What Is Your Return On Investment (ROI)?
A real estate investor generally makes purchase and sale decisions based on the return on investment (ROI) they receive on the equity in a property. Determining your ROI includes factoring in and evaluating your operating income, operating expenses, cost of the mortgage and tax cost/saving.
Cap rate and cash on cash are other valuation methods used by investors. If you are basing a purchase decision based on anticipated appreciation in the property’s value, most would say that is real estate speculating, not real estate investing — which may come with high reward, but with high reward comes high risk.
Maximizing Cost Recovery (Depreciation)?
Are you maximizing your cost recovery (depreciation) on your real estate investment property? Properly depreciating real estate may provide a significant tax shelter for other income. Many individuals and CPAs only divide the property into two categories for depreciation purposes, land and building.
Land is not depreciable and a building (residential) is only depreciable over 27 and a half years. What about personal property (cost recovery over five years) and land improvements (cost recovery over 15 years). If you are not maximizing your cost recovery, you are missing out on thousands of dollars.
Like Kind 1031 Exchange?
Many investors do not understand this concept, and how the IRS allows you to use it. You do not need to buy a property that is actually like the property you sold — you just need to identify and purchase another property within the allotted time period. So, if you sell a strip mall, you do not need to buy another strip mall. You can buy an apartment building, office building, single family homes, etc.
Have You Formulated A Long-Term Plan?
Are you considering investing in real estate? Income, retirement, assets for your children/grandchildren? Depending on your plan, your strategy should differ; if your intent is to leave assets for your children/grandchildren, if done correctly you can purchase a property, hold that property for a couple years while the cost recovery is aggressive, provided a tax shelter for income and then complete a like kind exchange and purchase a different property — repeating this process until death, where all of the gain will die with you. Keeping in mind that equity, which is subject to the estate tax is different than gain.