The optimum real estate investment is one that makes you smile everyday of the week, including weekends. The road to investment wealth is paved with simple tenets (not tenants); buy what you know, do your homework, hold your position, know when to sell, diversify your holdings and NEVER pay capital gains tax.
If you lay awake nights worrying about what the financial prognosticators are dwelling on the next twelve months then you haven’t realized that the world society doesn’t give a lick about the choices you have made. The global market will not influence your every decision. Realize now that all Real Estate is LOCAL!
Buy what you know: Give yourself some credit, you are street smart. The price of raw land in New Mexico does not have the same value as a building lot in the suburbs of Baltimore. If you grew up in Baltimore, you can’t compare the rest of the country to your limited value system. Use your local knowledge to assess individual neighborhoods and property values.
Do your homework: Check out the local market, do some comparative analysis, is the market trending up, down or is it flat? Virtually all real estate listings can be accessed via the internet; this will help you with price points and common amenities. Ask for the last three years of operating reports and check for deferred maintenance.
Trade sparingly: Real estate will produce greater financial rewards if you resist the temptation to become a “flipper.” The cost of paying tax on short term gains is painful. Holding the property for a minimum of twelve months pushes the investment into the “long-term” category and opens up the opportunity to handle the sale as a Section 1031 Exchange. This strategy will defer the payment of capital gains tax on both state and federal levels and avoid the recapture of previously taken depreciation leaving more net dollars to reinvest in bigger and better real estate.
Know when to sell: Holding real estate that doesn’t live up to its income or appreciation expectations will make your entire portfolio suffer. The property doesn’t know you own it; if you’re holding it for sentimental reasons, know there is a price to pay for the emotional attachment. Under- performing property hits your pocketbook and drains your optimism in every choice you make.
Diversify, diversify, diversify: If all your eggs are in one basket, you’re inviting disaster. Start by looking for different investment segments and different geographical areas. If housing in Atlanta is suffering think about relocating the investment to Houston. You are in charge of your own destiny, so mix it up.
NEVER pay the tax: Section 1031 is a powerful wealth building tool for real estate investors. There is absolutely no reason to pay tax when it can legitimately be deferred, forever. Selling the tired, negative cash flow property for fresh new property can be accomplished on a tax deferred basis. It is important to note that the entire value of the old or Relinquished Property is exchanged for the new or Replacement Property. Investors are often mistaken that they only have to roll the profit into new property to avoid tax.
Exchanges must be conducted within strict time frames and no extensions are available unless a presidential disaster is declared. The entire exchange must be concluded in 180 days or the due date of the tax return, whichever occurs first. The exchangor has a mere 45 days to develop a list of possible Replacement Property options. After day 45, no substitutions or changes can be made to the Identification List. Specific guidelines are provided in a choice of three Identification Rules ranging from three properties of any value to unlimited number of properties with the value capped at 200% of the old property value, or any number or value as long as 95% of the identified property (by value) is eventually acquired.
Why wait for the economy to make you feel comfortable? Step out and make changes now before everyone else decides to do the same thing. Everything you need to know is already at your disposal, so stop waiting for recess to have fun!
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