Right now, there’s one particular asset class in commercial investment real estate that’s got everyone talking. Apartment’s. Whether it’s a small duplex or a 100 plus unit complex, these assets just seem to be the number one target of investor’s. Of course, there’s a few reasons for this. Financing is extremely favorable, almost more so than a primary residence. Add also the declining vacancy rate and surging rents, it’s no wonder apartments are so desirable. But are we creating a bubble? When everyone’s investing in the same thing – be in tech stocks back in 2000 or single family homes all through 2008 – doesn’t that cause everything to burst after becoming inflated? I’m going to give you a quick rundown as the positives and negatives of buying apartments, so you as an investor can make a more informed decision.
When it comes to how to purchase a home, most people don’t know how they start looking, what the process is, or even which inspectors to hire. I’m going to answer these questions along with many others you may have as I explain from start to finish the steps needed to buy a home.
A large percentage of people when purchasing a home usually do so by obtaining financing. The common misconception is that you need at least 20% down on the home that you’re going to purchase. Even though this will obviously save you money on your mortgage, you can actually put down as little as 3.5% and still buy a home. Although I personally recommend putting down 5 or 10%, anywhere between 3.5% to 20% is completely acceptable.
Welcome to part two of my investing terms video. We’re going to continue off of the same scenario we were speaking of in my “Investing Terms Part 1” video, which discussed NOI, Cap Rate and Cash on Cash. As a refresher of what the details were in regards to the property, we were looking at a $2m income property that made $150k NOI. We figured the cap rate was 7.5%, and that if we used leverage our cash on cash return jumped up to 8.775%.
One word you’ll hear thrown around a lot in the property buying process is the word contingency. The American Heritage Dictionary defines the word “contingency” as “An event that may occur but that is not likely or intended”….this might actually get you MORE confused AFTER you’ve discovered what the literal definition is, so let me give you a simple way to think of it. When you’re buying a property, think of it as a race. The start of the race is when your offer is accepted. The end of the race is when the deal is done. Money is exchanged and the deed is swapped. Whenever you buy a property, you practically always put a deposit with a third party escrow or title company. This deposit is refundable, so long as you have contingencies in place.
As I discussed in my “Common Real Estate Tax Benefits” video, one of the key qualities that make real estate investments stand out from other types of investments is the ability to depreciate the actual property — among other deductions. The rule is that if you own an apartment or multifamily building, you can write off the improvements in a straight line method over 27 in a half years. If you own any other type of asset such as an office or warehouse that is then written off over 39 years. Remember, you can ONLY depreciate the building, not the land. The tax code basically says that land never uses its value.
A large percentage of people when purchasing a home usually do so by obtaining financing. The common practice is to save up for a home and put down 20%…right? Well, not necessarily. Although there is conventional financing done by most banks that can help buyers with only 10 or 5%, what about those with a little less than perfect credit or just a little less down?? How do we help those people get a loan? That is where most buyers turn to the Federal Housing Administration, or FHA.
Most people are aware of the fact that when you sell a long term investment such as real estate or stocks, you have to pay taxes. And these taxes don’t come cheap – currently capital gains tax is 15%, and California has its own capital gains tax of 9.3%. To put this in perspective, if you bought a property for $500,000 and years down the line you sell the same property for $1M, on that $500k profit you have to pay $121,500…PLUS your cost recovery recapture. That’s a HUGE chunk of cash. …but did you know there’s a way you can defer that and not even pay a SINGLE PENNY?? It’s called a 1031 Tax Deferred exchange, 1031 exchange for short. A 1031 exchange is when you sell your property and buy another like-kind property within a certain time frame and follow specific rules.
Hi…my name is Davide Pio, and I’m a real estate broker. I love what I do, and I love helping my clients. My specialty is commercial and investment real estate. By this I mean I help my clients – who are usually investors – find properties that match their needs. The thing I love most about my job is the chance to enlighten my clients by showing them possibilities they never knew existed. And if my clients did know these possibilities existed, they were usually unaware of all the details and how best to capitalize on them.