Your financial portfolio is healthy, but you are looking for a new asset class, and you’re still on the fence about cryptocurrency. With the current economic uncertainty, and the pandemic’s end line constantly shifting, is Southern California real estate a wise investment in 2021?
The California real estate market is strong
The answer is yes—for the investor with the right mindset. Southern California saw significant increases in both home sales and median sale prices in February compared with a year ago. According to data from the California Association of Realtors:
- The median home price in Southern California reached $675,000, representing a yearly increase of a whopping 10.5%.
- State-wide home sales were up by 15.9%, while the median home price had declined by 0.1% to $699,000.
- Historically, annual home sales volumes in Southern California have fluctuated little since 2010, dipping from 230,400 in 2018 to 234,700 in 2020.
The metrics of single-family residences spill over into marketplace for units in multifamily apartment complexes. With home prices so high, many families find that renting is the more affordable option. With the fifth-youngest population in the country and a continuing influx of immigration from abroad, California promises to remain a vibrant place to own rental properties.
Commercial real estate is always a hard marketplace to summarize in a few quick statistics. The pandemic has created interesting opportunities for buyers with capital and patience to ride out disruptions that we hope will recede as we begin to get a handle on COVID-19.
For investors who are just starting to think about real estate, it’s important to recognize that for every good deal out there, a dozen bad ones are waiting to claim an unsophisticated buyer’s dollars.
Every investor wants a good return. Some come to real estate with plans to quickly flip properties at a hefty profit. Although that approach has worked for some, it more often leads to financial trouble.
Can renovations create a good return? How will local rental rates respond to changes in the economy? Is the seller telling the whole story, or are important details being hidden? These are market-savvy questions to ask, which help determine a property’s value today and potential value within a reasonable investment window.
To reliably answer questions like these a buyer needs good advice. Sophisticated real estate investors rely on real estate professionals as well as financial and legal advisors to ensure they have a clear understanding of the deals they pursue.
What do real estate investors want? Tax advantages!
With those caveats out of the way, let’s focus on one of the big incentives for investing in real estate. The tax code is full of mechanisms that can give real estate investing a distinct advantage over other types of investment. Every investment plan should include a detailed tax strategy. Over the lifetime of an investment, it can save hundreds of thousands of dollars in taxable income.
Tax law allows property owners to deduct certain expenses that are unique to this asset class. Owners can deduct property taxes, property insurance, and mortgage interest, among other items. By purchasing property through an investment vehicle organized as a limited liability company or limited partnership, an investor can access tax deductions that are unavailable to individual owners.
Tax depreciation is a key concept to understand. Buildings and other fixtures on a property are subject to tax depreciation rules. Depreciation assumes that the value of assets other than land declines over time. The tax code specifies the length of time a taxpayer must use to calculate an annual depreciation deduction: 27.5 years for residential properties, 39 years for commercial property. This non-cash expense can be used to offset the real cash income that a property generates.
Depreciation schedules can be accelerated in a variety of ways. Huge savings can be achieved by conducting a cost segregation analysis of a newly acquired property. A “cost seg” breaks down a structure into its component parts, many of which can be depreciated much more quickly than the building itself.
The tax code is full of other special rules for real estate investors. A 1031 tax-deferred exchange allows a taxpayer to defer capital gains on real estate sales when profits are used to purchase another property. Properties located in designated opportunity zones can qualify for special capital gains reductions.
Pan American is your source for real estate investment advice
If all this has your head spinning, fear not. Pan American has built a team of dedicated professionals to cover a real estate investor’s needs from the due diligence stage through the eventual sale or transfer of property in five, ten, or twenty years. We have all the pieces you need: financial sophistication, expert remodeling contractors, exceptional property managers, and a service-first mindset.
Are you ready to move forward with investing in real estate? Call us at (888) 754-9700 or email [email protected] to learn more.