Source: Rental Housing Journal
More and more Americans are renters by choice as the modern American Dream involves renting rather than the desire to own a home.
While the American Dream might have included various components throughout the decades, one constant was the desire to own a home. For modern dreamers, however, that isn’t necessarily the case.
According to The New American Dream Report recently released by the property software management company Entrata, 41% of renters claim their American Dream has nothing to do with homeownership. In fact, 20% anticipate being lifelong renters, which represents a 33% increase from 2021.
The causes for this paradigm shift are wide-ranging, but it certainly includes the idea that skyrocketing home prices have made homeownership an unattractive option for many—even for those who can afford to take the plunge. In addition to the long-term financial commitment, property upkeep, taxes and insurance are stressors that can be avoided by renting. The report, based on a survey of 2,000 renters conducted in January, found that 23% of respondents enjoy the location flexibility provided by renting and 17% like the financial flexibility of not being tied to a mortgage.
Additionally, renting no longer carries the negative stigma of the past, when it was largely perceived as a necessity-based alternative for those who couldn’t afford a single-family home. The term “renter by choice” is more common in current times, particularly with a wide range of available rental homes with attractive amenities and an increased supply of single-family build-to-rent homes.
When you consider the price and commitment components of homeownership, contrasted with the convenience-based factors of renting, it helps underscore why homeownership is not as much of a standardized American goal as in the past. According to the study, 66% of renters say renting fits their current lifestyle more than homeownership.
Essentially, experiences and flexibility have become greater priorities to the modern American.
Some might make the counterpoint that it’s easy for someone to dismiss homeownership as a priority when it isn’t financially feasible.
But the perception that renters are too young or financially unequipped to purchase a home has become something of an outdated generalization. The study shows that 33% of renters say they could afford a home that meets their needs, but ownership doesn’t necessarily fit into their current lifestyle. Additionally, 25% of renters with credit scores 750 and above—those who could easily qualify for a home—never want to stop renting.
For many, renting also serves as a key component to their career paths. According to the study, 65% of renters are happy with the direction of their career and 35% believe being a renter gives them more career opportunities than being a homeowner. Additionally, a robust 63% of renters indicated that they have a similar or better quality of life than their parents at a similar age.
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The traditional notion of “I need to save to buy a house” doesn’t apply to many, as a sizable contingent of younger Americans are earmarking their funds for other financial priorities.
More than half of those surveyed (56%) say they’re currently prioritizing paying off debts rather than saving, and 43% prefer to have their savings in investments and retirement strategies rather than real estate, because they are easier to liquidate.
While homeownership does build equity where renting does not, the concept of having all of one’s income dedicated to a house is becoming an old-school thought process. Some renters are looking even further down the line with their funds, as 36% of renters prefer to invest in retirement as opposed to saving for a home.
For the majority of respondents, any discretionary money is dedicated to activities such as dining, travel and entertainment, such as concerts and sporting events. A sizable 74% indicate that they designate any extra funds toward these types of experiences. Nearly half of respondents—46%—say they have the financial means to pursue their hobbies.
While renting might often be more cost-effective than homeownership, many Americans also enjoy the social aspects of being part of an apartment community.
Renters also have the ability to use a property’s common areas to host their own visitors, which for many, is preferable to having a backyard.
Forty percent of renters have utilized a property’s communal spaces for social gatherings, and approximately one-third (34%) indicate that their friends or family visit at least once per month.
More than half of respondents (51%) say they enjoy the community aspect of renting, and many have fostered meaningful connections with their neighbors. To that end, 67% of renters have helped neighbors at their properties while 61% have had neighbors assist them.
In summation, homeownership no longer qualifies as a primary measure of success or fulfillment for many of today’s Americans—particularly younger generations. While a certain percentage of people will always be renters by default due to their financial situation, more and more Americans are renters by choice. That’s because flexibility, experiences and other financial priorities are increasingly more compelling than homeownership to many.
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Hoarding goes beyond common house clutter. It is a mental disorder that millions of people cope with and when it comes to hoarder tenants it is important to know they have legal rights we have to abide by.
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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.”
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.
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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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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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By G. Brian Davis
The Big Picture On How To Avoid Capital Gains Tax on Real Estate:
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.
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.
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.
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).
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 |
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.
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?
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:
Speak to your tax advisor about estimated tax payments if you expect a large profit on the sale of a property.
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.
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.
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.
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!
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. |
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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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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Still have questions? Here are a few common ones.
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.
Yes. Unless you utilize one of the tax strategies above, that is.
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.
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.
You pay capital gains taxes on properties as part of your annual income tax return due on April 15.
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.
Yes, unless you do a 1031 exchange, which defers it until you sell the new replacement property.
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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Source: Landlord Gurus
Landlords strive to ensure their rental properties remain sought after in the competitive rental property market, where demand and supply constantly fluctuate. We have found one of the keys to our success lies in the art of effective marketing. This process goes beyond traditional avenues and embraces innovative strategies that most larger property managers do not take the time to do properly. As independent landlords, we are able to tailor a unique approach to marketing that works well for us.
In an era where every click matters, understanding how to find tenants fast is not just a skill, it’s a necessity for landlords seeking to maximize occupancy rates and rental income. In this article, we share actionable tips on how to list a rental property and market it effectively.
High-quality photos and engaging narratives play a pivotal role in capturing the attention of potential tenants. Investing in professional photography is not just an expense. In fact, it’s an invaluable asset that showcases property features in their best light, creating an immediate connection.
Equally crucial is the art of creating detailed and enticing property descriptions to evoke emotions and resonate with potential tenants. A well-presented visual and verbal narrative serves as the gateway to a property, tempting individuals to envision their lives within its walls. This strategic investment in presentation enhances the property’s appeal and significantly contributes to the speed at which prospective tenants are drawn to make inquiries.
To make sure your property catches the eye of the right people, it’s important to understand what they like. Start by doing some research on who might be interested in your place – like finding out their age, interests, and lifestyle. This helps you adapt your marketing to fit their preferences. Think about what makes your rental special and how it matches what they’re looking for.
Maybe your potential tenants love cozy spaces, so highlight that comfy corner. Or, if they’re into modern living, show off your sleek amenities. By knowing who you’re trying to reach, you can shine a spotlight on the things that matter most to them. This way, your place becomes a perfect match for their lifestyle, making it more likely they’ll be interested in moving in. It’s like speaking their language and showing them your place is exactly what they’ve been looking for.
Enhancing visibility on reputable platforms such as Zillow is important. Effectively listing a rental on Zillow involves meticulous optimization of property listings with comprehensive descriptions, high-resolution imagery, and precise information. Consider improving the experience for potential tenants by incorporating virtual tours and 3D modeling, providing an immersive preview of the property from the comfort of their screens.
Mastering the art of how to list a rental property involves implementing strategies to increase visibility and attract tenants. By presenting your property with attention to detail and utilizing cutting-edge virtual tools, your listing becomes a standout in the competitive online landscape. This professional approach ensures that your property captures attention and communicates your commitment to excellence as a landlord.
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Building a strong online presence is like opening the door to a vibrant community of potential tenants. Be active on social media platforms, sharing details about your property, local amenities, and community events. This creates a sense of connection and belonging. Encourage tenant reviews and respond promptly to feedback to maintain a positive online reputation.
Social media isn’t just about sharing — it’s a powerful tool to find tenants fast. By reaching out to a broader audience through online communities, you increase your chances of catching the eye of prospective tenants. In this digital age, fostering a virtual community around your property is not just about finding tenants; it’s about creating a welcoming space that resonates with individuals seeking more than just a place to live.
Ensuring your property is always looking its best is key to attracting potential tenants. Regular maintenance and upkeep create a welcoming environment that leaves a positive impression. Addressing maintenance issues promptly not only enhances the property’s appeal but also minimizes the time it stays vacant.
To go the extra mile, consider adding personal touches and enhancements to create a homely ambiance. Small details like well-maintained landscaping or a fresh coat of paint can make a big difference. These personal touches resonate with potential tenants, making them envision the property not just as a place to stay but as a true home.
Setting the right rental price is a strategic move that can make a big difference. Start by diving into market research to understand what similar properties in your area are charging. This helps you set a competitive rate based on local trends. Take a close look at what makes your property special – unique features justify your rental prices.
Finding the sweet spot between being competitive and making a profit is crucial. You want to attract quality tenants while maximizing your rental income. It’s a delicate balance, and staying informed about the market ensures you make informed decisions. By setting the right rental price, you draw in potential tenants faster and also set the stage for a successful and financially sound leasing experience.
Broadening your reach involves exploring various marketing avenues. Consider traditional methods like local newspapers, magazines, and community events to tap into a diverse audience. Satisfied tenants can become your biggest advocates, generating valuable word-of-mouth referrals that enhance both reach and credibility.
Integrating digital and traditional marketing strategies creates a comprehensive approach. While online platforms maximize visibility in the digital world, traditional methods lend authenticity and local presence. This hybrid strategy ensures your property is showcased effectively across different channels, catering to a broader spectrum of potential tenants. By diversifying your marketing channels, you stay ahead of the curve and also establish a well-rounded presence in the competitive rental market.
Understand your target audience’s preferences, adapting property features accordingly. Utilize popular online platforms like Zillow, supplementing with virtual tours for an immersive experience.
Create an engaging online presence, building a sense of community through social media. Also, maintain property presentation with regular upkeep and personal touches, creating a homely ambiance. Set strategic rental prices based on market research, balancing competitiveness and profitability.
You should also diversify marketing channels by exploring both traditional and digital avenues. Incorporate word-of-mouth referrals for added credibility. This comprehensive strategy ensures landlords maximize property visibility, attract quality tenants, and ultimately improve the profitability of their rental investments.
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Occasionally, we like to do a landlord Q&A episode because we get a lot of questions from our listeners and followers that are important for all of us rental property owners to know about.
This week on the podcast, we have your landlord questions and answers, and we start with several follow up questions that came up about renters’ insurance. Specifically, can landlords pay for a policy on behalf of the tenant, can landlords REQUIRE tenants hold renter’s insurance, and how do we handle if the tenant takes out a renter’s insurance policy and then cancels it a few months after moving in?
Another question was about what’s better in a rental, gas or electric appliances. And before you go off on how electric is best, listen to what we have to say about tenants’ opinions on gas operated ones.
We were also asked about what mistakes we have made and how we corrected them. That was fun to rehash some pretty major errors in judgement! But we do have really solid solutions on how to overcome and avoid some of those mistakes made.
With the warm weather, landlords are getting asked permission to have a kiddie pool at their rentals. We have some really important points to consider before just saying yes or no to this request.
Lastly, we were asked about the importance of understanding Fair Housing laws as a self-managing landlord. So, we addressed this quickly and confidently, offering very easy solutions on how to handle it.
Enjoy this quick episode of landlord questions and answers!
👉 EP67: Renters Insurance: Why Landlords Should Require It
👉 EP29: Part 1, Rental Property Fire Safety Essentials
👉 EP30: Part 2, Rental Property Fire Safety Essentials
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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.
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…
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:
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.
This category includes all costs necessary to maintain and manage your investment, such as:
Accounting for vacancy rates is also wise, meaning you should estimate how long and how often the property might sit empty between tenants.
For many investors, purchasing a rental property involves securing financing. In your pro forma, detail these expenses, including:
These factors influence your monthly mortgage payments and the net cash flow generated by the property.
Capital expenditures include major repairs or improvements that increase the property’s value and/or extend its life, such as:
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.
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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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.
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:
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:
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.
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.
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.
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.
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.
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.
You can ensure a more reliable analysis of your rental property by avoiding these common mistakes:
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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.
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:
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.
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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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.
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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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.
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.
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.
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.
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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.
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.
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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