Real Estate (Real Estate Wealth Tips)
Real estate has been a source of abundant wealth for many generations. Despite the promise of easy riches from late-night purveyors of tape and video series on buying real estate with no money down, gaining wealth from real estate is neither quick nor easy. However, most who have become wealthy in real estate have observed the following rules.
Real estate appears most alluring when it is most dangerous to buy. Near the top of a real estate cycle, real estate seems safe and easy since it has appreciated so much during the past few years. However, this is the time when prices are probably near the peak and where there is more downside than upside. Real estate bought when prices have fallen sharply has much more potential for profit. The ideal time to buy is after the market has hit bottom and has clearly started to improve. This is often evidenced by several quarters of increasing occupancy rates and rental rates. In addition, economic drivers such as employment are typically also in an upward trend.
Due diligence is critical before purchasing real estate. Many investors have become attracted to the curb appeal or upside potential of a property. However, after the purchase has been completed they belatedly discover there is deferred maintenance beyond what they realized, tenants who are not paying rent, and revenues and expenses which were misrepresented. Researching the physical property, tenants, income and expenses in the rental market sharply reduces the risk of purchasing real estate.
Real estate investors face high levels of local and federal income taxation and have meaningful options to minimize the use taxes. Sophisticated real estate investors appeal property taxes annually, or as often as allowed by state law. Real estate investors can minimize federal income taxes by fine-tuning their depreciation schedule with a process termed cost segregation. Cost segregation is a specialized service performed by appraisers and engineers which allocates the cost basis of real estate into as many as 130 different components. Many short-life components can be depreciated over 5, 7 or 15 years. The building structure is depreciated over 27.5 years for rental residential real estate and 39 years for commercial real estate. Cost segregation can increase real estate depreciation by 50 to 100% during the first 5 to 7 years of ownership. Increasing depreciation with cost segregation both defers and reduces federal income taxes. Cost segregation defers payment of income taxes from the time income is earned until the property is sold, or a gain on the sale is recognized. Cost segregation reduces federal income taxes by shifting income which would be taxed at the ordinary income tax rate (35%) to the capital gains rate (15%).
Property management is the underbelly of real estate investments. It is critical and is often not given adequate attention. Property management includes many areas of specialized knowledge which require attention from either the owner or an agent of the owner. These include on-site visits, regular analysis of the rental market, leasing, tenant screening, expense management, maintenance and capital expenditure planning. Wealthy real estate investors either master these skills or find someone to do it for them.
Real estate is not a get rich quick business. However, by reasonably timing purchases, performing due diligence, managing taxes and prudently executing property management, it is possible to slowly become very wealthy through real estate investment.
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Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.
City:
- San Francisco, CA
- New York, NY
- Boston, MA
- Phoenix, AZ
- Tampa, FL
- Atlanta, GA
- Bridgeport, CT
- Miami, FL
- Orlando, FL
- Las Vegas, NV
- Charlotte, NC
- Syracuse, NY
- Minneapolis-St. Paul, MN
- Greenville, SC
- Stockton, CA
- San Antonio, TX
- Virginia Beach, VA
- Albany, NY
- Jacksonville, TN
- Portland, OR
- Indianapolis, IN
- Omaha, NE
- Baton Rouge, LA
- Knoxville, TN
- Harrisburg, PA
- Tulsa, OK
- Akron, OH
- Austin, TX
- Buffalo, NY
- San Jose, CA
Cost segregation produces tax deductions for virtually all property types.
Property Type:
- Discount store
- Drugstore
- Research and development
- Convenience store
- Medical office
- Truck terminal
- Bank
- Health spa
- Racket club
- Commercial building
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
- Durable good wholesalers
- Day care facilities
- Frozen food manufacturing
- Textile product mills
- Golf courses and country clubs
- Printing activities
- Automotive parts distributors
- Metal manufacturing
- Automotive repair facilities
- Laundry facilities
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