast and Midwest were up considerably over last year. The highest gains were seen in New York City, with a 4.8% year-over-year increase, and Columbus, Ohio, with a 3.6% increase.
Single-Family Homes Are a Coveted Investment
According to Morgan Stanley, single-family homes are the most lucrative asset class, with national developers such as AMH Homes focusing specifically on them. The build-to-rent single-family development boom is one of the hottest real estate sectors.
In 2023, builders completed an estimated 97,000 build-to-rent residential homes, including those outside build-to-rent communities, which represented an increase of 45% from the year before and a record number. Moving into a built-to-rent home gives tenants the feeling of living in a single-family home community while they prepare financially to move into a home of their own. It’s an ideal stopgap amid high interest rates.
Elsewhere, high rates have caused developers of large multifamily rental projects, such as Seattle-based Tyler Carr, who was due to break ground on a 104-unit development in Boise, Idaho, to press pause. And in Worcester, Massachusetts, at the center of the state, about 2,000 units have been delayed in coming to market.
“We certainly are seeing a decline in construction,” said Robert Dietz, chief economist at the National Association of Home Builders, told the Wall Street Journal. “Deals and financing have dried up.”
Housing data company CoreLogic, quoted in Forbes, recently analyzed single-family rental increases and found that of the 20 metros analyzed, New York posted the highest year-over-year increase in single-family rents in February 2024: 6.9%. Seattle came in second at 6.8%, followed by Boston at 6.4%.
Taking a step back and looking at the data with a wider lens, the numbers are staggering. According to Realtor.com, the typical listed home price grew by an astounding 37.5% overall from May 2019 to May 2024. The demand has created a golden opportunity for smaller investors who either can’t get approved for multifamily units or are unwilling to undertake the responsibility to laser-focus on building their single-family portfolios.
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Essential Moves You Can Make to Build a Single-Family Rental Portfolio
So what can real estate investors do to make sure they are positioned to get into single-family rentals? Here are 12 moves to consider.
1. Increase your credit score
Let’s start with the basics. Without a high credit score, your chances of getting approved for a loan are severely diminished. There are many ways to start building your credit. The faster you start, the better.
2. Buy a rental first
While the desire to buy a home to live in yourself is understandably strong, it might not be the best move if you want to scale quickly. Keeping a low debt-to-income ratio will allow you to get approved faster and buy more homes in a shorter period of time.
3. House hack
Here’s another old-school technique: Assuming you already have a single-family home with additional space that can easily be rented, such as a finished basement, renting part of your home to help with your expenses, either to a full-time tenant or a short/mid-term guest, will help you save cash faster for your next property.
4. Live in your home and move every two years
If you are not in a rush to scale, this is a great way to avoid capital gains taxes while buying and selling your personal residence for profit. The tax code allows owner-occupants who have lived in a home for two out of every five years to forgo paying capital gains taxes on $250,000 of profit if single and $500,000 of profit if a couple. You can use the money made as a down payment for an investment property.
5. BRRRR
No article on scaling would be complete without mentioning the BRRRR method. In an era of high interest rates, be careful that your investment still cash flows once you have taken equity out of it, or at least breaks even. Also, be sure to estimate the rehab costs correctly so you have enough cash to complete them and get your property rented quickly.
6. Liquidate assets
Whether you are an empty nester looking to downsize your personal residence or have stocks or a 401(k), you can liquidate assets that are not appreciating as quickly as the real estate market is one of the fastest ways to free up cash for investment.
7. Borrow money from friends and family
If you want to start your single-family real estate investing career, borrowing money from friends isn’t a bad idea—provided they say yes! Borrowing from people you know serves the same purpose as a hard money lender (without the high interest rates), and once you refinance the property, you can pay them back and use the equity to continue to BRRRR.
8. Take out a HELOC
If your single-family investment will appreciate at a greater interest rate than you will pay on your HELOC, consider using some of the interest in your residence to start your investing career.
9. Move into your rental and rent out your personal residence
Since it is currently 25% cheaper to rent than buy in some markets, moving into a rental while renting out your personal residence will not only leave you ahead financially but lower your debt-to-income ratio. If you can manage to amass a down payment for your second home in savings, helped by your lower living costs, you’ll be on your way to building a portfolio.
10. Earn more money and minimize expenses
We might be in an era of quiet quitting, but there’s a lot to be said for earning the most money you can from your job, being strategic about getting promoted or building your career, and keeping your living expenses low to save and invest in real estate. If you cannot earn more money in your day job, consider a side hustle.
11. Move somewhere cheaper
Moving somewhere cheaper doesn’t necessarily mean moving into a bad neighborhood. It could mean bunking with mom and dad (if you are young enough, and they are willing), moving into a co-living space, or even moving overseas. The idea is to decrease your living expenses so you can save for your first investment.
12. Find a seller-financed deal
These are often easier said than done to find. However, there are always investors who are cycling out of being full-time landlords and don’t want the tax hit that comes with receiving a lump sum of cash, but prefer regular payments while enjoying their retirement. The advantage for a buyer is that the loan won’t show up on your credit reports, and qualifying might be easier than with a traditional lender and less expensive.
Final Thoughts
As ATTOM Data’s recent Top 10 Counties for Buying Single Family Rentals in 2024 report shows, single-family rentals are booming nationwide. Between 2023 and 2024, median three-bedroom rents increased more than median single-family home prices in 216, or 63%, of the markets analyzed.
Buying a single-family home can be the springboard for other purchases and is one of the easiest loans to qualify for, thanks to FHA lending guidelines. A 203(k) loan can also help you fix up your home, giving you a live-in BRRRR, which you can then refinance and repeat.
Not every deal will cash flow in this current market of high interest rates and minimal inventory. As long as you are not losing money, appreciation is the real play. Once rates drop, you can refinance and enjoy cash flow.
Provided by Bigger Pockets
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Source: Disrupt Equity
In the complex world of investment opportunities, the multifamily real estate sector is poised for success in 2024. With its multifaceted capacity to deliver stability, growth, and tax benefits, residential properties that serve multiple inhabitants are more than a physical asset – they’re a versatile financial instrument. Here, we explore why those with a financial eye to the future should consider multifamily real estate as a linchpin in their investment portfolio.
Maximizing Benefits Through Leveraging Debt
Multifamily properties offer several strategic advantages that single-family homes simply cannot match. The first and arguably most significant is debt leverage. With a single down payment, an investor can control a much larger asset through a loan, magnifying the potential return on investment.
Furthermore, fixed rate debt offers a hedge against future interest increases, a particularly compelling feature amidst the whispers of economic policy shifts. Coupled with the fact that tenants often cover the costs of this debt through rent, the investor enjoys not only a stronghold against inflation but immediate cash flow as well.
In the race for financial independence, few things are as satisfying as an asset that generates its own passive income to pay down the mortgage. For multifamily properties, this is a given, positioning the investor favorably when it comes to long-term wealth accumulation.
Cash Flow in Multifamily Investments
An often underappreciated yet vital aspect of multifamily real estate investments is the potential for substantial cash flow. Over time, as the principal is paid down and property values, ideally, appreciate, the monthly income generated from tenants begins to exceed the expenses associated with property management, maintenance, and mortgage payments. This surplus is what investors refer to as cash flow – the real-time return on investment that lands in your pocket each month.
For those investors committed to the long haul, this shift towards positive cash flow is a significant milestone. It represents not only a return on investment but also an increase in the asset’s equity. The longer you are in the deal, the greater the potential for cash flow becomes. This growing income stream can provide financial stability and the flexibility to reinvest in additional properties, pay down existing debts faster, or fund personal endeavors. In essence, enduring the initial years where cash flow might be leaner can set the stage for a potential windfall of passive income, underscoring the value of patience and strategic foresight in multifamily real estate investing.
The Phasing out of Bonus Depreciation
Bonus Depreciation offers specific advantages, particularly to multifamily investors, who stand to gain significantly. A key component of multifamily investment is depreciation, a method allowing the gradual tax deduction for real estate depreciation. There are several reasons to invest in 2024, the main reason being that Bonus Depreciation is being phased out.
- Current Legal Provisions: The existing IRS tax code permits investors to utilize 60% bonus depreciation for certain qualifying improvements. In 2025 that drops to 40% and will be completely phased out by 2027.
- Future Policy Adjustments: The availability of these deductions is anticipated to decrease in the forthcoming year, underscoring the urgency for investors to engage with the multifamily market promptly to capitalize on these benefits.
- Enhanced Fiscal Benefits: When these tax incentives are combined with other financial advantages inherent to multifamily investments, such as mortgage interest deductions and business expense deductions, the tax efficiency of the multifamily sector becomes particularly evident.
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Rental Rates and the Inflation
Given the Federal Reserve’s considerable expansion of the money supply, 2024 is a year characterized by inflation. In such a climate, investors in multifamily properties stand to gain a strategic advantage.
Rent growth over time plays a crucial role in countering the effects of inflation for multifamily property investors. As rental rates increase, investors can more effectively manage and offset the cost increases in property maintenance and operations, thereby preserving the profitability and value of their investments in an inflationary environment.
Investors in multifamily properties are well-placed to navigate inflationary pressures. Rents typically rise with inflation, and the value of the underlying assets, such as apartments and buildings, also appreciates. This combination effectively enhances the investor’s financial portfolio.
Riding the Wave of Changing Lifestyles
The allure of a single-family home is losing its luster for a segment of the population increasingly drawn to the convenience and cost-sharing ethos of multifamily living. Changing demographic landscapes, lifestyle priorities, and an evolving workforce mean opportunities abound in this sector.
Millennials and Gen Z, in particular, are reshaping the real estate landscape. Their preference for urban living and the flexible demands of the modern workplace have turbocharged the multifamily market, and this trend shows no sign of abating.
Capitalize Now to Secure Your Future
Investing in multifamily real estate is not just about securing a property; it’s about securing your financial future. With debt leverage, tax benefits, and inflation-resistant income, the multifamily asset class is a testament to capital preservation and growth.
In conclusion, multifamily real estate should be on your radar for those looking to build a diverse and resilient investment portfolio. The nuances of 2024 present a unique confluence of factors that make this sector particularly attractive for immediate investment.
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Provided by Rental Housing Journal
Here is a look at 4 kinds of front doors you can choose for your rental property when you are making repairs or replacing and the pros and cons of each.
The look, feel and features of a rental property’s front door are more important to tenants than landlords and property managers might think.
The front door is one of those subtle elements that can actually make a big difference to the overall feel of a property. Experts point out that a property’s front door can actually be responsible for significant fluctuations in the value of the property.
Potential tenants will likely take notice of a damaged, flimsy or older-looking entryways. They could interpret this as a sign of lack of upkeep for the property or concern for the well-being of tenants.
Additionally, a damaged front door can make it easy for burglars to identify a certain property as one that they could successfully break into.
Pros and cons of front door material for your rental property
Purchasing a brand-new front door is not a routine expense. So, if you are thinking of replacing old doors or upgrading doors on your property, here are some front door materials to consider:
Pros and cons of wooden front doors
1. Ultra-customizable – wooden doors can be tailored to match countless designs, shapes and color schemes, while also being able to house additional decorative elements, such as glass mosaics and panels
2. Flexible price points – the unique natural look of wood can be accessible for most budgets as different varieties of woods are available at a variety of price points
3. Unique look – Many property owners and designers find wood to be worth the investment as it presents a naturally variegated and “high-end” refined look that other man-made materials cannot replicate
Cons:
1. Weather-sensitive – wood is a material that is prone to be affected by its exposure to the weather and other environmental elements. Direct sunlight can fade the natural coloring of the wood, and high-moisture levels in the air (or from precipitation alone) can lead to warping and even rotting of the wood
2. High-maintenance – to ensure that the wood ages well and without being damaged by the natural elements discussed above, it’s essential to regularly treat the wood. Tinctures and sealants should be regularly applied by a reliable maintenance professional, which will be an added maintenance cost to consider.
3. High-price for top-quality – some wood varieties are naturally more resistant and sophisticated-looking, which contributes to their one-of-a-kind appeal and/or ability to last through the years without needing major attention. Premium varieties, such as mahogany or cedar, will be considerably pricier.
Pros and cons of steel front doors
1. Super safe – when it comes to property intrusions, reinforced steel doors are known to be safest against breaches, allowing for increased confidence in a property’s overall defenses against unwanted visitors.
2. Affordable but effective – when considering its wood and fiberglass counterparts, steel stands out as being far more affordable, while still offering the safety element that it shares with fiberglass and being much more low-maintenance than wood and its issues with exposure and aging.
Cons:
1. Insulation is not its forte – steel is a known conductor of heat and electricity, which makes it problematic when it comes to wanting to keep a property’s interior temperature at a set level. Steel will contribute to heating up the space when heated by outside temperatures and/or sunlight and will struggle to keep the cold out during the winter months. Insulating layers and treatments can improve this downside, but they will come at an added cost.
2. Denting – steel can easily become dented or chipped following impact, and this often results in unappealing marks that are difficult to completely erase. To effectively get right of the unappealing look of those visible surface damages, an entirely new door might need to be purchased.
3. Rusting – while steel is not as sensitive to moisture as wood, it can easily rust over time as it is exposed to moisture and precipitation. Our experts encourage consulting the manufacturer to understand whether and how professional treatments can help with rustproofing.
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Pros and cons of glass front doors
1. Unique look – solid glass doors can be made to match a great variety of preferred styles, with varying cuts, shapes and opacity available to be reproduced as desired.
2. Luminosity – glass allows natural light to enter the home like no other material can, which some property owners find to be a valuable addition to the look and feel of their property.
Cons:
1. Fragility – experts agree that glass is naturally delicate even when it is reinforced, making it essential to be mindful of potential scratches, cracks and chipping that could easily occur.
2. Privacy – while some might be excited about the way glass allows for natural light to illuminate the home, some can be put off by the way glass makes it easy for passerby’s to peek inside a property
3. Questionable safety factor – glass door made for the purpose of being utilized as a property’s front door are generally reinforced to make it difficult for intruders to gain access by easily shattering the glass surface. This being said, glass remains rather fragile and much easier to break than wood, steel, and fiberglass combined.
Pros and cons of fiberglass front doors for your rental
1. Versatile – fiberglass paneling is man-made, which allows for creating a variety of unique textures and styles. Fiberglass doors can be made to resemble a natural wood grain, or also present smooth and glossy or matte and satin surfaces for distinguished coloring that can match a variety of architectural elements.
2. Resistant – many property owners choose fiberglass front doors as opposed to wood because they are not vulnerable to discoloration and damage from exposure, while still closely resembling the look of wood. They are also more resistant to wear and tear than their steel counterpart.
3. Low-maintenance – these doors should be maintained occasionally as they age, but they do not require sealants to be regularly applied, which does help with saving considerable amounts when it comes to maintenance expenses.
4. Secure – our experts confirm that fiberglass doors are just as secure as their steel counterpart, which allows them to stand strong and dent-free following forced impact
5. Efficient – while all door types can be treated to add insulating properties, fiberglass vastly surpasses wooden and steel door when it comes to insulation. While steel will always struggle with efficiently insulating and wood is vulnerable to temperature and humidity changes, fiberglass is not affected by any of these issues. Having optimal insulation can help ensure lower energy use and expenses as it allows for a property to easily remain hot or cool temperatures as desired.
6. Affordable – while aesthetic additions – such as integrated wood or glass decors – will rise costs, basic fiberglass door models are generally rather affordable.
Cons:
Pricey add-ons – fiberglass doors are fairly affordable. But can get expensive as they are further customized with the addition of decorative elements or coats.
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By Jeff Rohde
A rental property pro forma is a comprehensive document that projects the income and expenses of a particular property. It typically offers the prospective buyer a crystal-clear picture of their potential returns.
Unlike actual financial statements, which record past transactions, a pro forma is forward-looking. It’s a blueprint, a hypothetical scenario based on a few well-informed assumptions about how a property may perform financially.
Understanding and creating a robust pro forma can significantly impact your expectations and ultimately, your investment decisions.
Sellers often use pro formas to present their properties in the best light, highlighting potential for growth and profitability that may not be reflected in past or current financials. Buyers benefit by making their own assumptions and peering into the future to see the viability of an investment before committing hard-earned money.
To help save you time when creating one for yourself, we provide a free pro forma template below. We also break down its components, analyze a buyer’s and seller’s perspectives of the document, and share pitfalls to avoid.
Key components of a pro forma template
The following pro forma components are some of the key pieces you’ll want to use to paint a realistic picture of a property’s financial potential. This in turn creates a foundation for making informed investment decisions. Here’s a closer look at each section…
Revenue sources
When detailing revenue sources, a pro forma’s primary focus is the property’s rental income. However, it’s crucial not to overlook additional revenue streams that can boost your bottom line, including:
- Late fees
- Parking and storage fees
- Charges for lost or replacement keys
- Income from appliance or furniture rental
- Laundry facilities in a multifamily unit
- Roommate fees and rent
- Pet fees and rent
Accurately projecting these figures requires market research and an analysis of comparable properties to help ensure your estimates are realistic and competitive. Consider using tools like the Zillow Rent Estimate Calculator, Rentometer, or Stessa’s Rent Estimate reports.
Operating expenses
This category includes all costs necessary to maintain and manage your investment, such as:
- Property management fees (which can vary depending on the level of service provided)
- Leasing fees paid to a real estate agent or property manager
- Maintenance and repair costs
- Property taxes
- Landlord insurance premiums
- Utilities not covered by tenants
- Landscaping
- HOA fees
- Professional fees like legal and accounting
Accounting for vacancy rates is also wise, meaning you should estimate how long and how often the property might sit empty between tenants.
Financing details
For many investors, purchasing a rental property involves securing financing. In your pro forma, detail these expenses, including:
- Loan amount
- Interest rate
- Term length
- Down payment
- Closing costs
- Any required escrow payments
These factors influence your monthly mortgage payments and the net cash flow generated by the property.
Capital expenditure (CapEx) forecasts
Capital expenditures include major repairs or improvements that increase the property’s value and/or extend its life, such as:
- Roof replacement
- HVAC updates
- Kitchen remodels
- Funds used to make a property rent-ready at the time of purchase
Unlike routine maintenance expenses, CapEx investments are not made annually. They’re used for long-term property value preservation and growth. However, consider setting aside a portion of your rental income in a reserve account each month to ensure the money is available when and if you need it.
Accurately forecasting these expenses in your pro forma helps ensure you’re prepared for significant future outlays, preventing an unexpected impact on your cash flow or paying out of pocket from personal funds.
A free pro forma template for rental properties
To help streamline your investment analysis, use our free rental property pro forma template. Incorporating the key components into this template—revenue sources, operating expenses, financing details, and CapEx forecasts—helps you create a detailed financial overview of your rental properties.
To download the template in your preferred format, click either link below. Whether you’re analyzing a new investment opportunity or assessing the ongoing performance of current properties, this template can become a vital part of your real estate investment toolkit.
Download the complete rental property pro forma template in Excel here.
Download the complete rental property pro forma template in Google Sheets here.
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How to use a rental property pro forma
A well-crafted pro forma is more than mere numbers; it offers a narrative of what a property may be able to achieve over time.
For buyers, a pro forma is a lens through which they can assess an investment’s potential returns and valuation. Sellers use it to outline their property’s strengths and future financial prospects, in the hopes of making the opportunity more attractive to interested investors.
A buyer’s pro forma: Strategic evaluation for long-term growth
When buyers analyze a rental property through a pro forma, their goal is typically to unearth opportunities and risks that aren’t immediately apparent. Here are a few key factors to evaluate in a pro forma if you’re a potential buyer:
- Market rent vs. operational efficiency: Along with projecting rental income, assess how the property’s unique features or location contribute to achieving or surpassing market rent while maintaining operational efficiency. Evaluate how minor upgrades or changes in management could significantly enhance the net operating income (NOI).
- Dynamic financing scenarios: Go beyond static financing details to model different scenarios, including down payment amounts, interest rates, and the impact on cash flow. Consider the effects of refinancing options down the line, especially if the initial terms are adjustable or if market conditions change.
- Growth potential analysis: Use the pro forma to simulate various market conditions, such as property tax rate changes or insurance costs, and their impact on the property’s long-term valuation. This helps identify the property’s immediate and sustained ROI, factoring in market volatility.
A seller’s pro forma: Demonstrating unique value and future upside
Sellers can use the pro forma to highlight aspects of the property that might be overlooked or undervalued. Here are a few ways to create a compelling story for interested buyers:
- Customize to highlight strengths: Tailor the pro forma to showcase the property’s unique strengths, such as energy-efficient installations that can reduce long-term operating costs or zoning advantages that may allow for future expansion or alternative use.
- Scenario planning: Provide prospective buyers with a scenario-based pro forma that illustrates the financial outcomes of different strategies, like possibly transitioning from long-term to short-term rentals or the impact of proposed local developments on property values.
- Highlight economic moats: Utilize the pro forma to discuss non-financial factors that serve as economic moats, such as major employers, emerging technology hubs, or nearby infrastructure projects that could enhance accessibility and desirability, increasing the property’s competitive edge in the rental market.
Metrics to measure investment performance
A well-prepared rental property pro forma can offer a detailed view of specific metrics, which help evaluate the health and potential of your investment. Here are some key financial benchmarks to include.
Cash flow analysis
A cash flow analysis measures the net amount of cash transferred into and out of a property investment over a certain period. It’s essential for understanding your investment’s liquidity and immediate financial health.
Example
Suppose your rental generates $2,000 in rent monthly, and your total monthly expenses (including mortgage, taxes, insurance, and maintenance) are $1,500. Your monthly cash flow would be $500.
Net operating income (NOI)
NOI is a property’s total income minus its total operating expenses, excluding financing costs. This figure helps evaluate the property’s intrinsic income-generating capabilities, independent of how it’s financed, providing a pure look at its operational effectiveness.
Example
If your rental brings in $24,000 annually in rent and incurs $8,000 in annual operating expenses, the NOI would be $16,000.
Capitalization rate (Cap rate)
The cap rate offers a snapshot of a property’s yield within a specific time frame, calculated by dividing the NOI by the property’s current market value. It’s instrumental in comparing the relative value of similar properties in the same market and understanding market trends.
Example
For a rental valued at $300,000 with an NOI of $16,000, the cap rate would be approximately 5.33% ($16,000/$300,000). A higher cap rate may indicate a higher return but may also come with higher risk. A lower cap rate suggests a potentially safer investment in a more mature market that may sometimes offer greater upside on appreciation.
Return on investment (ROI)
ROI measures the overall profitability of an investment, calculated by dividing the net profit of the investment by the initial cost. It provides a high-level view of the investment’s performance over time.
Example
Assume you bought a rental for $250,000 and, after a few years of operation and appreciation, sold it for $350,000. After subtracting all costs (e.g., closing fees and a real estate commission), your net profit is $80,000. The ROI would be 32% ($80,000/$250,000), illustrating the investment’s growth in value beyond its basic cash flow.
Cash-on-cash return
This metric calculates the cash income earned on the cash invested in a property, offering a clear picture of the investment’s net cash yield based on the actual cash outlay. It’s useful for evaluating the effectiveness of your cash investment in generating income from rental real estate versus alternative investments.
Example
Say you made a down payment of $50,000 on a rental property, your annual cash flow after all expenses (opex + capex) was $6,000 in the first year. Your cash-on-cash return would be 12% ($6,000/$50,000) for the year.
Common pitfalls to avoid
You can ensure a more reliable analysis of your rental property by avoiding these common mistakes:
- Overestimating rental income and rent increases: Assuming you’ll rent your property consistently at top dollar and your rent will continually rise is tempting but overlooks market fluctuations, potential vacancies, and periods when rent increases may not be feasible due to economic conditions or local rent control laws. Use sound estimates based on current and realistic market data to avoid overly optimistic projections.
- Underestimating expenses and the effect of inflation: Operational and maintenance costs can often be higher than you planned. Additionally, inflation can significantly increase these expenses over time. Failing to account for regular maintenance, capital expenditures, and inflation may result in underestimating ongoing costs, affecting the long-term profitability of the investment.
- Ignoring market dynamics and trends: Real estate markets are influenced by macroeconomic factors and local trends, including job growth, population shifts, and industry expansions or contractions. Ignoring these can lead to inaccurate future property value assessments and rental demand. Including a sensitivity analysis in your pro forma can help account for various market scenarios.
- Property-specific risks: Every property comes with unique risks, such as tenant turnover, unexpected major repairs, or changes in neighborhood desirability. For instance, high tenant turnover can increase vacancy rates and maintenance costs, impacting your bottom line. Assessing these risks upfront can help mitigate surprises down the road.
- Failing to plan for vacancies: Thinking you’ll have 100% occupancy year-round is unrealistic. Vacancies can occur for various reasons like market downturns, seasonal fluctuations, or the time needed for repairs and finding new tenants. Not accounting for these vacancy periods can inflate expected income and distort investment performance metrics.
- Neglecting cash reserves: Many investors neglect setting aside enough cash reserves for emergencies or unforeseen expenses. Without this safety net, one significant repair or a few months of vacancy can put undue financial strain on the investment, potentially forcing a sale at an inopportune time.
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Article provided by Fair Housing Institute
It’s simply a part of any property; your residents aren’t always going to agree. This makes conflict inevitable, but the key turning point is when it turns into bullying and harassment. To be clear, the Fair Housing Act states that resident bullying and harassment cannot be tolerated. Are you sure that your property, as a whole, has the best practices in place when it comes to resident bullying and harassment? Let’s go over four key points that occur during this situation and highlight best practices for each.
Best Practice: Proper Training for Staff
Your staff members typically have the most contact with your residents. They’re the listening ear and first point of contact for many issues, including incidents of harassment and bullying. So, what if your staff member witnesses a case of resident bullying?
First and foremost, any member of staff who is not involved with management should not get involved in the situation in any way. This is because not all staff members will have the training to discern a personality conflict from a conflict based on a protected category/class.
The training you should invest in for all staff members is twofold: incident reaction and documentation. Training all staff members to stay a witness to an incident involving resident bullying and harassment is your first step. The next steps are to ensure everyone understands how to document the witnessed occurrence properly. Any little detail missed can impact management’s investigation of the incident.
Best Practice: Incident Documentation
So, a staff member has witnessed and documented a conflict between two residents that they perceived to be bullying and/or harassment. What are management’s next steps? Along the same lines as staff members training, ensure every step you take is documented well when following up on the reported incident.
Your first important step is to establish that there is bullying and/or harassment taking place between the residents. If there is enough evidence found to support this claim, you cannot hesitate to launch an investigation. Why is this?
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Best Practice: No Investigation Hesitation
The most important answer to the above question is quite simple: investigation hesitation can lead to a violation of the Fair Housing Act. It is illegal for harassment to persist with no action on behalf of the housing provider.
As a follow-up answer, the housing provider will almost always be the focus of the legal case if a court investigation is launched. This is based on the fact that the housing provider is operating as an asset of a property management company, therefore, they have more money to pay in a settlement, as opposed to an individual who was the cause of the bullying. In summary, if you want to avoid a pricey settlement on top of a violation fine, it’s best that you launch an investigation as soon as it has been proven harassment is taking place.
Best Practice: Zero Tolerance Policy
Once you have your documentation in place, from the incident report to the investigation, it is up to management to issue consequential action. Bullying and harassment are not only against the Fair Housing Act but also a violation of the resident’s lease.
So, depending on the severity of the situation, a lease violation or termination can be issued. A zero-tolerance for bullying and harassment policy can also be installed as part of your property for further proof of a decision made by management.
In conclusion, situations of harassment and bullying will occur on any property. And they’re tough incidents to deal with. In any case, remember the discussed best practices: ensure your staff is properly trained, incident documentation is as thorough as possible, don’t give in to investigation hesitation, and consider a zero-tolerance policy.
Above all else, remember the Fair Housing Act is against bullying and harassment of any kind. So, ensure you’re following through on your responsibility to uphold and abide by its laws.
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Source: Rental Housing Journal
Small move sizes by renters are predicted to grow in 2024 mostly because the ratio of rental moves and homeowner moves changed.
A full 50% of moves in 2024 will be renters with small move sizes, predicts one report based on moving company request trends.
Looking ahead to the warm weather moving season’s busiest months, the report notes that “people who own homes aren’t moving. Only renters are moving. And renters have a lot less stuff.
So, in 2023, we saw the average move size drop by about 30%. Mostly because the ratio of rental moves and homeowner moves changed. So, we’ll continue to see rental moves make up a big portion of 2024 moves.”
The report‘s predictions are based on user behavior — when movers submit requests, interest in those destinations and sizes of moves are logged. If the trend continues, rentals will reign, and small-size movers will take a larger and larger percentage of overall moves this year.
Why? And what does that mean? We’ll dig into some factors we think are behind the trend.
What are the Reasons Behind the Small-Move Rental Boom?
1. It’s Easier to Move a Rental Household
Typically, renters have fewer items to move than owners. That makes them more likely to relocate than owners, who might have decades’ worth of possessions tucked into garages, basements, and attics. It makes renters more mobile than owners.
Owners have social and psychological reasons to stay put, too. They may be ensconced in their communities, from schools to places of worship and city councils.
In fact, one study showed renters were three times more likely than owners to have moved recently.
But that doesn’t explain why this year’s renters are taking an even larger share of the pie. Or does it?
2. The Current Job Market Favors Relocators
When it’s easier to move without having to find a new job, more and more renters who are thinking about relocation are likely to jump in.
Long-distance moves continued to accelerate through 2023 as jobseekers looked outside their own cities in search of affordable housing and better quality of life. The remote-work renaissance during pandemic shut-downs made that possible, and it shows no signs of slowing years after lockdowns.
Some even say that return-to-office “died” in 2023, so workers may be feeling bolder that their jobs will accommodate new moves.
Because renters can pick up and move more easily with smaller move sizes, more small-move relocators get in on the trend.
3. Interest Rates Are High
At the same time, large move sizes (belonging to more homeowner moves) are stagnating.
While current interest rates can’t compete with their high 1990s counterparts, they’re still high compared to anything prospective homeowners have seen in the last two decades. That’s put a damper on home buying and it has encouraged owners who are moving to consider renting in their new location until rates come down.
With some speculation that this could happen by the end of the year, homeowners are more likely to put off moving for one more year, while renters face no such obstacles. They can move now, and many are.
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4. Pricing Pressures
Recent inflation on everything from food to consumer goods, coupled with an ongoing housing shortage that’s been driving prices upward, has put pressure on renters to move. According to one survey, 56% of renters said they felt pressure to move in order to seek relief from increasing rents.
And, as prices rise, renters who have a mobility advantage can look outside their home cities for a discount. With remote jobs, they’re even more likely to do so.
The result? Renters are less likely than ever before to ask themselves if lower-rent regions are “worth it.” Of course they are! They can increasingly keep their jobs anywhere in the country while saving more — and maybe even increasing the likelihood that they become homeowners in the future.
In a world where renters can work just as much, but save more and live larger in a potentially safer, cleaner location closer to nature, why wouldn’t they?
What Does the Rental Move Boom Mean for Renters?
More moves, more renters, and smaller move sizes?
Is that positive or negative? As housing transactions fall, demand for rental units necessarily rises, benefitting landlords. That small-size rental moves are grabbing a bigger share of the moving pie also predicts strong demand for rental properties, rising rates and competition for units.
However, there are benefits for renters that come with the trend toward smaller move sizes:
- Focus on tenant satisfaction: As landlords try to keep down the high turnover that comes from more moves, they’re more likely to seek out stable tenants who they feel will stay long-term. That means more focus on tenant satisfaction and retention, with more responsive property management, on-point maintenance, and timely communication.
- Greater flexibility: More small moves and higher mobility may pressure unit owners to offer more flexible lease terms, as renters increasingly value the freedom to move. Landlords can attract a broader pool of tenants when they offer more flexibility in housing terms.
- Amenities rule: Tenants will be increasingly able to seek out properties near transportation or with lifestyle amenities from fishing ponds to crystal lagoons, car-free thoroughfares, and more. After all, they’re often moving to increase their quality of life. Appealing to these renters may mean the market increasingly bends toward differentiating their properties and making them lifestyle destinations.
- Moving becomes more about location, location, location: Renters may find it more difficult to move to neighborhoods in high demand for their high quality-of-life amenities, access to culture, and accessible transportation. These hot spots should see increasing applications for new moves.
Small Moves Will Reign in 2024
While some landlords fear a rental market crash in 2024, the reality is far more nuanced. In fact, demand for rental housing stands to rise, with prices predicted to increase 1.5% in 2024. New supply is actually putting the brakes on the rental market, not a lack of movers.
Landlords can take heart from moveBuddha’s data that shows an increase in the market share of small-size moves, as they predict high move intent from renters throughout the 2024 moving season. But renters have plenty to celebrate, too.
The biggest takeaway?
The era of moving to “Zoom towns” is not over, as more and more renters recognize that it’s not the time to buy, and that they won’t lose their existing jobs if they opt for new rental digs. Renters who can harness the demand for these moves stand to gain in 2024.
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Written by Emily Koelsch
With changing economic and market conditions, some Landlords are deciding to sell their rental property with Tenants in place. There are various reasons to do this – for example, wanting to take advantage of strong markets, needing cash for other opportunities, or no longer wanting to be a Landlord.
There are some distinct advantages and disadvantages to selling a property with Tenants in place. If you decide to buy or sell a property with Tenants, you must know and respect your Tenants’ rights.
To help you do that, here’s an overview of those Tenant rights and tips for making the process go smoothly.
Notice Requirements When Selling a Property With Tenants in Place
Tenants have a right to receive an official Notice of Sale of Property. This Notice should be detailed and include specifics about when you’re putting the property on the market, the notice Tenants will receive before showings, and any other Tenant rights or responsibilities.
When drafting this Notice, look at your Lease Agreement and state laws. Some states have specific timelines for when Landlords must give notice. Additionally, good Lease Agreements include language about Notice of Sale and Notice of Showings.
Here are some tips for drafting this Notice:
- Review your Lease and make sure you comply with all terms;
- Review state and local laws to ensure compliance with all requirements;
- Include as much detail as possible;
- Tell Tenants how much Notice you must give before showings;
- Discuss the Tenants’ rights and responsibilities;
- Encourage Tenants to contact you with any questions or concerns.
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The Lease Agreement Is Enforced Even if Ownership Changes
One of the most essential things for Landlords and Tenants to understand is that a fixed-term Lease Agreement remains in effect even if ownership changes. The Lease isn’t tied to the Landlord; instead, it remains with the property and is in full effect until the end of the Lease period.
Here are some Lease-related tips when selling a property.
- Tenants are understandably anxious when they hear that their home is being sold. To ease their concerns, let them know that their Lease terms won’t change.
- A strong Lease Agreement can make your home more attractive to investors. Investors are bound by the terms of the Lease. They’ll be more comfortable with a thorough, state-specific Lease Agreement.
- To protect your Tenant, put everything in writing. For example, if the Lease doesn’t include a Pet Addendum or address pets, the new owner could tell your Tenants their pets are not allowed. Add any needed Addendums to your Lease before selling the property.
- At the end of the Lease term, Tenants are entitled to their security deposit. At the time of the sale, Landlords should transfer the deposit and any accrued interest to the new owner.
Effectively Marketing & Selling a Property With Tenants in Place
Even with proper Notice and a good Lease, it can be tricky to sell an occupied rental property. The process is stressful for Tenants and presents uncertainty for buyers. Thankfully, there are some ways to make the process go smoothly.
With that in mind, here are some tips to help you market and sell an occupied rental.
- Make sure Tenants are current on rent. If Tenants are behind, it makes your property less attractive to investors.
- Offer incentives to encourage Tenants to be cooperative during the selling process. Tenants can help by keeping the property clean, leaving during showings, and staying current on rent. To encourage cooperation, consider offering incentives like gift cards to local restaurants, a night at a hotel during an open house, or a rent discount while the house is on the market.
- Communicate well with Tenants throughout the entire process. Good communication includes coordinating showings around their schedule. Ask your Tenants when it’s convenient to show the property and, whenever possible, schedule showings during these times.
- Even if you don’t plan to sell a property, your Lease should always include language about a Landlord’s right to sell a property.
- Tenants are not required to clean or prepare the property for showings. To ensure it’s in good condition, offer to have it professionally cleaned.
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Good Tenants and a strong Lease Agreement are key factors for selling your property with Tenants in place. Buyers need to feel comfortable that they won’t have Tenant headaches. When there’s a thorough Lease and the property’s in good condition, the buyer has peace of mind that they’re inheriting quality Tenants.
Visit ezLandlordForms.com to customize a Notice of Sale, create Addendums for your current Lease Agreement, or build a state-specific Lease Agreement.
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By John Triplett
The U.S. Department of Housing and Urban Development (HUD) has issued two guidance documents addressing the application of the Fair Housing Act to two areas in which the use of artificial intelligence (AI) poses particular concerns: the tenant-screening process and its application to the advertising of housing opportunities through online platforms that use targeted ads, according to a release.
“We have released new guidance to ensure that our partners in the private sector who utilize artificial intelligence and algorithms are aware of how the Fair Housing Act applies to these practices,” acting HUD Secretary Adrianne Todman said in the release.
Demetria McCain, principal deputy assistant secretary for Fair Housing and Equal Opportunity said, “Housing providers, tenant-screening companies, advertisers and online platforms should be aware that the Fair Housing Act applies to tenant screening and the advertising of housing, including when artificial intelligence and algorithms are used to perform these functions.”
“Housing providers have a legitimate interest in selecting tenants who will pay their rent and otherwise comply with lawful requirements of their lease. However, some tenant-screening practices do not in fact serve these goals.
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“Tenant screening based on imprecise or overbroad criteria may unjustifiably exclude people from housing opportunities in discriminatory ways. These issues have been magnified in recent years by the increasing reliance by housing providers on tenant-screening companies to drive tenant-selection decisions.
“An increasing number of tenant-screening companies claim that they use advanced technologies, such as machine learning and other forms of artificial intelligence (“AI”). These technologies can increase these companies’ capacity to access and analyze information about applicants that has not been widely used for rental decisions until recently but may have little bearing on whether someone will comply with their lease.
“These technologies can also lead to a less transparent process by obscuring the precise reasons for a denial from the housing provider and applicant,” HUD says. “The Fair Housing Act applies to housing decisions regardless of what technology is used. Both housing providers and tenant-screening companies have a responsibility to avoid using these technologies in a discriminatory manner.”
On the advertising side, HUD cautioned that online advertising-targeting tools are covered by the Fair Housing Act. The release said violations “may also occur when ad targeting and delivery functions are used, on the basis of protected characteristics, to target vulnerable consumers for predatory products or services, display content that could discourage or deter potential consumers, or charge different amounts for delivered advertisements.”
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In a landmark settlement, a property management company and its landlord have agreed to pay a significant sum following allegations of violating the Servicemembers Civil Relief Act (SCRA).
The U.S. Attorney’s Office, Eastern District of Virginia, recently announced the settlement involving a claim between a servicemember homeowner and their landlord and property management company, McGowan Realty LLC, operating as RedSail Property Management. The complaint alleged that the defendants violated the SCRA by imposing early lease termination charges and additional rent on a servicemember.
An overview of the Servicemembers Civil Relief Act (SCRA)
The SCRA is a federal law enacted to provide legal protections and relief to active-duty servicemembers of the United States Armed Forces. Originally known as the Soldiers’ and Sailors’ Civil Relief Act (SSCRA) when it was first passed in 1940, it has undergone amendments and updates over the years.
The SCRA aims to ease the financial and legal burdens placed on servicemembers during active duty by postponing or suspending certain civil obligations. For example, the law allows servicemembers to request a postponement of civil court proceedings, such as lawsuits, foreclosures, or bankruptcy proceedings if their military service materially affects their ability to participate. It also protects servicemembers’ property, such as vehicles, against repossession for nonpayment while they are on active duty.
This lawsuit involved a different provision of the SCRA, which allows servicemembers who receive permanent change of station orders or are deployed for at least 90 days to terminate their residential leases without penalty. Landlords are prohibited from imposing early termination fees or requiring payment of rent beyond the termination date specified in the SCRA.
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The allegations of SCRA violations in this lawsuit
Here, the defendants refused to honor a servicemember’s lease termination after he received a permanent order to a new duty station 33.5 miles from his residence in Virginia Beach. The defendants argued they were covered by the Virginia Residential Landlord and Tenant Act. Unlike the SCRA, the Virginia law allows servicemembers to qualify for early lease termination only if they must relocate 35 or more miles from their current residence. Therefore, the defendants forced the sailor to pay $3,408.55 in early termination fees plus additional rent.
The Department of Justice argued that the SCRA offers “relief to servicemembers who would otherwise be forced to pay rent for housing they cannot occupy because they have been ordered to move to another location.” The federal law, they argued, trumped state law in this case because the SCRA has no distance limitation. Moreover, while the SCRA allows a landlord and tenant to waive the applicability of the rules, there was no such waiver in this case. A waiver must be executed in writing separate from the lease.
After spending 14 months and $50,000 in attorneys’ fees litigating the case, the defendants opted to settle. The consent decree requires the defendants to pay the servicemember $10,225.65, which includes the unlawful termination fees and additional rent plus two times the unlawful fees and additional rent assessed. The decree also orders the defendants to pay a $3,000 civil penalty to the U.S. Treasury. Moreover, the company must provide SCRA training for its employees and avoid imposing the 35-mile restriction on leases involving qualifying service members and their dependents.
What this lawsuit means for landlords
The resolution of this case sets a precedent for the protection of SCRA rights nationwide. All landlords should be aware of how the SCRA affects their relationship with tenants. In litigation failure to provide a servicemembers affidavit can derail proceedings, wasting the time, effort, and resources of the landlord. Even out of court, failure to abide by SCRA rules can be an expensive mistake.
Source: JD Supra by Ryan Kennedy
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