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Investing means to lay out money in expectation
of profit. This is measured in business by ROI, return on investment. With real estate investment we use cap rate
and, the degree of capitalization of the investment. Net CAP rate takes into account the expenses involved in operating
the investment. Ten percent was the benchmark at one time, and now it seems to vary from 3% to 7%. To calculate
divide the annual income minus expenses by the cost of the property for the percentage.
Multi family can be purchased as either
operational, for refurbishment to rent or sell, or for conversion to condominiums. Rehabbing is a big part of the market,
particularly with single family housing. Some of it coming through foreclosure, sheriff sales, and HUD sales.
There is a lot of investing that is done
with second homes and recreational property. Quite often there is not the intent to add value, but what has proved in
the past to be quite lucrative, which is holding for three to five years and profit from the accrued price. Ten years
in many areas has yielded an almost 100% increase.
One of the great features of investment property is the annual tax break
based on depreciation. This often allows an investment with a bad cap rate to not hurt the pocket as much. When
the investment is sold the IRS rules allow it to reclaim all the depreciation. This is a big tax hit that is usually
paid at the capital gains rate. The normal approach to delaying the IRS is using a rule 1031 exchange. This allows
for leveraging one or several properties into something greater and delaying the capital gains hit even until death when depending
on trust, or probate, etc the basis can change. |
