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Investing In South Bay Real Estate

There are many ways to invest your money, and each has it's own levels of risk and reward. Among one of the best investments is in real estate. Whether the investment is in a single family home, or a 12 unit apartment building, owning real estate has a number of advantages, and often not the same levels of risk.

As with any investing, investing in real estate takes a lot of time, education, and, of course, risk. But the rewards can be the difference between barely getting by and financial independence.

There are plenty of benefits in real estate...see also Buying your first investment property in the South Bay.

Cash flow
Cash flow is the difference between your income and your expenses on a piece of property. You can have a positive or negative cash flow. Obviously, you'll feel a lot better if the cash flow is positive.

My advice on cash flow is this: Never use all of your positive cash flow for rapid debt reduction. You will be walking a thin line. By keeping a strong positive cash flow, you will have more options and space to maneuver.

Appreciation
Appreciation is the increase in value of a property. There are two kinds of appreciation. The first is from economic conditions beyond your control, such as inflation.

The second kind is market appreciation, which you can control. When you improve a property (through renovations), you force its value higher. You can purchase a piece of property in need of repairs and bring it back up to neighborhood standards or slightly higher; this will give you a property that is much higher in value. In addition, the South Bay has long been a very strong real estate and investment market. The simple truth is that there are only so many homes near the beach, and the demand is generally high. The market tends to appreciate more, and is less likely to drop in a down market.

Leverage
Leverage is the ability to borrow a percentage of the value of a piece of property. Real estate, in comparison to other investments, offers a very high degree of leverage. In some cases, a couple buying a single-family home can obtain 95% financing. This allows individuals to purchase real estate with little, if any, of their own money, and it is this ability that allows the savvy investor to develop a real estate portfolio by using the appreciation of one property as the down payment on another.

Amortization
With leverage, or the use of other people's money, comes a repayment schedule. Your outstanding balance is reduced with every payment you make. Part of each payment goes to interest (applied first) and the rest goes to pay off the principal. The principal reduction is called amortization -- reducing debt. Hence, amortization can make you wealthy, slowly and steadily.

Tax advantages
Owning real estate with the goal of making a profit allows you to deduct interest payments and other expenses come tax time. But don't be fooled into buying real estate for the tax advantages; rather, purchase it because it makes economic sense to do so.

7 Important Questions Every Investor Needs to Ask


Are you effectively managing your investment portfolio to make the most of its potential?

Here are 7 good questions to ask:

  1. How can I maximize the equity I have gained in recent
    years and leverage it into a much greater real estate
    portfolio with greater cash flow?
  2. How can I reduce my investment risk factors by diversifying my portfolio should the market adjust?
  3. How can I reduce the stress and time I spend managing my properties without sacrificing income or growth potential?
  4. How can I minimize or defer the tax burden for myself and my heirs, and still grow my asset base?
  5. How can I utilize the same strategies employed by large institutional real estate investment firms?
  6. Am I holding Title to my properties in a way to protect me and my estate?
  7. Am I utilizing the maximum amount of depreciation?

If you're not sure of the answers, please feel free to call. As a real estate professional, I am here to provide you and direction in these areas. In most situations, investment properties amount to our most important and lucrative investments. Doesn't it make sense to maximize their growth and potential?

You May Have Already Purchased Your First Income Property

With the equity homeowners have built up over the last few years, many begin to look toward “income property” to expand the real estate portion of their portfolio. There are many forms of “income property”, residential, retail, commercial, industrial, lodging, etc.. Let’s focus on the residential portion of 1-4
units.

  1. South Bay Rental Market: One of the great aspects of the South Bay residential real estate market is the strength of the rental market. A residential “income property” in our area is not just a 30-unit apartment building. It could be an older duplex, it could be a cute 950’s single family home or it could be a brand new construction on The Strand. The demand to enjoy the lifestyle of the South Bay will remain, regardless of the interest rates and home prices. Whether one buys or rents is the bottom line question.
  2. Low Cost Basis: Those homeowners who are considering moving and keeping their first home as a rental, many times have low enough cost-basis on their current home to make that happen. The lower cost-basis and taxbasis often can be offset with current market rents. With a plan for a long-term hold, a rental that barely “breaks even” can still be a strong investment because of appreciation (even with more normal appreciation rates of 5%-8%).
  3. Depreciation: There are other benefits to owning “income property” such as depreciation offsetting rental income. Rental property losses can also offset ordinary income; depending on your tax bracket (see your CPA to see how the tax code works for your specific situation). Income property can be sold and “1031 Exchanged” into other investment property tax-deferred.
  4. Growing Tax Free Gains: Continued growth of potential tax free gains is
    another way use the strength of the local rental market in your favor. Most homeowners are familiar with the benefit of receiving up to $500,000 as a couple; $250,000 for a single person tax free from the sale of a primary residence if you have lived there for 2 of the past 5 years. The key here is “2 of the past 5 years”. As an example, say you have lived in your home for more than 2 years, and have $300,000 in equity. You can move and rent out your current home. If you sell your original home
    before the next 3 years, you would still meet the “primary residence” requirement for the Tax Code of living in the home for “2 of the previous 5 years”. The potential benefit can be nearly three more years of appreciation to increase your equity closer to the $500,000 tax free maximum. (ex: a current $900,000 home that appreciates 5% a year could add @ $150,000 of tax-free equity). All the while if you have been living in your new home, you have begun the cycle again by starting “the clock” on living in your new home. You are allowed to take advantage of these tax free gains no more than twice in five years, and no sooner than two years apart.

Needless to say, the long term strength of the South Bay rental market is something that can play a positive role in one’s portfolio. I always say, “Don’t the landlords who have lived in the South Bay for many years always seem to have a smile on their face”.

 

 

 

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