For those who want to increase the potential of your real estate investments I've summarized some key strategies.
First and foremost before going into any investment make sure you've taken the necessary steps to understand your net worth, cash flow, and credit worthiness. This will help you determine how much you can leverage and if you can afford the new mortgage payment, if applicable.
For first-time homebuyers you may be eligible for certain tax credits if you're under the various income thresholds. This includes the mortgage credit certificate and American Recovery and Reinvestment Act tax credit available for people earning less than usually $90,000/year, although depends by county. All first-time homebuyers are able to use $10,000 from their IRA penalty free although this would be included in your taxable income.
For investment property purchases you will need enough cash for a 20% down payment before being eligible for most financing. With any new investment property purchase anticipate your expenses including maintenance costs, HOA fees, property taxes, landscaping, insurance, and others. A 6% return on your cash flow is considered healthy.
Short-term rentals are subjected to the rules in your area which may include vacation rental ordinance and regulations, zoning codes and permits, transient occupancy tax, and whether or not your property is considered a hotel. This will also play into whether you should file a Schedule E (rentals) or C (small business).
Specific tax strategies include section 121 of the IRS code which says each spouse has $250,000 of exclusion on primary residence capital gains. If you have a rental you will have to move back in, claim it as your primary residence, and live there for two years before taking the exclusion. Section 280A says you can rent your residence out for up to 14 days with no tax. This could be great during a festival or a period of time in which you could rent out your residence for a significant amount. Section 469 is the passive loss limitation. You can carry over $25,000 of losses from your rental if you meet the income thresholds of $100,000 to $150,000. If you work 750 hours or more a year on real estate then those passive loss limitation rules don't apply. Note that this is an area that the IRS apparently likes to audit.
In terms of performance, the iShares US real estate ETF increased 9% since this time 10 years ago, just before the crash, while the S&P 500 is up 65%. I note this because real estate is not the only thing that investors should be considering. Asset prices of all kinds including global equities and bonds have increased in value significantly over the last 10 years. It's important to maintain a diversified portfolio and not over-leverage yourself in one single asset class. Work with your financial advisor to determine if you're appropriately diversified and consult a tax advisor to see if you meet the requirements for the tax strategies above.
I would be glad to help you go over your financial situation to help you find the right investment and best path forward. For more information about real estate investment strategies, watch my Aug. 22nd video or contact me directly.