You’ve decided to invest in that multi-use property in Irvine. Statistics show that market conditions in Southern California will be favorable for real estate investors throughout 2021, and that historically low interest rates will remain so until the economy recovers from the pandemic. What else do you need to know to be successful in today’s competitive real estate marketplace?
Know your tax and financial laws
For those who know the tax code, real estate investing offers a wealth of incentives, like 1031 tax-deferred exchanges and strategies to accelerate depreciation on parts of the property. These tax strategies can save investors hundreds of thousands of dollars in taxable income over the lifetime of the investment.
But it’s not enough to just know current tax codes. Financial sophistication is essential in this industry. Following are some of the options available to you.
- The advantages of long-term debt. Funding the purchase of an asset that will likely appreciate in value each year with long-term, low-interest loans can be thought of as taking on good debt. In addition to traditional 30 and 15-year mortgage loans, Fannie Mae and Freddie Mac are now offering 25-year loans, and with mortgage rates at all-time lows there’s no better time than the present to lock in a low rate.
- The power of short-term debt. Bridge loans are essential tools for real estate investors who need cash to complete a transaction but don’t want a long-term commitment. These short-term vehicles are relatively competitive and need to be paid off in two to five years or converted into a longer-term traditional loan. They carry higher interest rates than traditionally longer loans, but they are convenient for investors seeking to bridge the cash gap between selling one property and buying another.
- The REIT alternative. There is power in numbers, and some investors participate in real estate investment trusts, or REITs, companies that own, operate, or finance income-producing properties. REITs generate a steady income stream for investors but offer little in the way of capital appreciation. Ownership stakes in many REITs are publicly traded like stocks, which makes them highly liquid (unlike direct investments in physical real estate investments). Investing in REITs is a good way to tap into the investment advantages of real estate without taking on the risk of direct ownership of a property.
REITs do have their downsides. They need to be exercised constantly. You can get a fair return but nothing outstanding. You may instead want to consider a group investment vehicle that is asset-based rather than fund-based. A good property group or advisor can make this happen.
Hire good legal and accounting professionals
To be competitive in real estate you need to have a good advisor group in place. A legally sophisticated person can’t just know the law, they also need to understand the commercial side of the real estate deal and be able to hold their own with certified public accountants (CPAs.) In turn, your CPA needs to know more than numbers; they need to understand the nuances of tax planning.
Invest in a quality property management
Your property management firm should be involved in the investment from the point of initial interest. A full-service firm like Pan American Properties will work with you to conduct thorough due diligence on a property to verify that the deal makes sense. A proper due diligence review requires both a physical examination of the site to identify hidden problems and a financial analysis to confirm that expenses and revenues are as claimed.
Other things your property management team can do:
- Budgeting. The budgeting process starts at the onboarding stage and carries on throughout the term of ownership. Setting and adhering to a strict budget is essential for achieving the expected return.
- Resident service. Residents who feel cared for are more likely to stay where they are, even if rents go up. A good property management company helps its residents understand the value they get for their monthly rent.
- Market strategy. Every rental property operates within a competitive landscape. How much should you spend on renovations? How should rents be set given local market conditions? What ancillary revenue sources—pet rent, parking fees—can be found? At Pan American we regularly help our clients answer questions like these.
Pan American Properties can get you where you want to go
Pan American goes above and beyond when it comes to managing your property. We will help you hire the right professionals and use our own in-house professionals to advise you on what financial and legal steps to take. More an advisor than a typical property management firm, we will look for ways to take your investment to the next level. Think of us as a one stop shop for all your real estate and estate planning needs. Call us today at (888) 754-9700 or email us at [email protected] to learn more.