Exploring Types of Real Estate Investments

Choosing the best type of real estate investment will depend on your individual circumstances, goals, market area, and preferred level of involvement.

 

As an investor, there are a few types of real estate properties you should be familiar with: Residential, Commercial, and Raw Land Investing/New Construction. Each comes with unique advantages and disadvantages which require thorough analysis.

Residential Real Estate

This category includes both new construction and resale homes. The most common subjects are single-family homes, but the scope may also include condominiums, townhouses, multiplex units, and vacation homes. 

In general, the best investment property for beginners is a single-family dwelling or a duplex which tend to attract long-term renters. According to Investopedia.com, the main things to consider when searching for the right residential income property are:

  • Neighborhood

The neighborhood will determine the types of tenants you attract and your vacancy rate. If you buy near a university, for example, chances are that students will dominate your pool of potential tenants and you will struggle to fill vacancies every summer.

  • Schools

If you’re dealing with family-sized homes, consider the quality of the local schools. According to a recent survey by the National Association of Realtors, 25% of homebuyers listed school quality and 20% listed proximity to schools as deciding factors in their home purchases. Although you will be mostly concerned about the monthly cash flow, the overall value of your rental property comes into play when you eventually sell it. Homes in good school districts sell more quickly and command higher selling prices than those in lower-quality ones. If no good schools are nearby, the value of your investment may be affected.

  • Crime

Check the rates for vandalism, serious crimes, and petty crimes, and note if local criminal activity is moving up or down. You might also want to ask about the frequency of police presence in your target neighborhood.

  • Job Market

Locations with growing employment opportunities attract more tenants. Click here for a snapshot of job and wage data specific to the San Francisco Bay Area.

  • Amenities

The presence of parks, restaurants, gyms, movie theaters, public transportation, open spaces, bike paths, and other perks will help attract renters.

  • Future Development

The municipal planning department will have information on upcoming development or one that’s already been zoned into the area. If a lot of construction is going on, it’s probably a good growth area. However, new housing development could also hurt the price of surrounding properties by increasing supply (see: Regional Transportation Plan and Sustainable Communities Strategy for the San Francisco Bay area 2013-2040).

  • Number Of Listings & Vacancies

If a neighborhood has an unusually high number of listings, it can either signal a seasonal cycle or a neighborhood in decline.

  • Average Rents

Rental income will be your bread-and-butter, so you need to know what the average rent in the area is. Zillow offers a searchable database for estimated median market rate rents by housing type across a given region.

  • Natural Disasters

Insurance is another expense you will have to subtract from your returns, so you need to know just how much it’s going to cost. If an area is prone to earthquakes, fires, or flooding, coverage costs can erode your rental income. 

Commercial Real Estate

Commercial real estate is property leased for business and retail purposes. Multifamily apartment buildings are also considered commercial, even though they are used for residences. Commercial properties are generally grouped into the following types: 

  • Office: This includes single-tenant offices, shared-office spaces (favored by Millennials), and skyscrapers.
  • Retail: Strip malls, community retail centers, banks, and restaurants all count as retail.
  • Industrial: Warehouses and buildings designed for manufacturing make up this division.
  • Multifamily: Apartment complexes, high-rise condos, and smaller multifamily units fall under this classification.
  • Special Purpose: This means buildings designed for specific uses, like car washes, self-storage facilities, and hotels.

Raw Land Investing & New Construction

Raw land refers to any vacant land available for purchase. It is most attractive in markets with high projected growth. New construction is not much different, with the exception that properties have recently been built on the land.

Where To Find Real Estate Investment Properties

Multiple Listing Service (MLS) & For Sale By Owner (FSBOs)

Through more than 800 MLS networks, brokers share information on properties they have listed and invite other brokers to cooperate in their sale in exchange for compensation if they produce the buyer. Sellers benefit by increased exposure to their properties. Buyers benefit because they can obtain information about all MLS-listed properties while working with only one broker. In order to access the MLS, you need to work with a real estate agent like Julie who can help you find and navigate the results. 

If you’re looking for FSBOs, you could drive through your target area looking for signs to find these properties—but most investors find it more beneficial to work with a real estate agent. Real estate agents are often aware of FSBO properties in a given area and will pass that information along to their clients.

Off-Market Properties

Off-market properties can represent an opportunity to get ahead of the competition. Though they are not listed on the MLS, off-market properties are not impossible to find. When it comes to looking for them, there are a few resources investors should check first. These include public records, real estate auctions, wholesalers, networking events, and contractors. 

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Julie and her team of experts are ready to help you achieve your investment goals, and we look forward to helping you with any real estate investment questions you may have.

 

Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Rebuild Or Remodel

Does your next investment property need just a little love, or does it demand a wrecking ball? Well, it all boils down to the numbers.

 

Rebuild

The first step in planning a rebuild is determining scope, timing, and budget. In addition to providing enough time for the approval and permitting processes (which vary by city), you will need to plan for “hard” and “soft” costs. Hard costs refer to costs like excavation, construction, landscaping, etc., while soft costs refer to design, engineering, permitting, etc.

The following estimates, provided by Peters Design-Build, will give you a general understanding of current architecture and construction costs in the San Francisco Bay Area.

Hard Costs

The costs below are based on whole-house rebuilds or new construction, and generally assume 1 kitchen and 1.5 bathrooms per 1000 square feet of living space. 

Entry-level custom projects are typically in the range of $600 to $700 per square foot. Entry-level custom projects have good quality but include value-conscious finishes and fixtures. These projects are, in general, structurally straightforward with simple detailing. 

Mid-range custom projects typically range between $700 to $800 per square foot. The majority of projects fall into this category. Mid-range custom projects have unique design features and custom details, and the client is able to choose from a broad range of high-quality finishes and fixtures. These projects are generally more structurally complex.

More distinctive projects can range upwards of $800 per square foot. These unique designs are structurally complex and often include large expanses of glass, structural steel, architectural concrete, or other technically advanced systems. These luxury projects often have artisan or boutique finishes, custom details throughout, and the highest quality fixtures.

Soft Costs

Soft costs include architectural design, engineering, surveying, permit applications, Title 24 compliance documents, insurance, and elective certifications such as LEED certification.  

Architecture, engineering, and other design-related professional services are typically around 15% of the project’s hard cost. Setting aside an additional 5% for permits and other regulatory compliance costs is highly recommended.

Remodel

While a teardown and complete rebuild may be an easier and more straightforward process, if your house is structurally sound then a well-planned, tightly controlled renovation might make better financial sense. 

Cost control is key. Anyone who has ever done an expansive renovation project will tell you that the final cost is always higher than anticipated. In addition, you’ll want to consider adding the right value to the future sales price of your home by keeping these two things in mind when planning a remodel: 

  • The return on investment (ROI) per upgrade.
  • The changing preferences of homebuyers.

Upgrades That Pay Off

According to a cost vs. value analysis conducted in 2019 by remodeling.hw.net, the five home updates with the highest payoffs in the San Francisco Bay Area are:

Project Type Job Cost Resale Value Cost Recouped
Manufactured Stone Veneer 10,890 16,731 153.6%
Garage Door Replacement 4,199 5,784 137.8%
Grand Entrance 10,101 12,872 127.4%
Minor Kitchen Remodel (Midrange) 29,569 33,341 112.8%
Deck Addition (Wood) 19,062 19,477 102.2%

 

Click here to generate the complete list.

Changing Buyer Preferences

Millennials are expected to account for about two-thirds of new households, increasing to 21.6 million households last year. Three-quarters want a single-family home. 

When asked about home size, an average of 2,475 square feet is preferred. Two-story homes (52%) and open-concept floor plans (78%) were also preferences in research conducted by the National Association of Home Builders. Eighty-one percent said they wanted either three or four bedrooms, and two or two-and-a-half baths.

 “Home design is also one of the top motivating factors,” says Mollie Carmichael, a principal in John Burns Consulting. Design emerged as the No. 1 trend for millennials in Burns’ study. When asked to choose a preferred style from photos reflecting a range of popular designs in Burns’ research, millennials selected Modern Traditional as the most preferred style.

When it comes to features, the most desired by millennials is a laundry room, with 55% saying they just wouldn’t buy a new home without one. Exterior lighting came in second, with 88% saying it was essential or desirable. Storage is also important, with linen closets, a walk-in pantry, and garage storage making the top 10 most desired features.

Jill Waage, editorial director for home content at Better Homes & Gardens, says that the next generation of homeowners wants smart, stylish homes that enable them to connect with friends and family.

Outdoor living comes out on the top in BHG’s survey “You and Your Home,” with three out of four of those under 35 saying outdoor space is important for entertaining, and 51% dreaming of having an outdoor sink, cooktop, refrigerator, and grill. In comparison, only 25% of those over age 55 and 37% of those between 35 and 55 desired those features. 

 

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Julie and her team of experts are ready to help you achieve your investment goals. Our vast experience, pre-inspection services, and high-quality network of contractors and providers will ensure your success when choosing whether to rebuild, remodel, or even to buy new.  

Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Defining A 1031 Exchange

Section 1031 of the Internal Revenue Code allows a tax-deferred exchange of an investment property for another, as long as the transaction represents a “trade-up” in value. For instance, the exchange for vacant land (which is not yet producing income) for a commercial building that is bringing in rent would be considered eligible for exchange under Section 1031.

Benefits Of A 1031 Exchange

LEVERAGE

Investors can take advantage of the 1031 tax-deferred exchange to acquire a more valuable investment property. By utilizing the money otherwise paid to the IRS in taxes, investors can increase their overall buying power to acquire a more expensive and profitable replacement property.

CONSOLIDATION/DIVERSIFICATION

With the flexibility of an exchange, an investor may exchange one property for several others, consolidate multiple properties into one, and acquire property in other areas.

INCREASED CASH FLOW/INCOME

Cash flow and overall income can be increased through a 1031 tax-deferred exchange. For example, a vacant parcel of land that generates no cash flow or depreciation benefits can be exchanged for a commercial building that does.

Main Types Of 1031 Exchanges

TRADITIONAL 1031 EXCHANGES

There are two types of traditional 1031 exchanges:

  1. A delayed exchange is when the relinquished property is sold to a buyer and the replacement property is purchased within 180 days from a third party.
  2. A simultaneous exchange is when two parties either “swap” properties with each other, or the exchanger closes on both the sale of the relinquished property and the purchase of the replacement property on the same day.

REVERSE EXCHANGES: BUY NOW, SELL LATER

A reverse exchange allows the acquisition of new property before the selling of the existing investment. If a seller cannot sell the existing property within the timeframe to perform a standard 1031 exchange, a qualified intermediary (QI) can hold title on the desired property until the first property sells. The seller is then able to take possession of the new investment parcel from the QI.

Requirements For An Eligible 1031 Exchange

NET SELLING PRICE (NSP)

To avoid capital gains tax on the sale of your relinquished property, you must spend an amount equal or greater than your net selling price (NSP = selling price minus closing cost.)

QUALIFYING PROPERTIES

All real estate can be exchanged as long as it is held for investment or for productive use in a trade or business.

USE OF QUALIFIED INTERMEDIARY (QI)

The regulations require that you use a QI to facilitate your exchange. The QI is the independent third party required by the IRS to act as the middleman in both the sale and purchase transactions. The QI cannot be the taxpayer, a descendant of the taxpayer, or an agent of the taxpayer (realtor, attorney, accountant, etc.). The role of the QI is to prepare the exchange documents, coordinate with the closing agents for each transaction, and escrow the funds. (Click here for a list of top-rated QI’s in the San Francisco Bay Area).

45-DAY RULE

You have 45 calendar days from closing on the sale of the relinquished property to identify up to three replacement properties. If a property has not been properly identified by midnight of the 45th day, you will be unable to complete the exchange. If you wish to identify more than three replacement properties, restrictions will apply.

180-DAY RULE

You must close on the replacement property by the earliest of either the due date of the tax return (including extensions) for the tax year that the exchange took place, or within 180 calendar days after closing on the relinquished property.

Click here for a detailed look at Section 1031 of the United States Internal Revenue Code. Julie and her team of experts look forward to helping you with any real estate investment questions you may have.

Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Should You Flip Or Hold

“Flipping” a property—that is, buying a property then reselling it after some time has passed, usually after installing upgrades—is popular amongst beginner and seasoned investors alike. However, there are cases when it makes more financial sense to hold on to your property instead of flipping it.

The question of flipping versus holding does not have one correct answer. It all depends on trends and numbers.

Market Trends

When asking this question, far more important than national economic indicators are the conditions of your local real estate market. Deciding whether to flip or hold on to a property requires a thorough understanding of real estate trends in your area.

Factors like job and income growth, past and forecast trends in home prices, housing affordability, demographic shifts, pending legislation, zoning laws, future development plans—even the growing impacts of natural disasters—must be carefully scrutinized.  

While by no means exhaustive, the following list provides some pointers: 

  • Hold on to rental properties located in stable markets, especially ones which have had solid tenants for several years.
  • Consider flipping a rental property located in an area which has experienced runups in home prices for several years and that could be reaching peak value. Then, through a tax-deferred 1031 Exchange (link to Investors: Defining A 1031 Exchange), you could acquire a new income property in neighborhoods that still have room for further appreciation (link to Investors: Where Are The Best Local Places To Invest?).
  • Consider flipping out of areas under rent-control and shifting your investments to unrestricted localities. Also, keep an eye on pending legislation intended to increase housing supply.
  • Areas increasingly prone to damage by floods or wildfires could experience higher insurance premiums and deductibles in the future. Consider flipping in areas less susceptible to natural disasters.
  • Neighborhoods experiencing growth in crime are likely to experience decreased demand and lower rental prices. Keep your finger on the pulse by frequently assessing the crime rate in your area.    
  • Keep a close watch on future development plans which could increase the housing stock and drive rental prices lower in the areas where you own income properties, and consider flipping those assets for real estate in areas with more restrictive zoning laws. 
  • A deteriorating school district, both in educational achievement and finances, can trigger an exodus of families seeking better schools for their children and depress the real estate market in the troubled area. Stay current on local school news.

The Numbers

All things being equal, deciding whether to flip or hold will require a thorough financial analysis. This means you should compare the profitability index of each set of numbers.

Our comprehensive online research has found the following tools to help you run such analysis:

Fix-&-Flip Analysis and Reporting Tool

Rental Property Calculator

Property Flip-or-Hold App

Taxes

Incorporating the tax treatment of both flip and hold strategies is crucial to your comparative analysis. Click here for a summary and examples.

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Julie and her team of experts are ready to help you achieve your investment goals, and we look forward to helping you with any real estate investment questions you may have.

Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

The information in this post is being provided for informational purposes only and not for the purpose of providing tax, legal, or real estate investment advice. No liability is assumed by Julie Tsai Law or Compass Realty with respect to such information.

 

Make Your Income Property A Success

You’ve followed our guide on starting your real estate investment (Real Estate Investing: How To Get Started), developed a solid plan, prequalified for a loan (Buyers: How To Find The Best Mortgage & Get Prequalified), and located the income property that best matches your investment objectives. Now, it’s time to review the steps to make your income property maximize profitability and minimize headaches.

Treat It As A Business

We can’t stress this enough. Your rental property IS a business—and you need to treat it that way. This type of investment is not hands-off. It requires involvement, lots of time and attention, and the mindset of a business professional.

Limit Your Liability

Here’s every landlord’s nightmare: a tenant throws a big party, one of his guests has one drink too many, falls off the balcony, breaks his neck, and sues both tenant and landlord. The landlord discovers his/her liability insurance is inadequate and is now personally liable for hundreds of thousands in damages.

Real estate investors who rely solely on insurance as a means of protection from personal liability take a significant risk. Liability policies typically have limits, exceptions, and carve-outs. While the chance of a loss that exceeds policy limits may be remote, if it happens, the consequences can be devastating, says Jeff Weaver from legalzoom.com.

To better protect yourself and your personal assets, consider setting-up your real estate business as a Limited Liability Company (LLC).

LLCs have become one of the most preferred forms of business entities through which to hold title to investment real estate properties, according to legalzoom. The insulation from personal risk exposure coupled with the relative ease of administration and potential tax benefits makes ownership of investment property through an LLC a very desirable option in most instances.

Before you do, it is always good practice to seek legal and tax counsel.

To Manage—Or Not?

First-time investors are strongly advised not to hire a property management company in the early stages of their business. Not only will it save you money, but it will allow you to gain valuable knowledge and expertise. Once you thoroughly understand how to manage a property, you will know what to look for in a management company as you grow your portfolio. 

Regardless of whether you choose to hire a professional management company or not, knowing the seven most-common mistakes landlords make will save you money and headaches. 

Consider them the seven deadly sins of landlording.

Mistake # 1: Inadequate Tenant Screening

A vacant property is preferable to a property rented to the wrong person. Not only are bad tenants a cause for headaches, but they can quickly eat up profits. 

Screening tenants is about digging into a potential tenant’s background and discovering who they really are, says Brandon Turner at BiggerPockets.com. An application can only tell you so much and can be easily manipulated or falsified. Screening your tenant means looking into the information they provided, as well as analyzing outside information you can find on your own to get the whole picture.

When digging, however, make sure you adhere to Fair Housing and Discrimination Laws. Otherwise, you could be setting yourself up for a lawsuit.

To set up your tenant-screening process, start by reviewing this comprehensive guide

Mistake # 2: Assuming The Property Will Always Be Rented

You’ve run your numbers and they look great. But wait! Did you consider vacancy?

Vacancy rate is the percentage of a year that a property sits empty. The nationwide vacancy rate during Q1 of 2019 was 7%. 

To obtain the specific rate in your investment area, check the U.S. Census Bureau, contact local property management companies and large landlords, and/or ask a real estate agent like Julie to conduct a comparative market analysis on local rental property stats available on the MLS. 

Mistake # 3: Underestimating Repairs & Maintenance

According to a common rule of thumb, you should set aside at least 1% of the property’s value every year for home maintenance. For larger repairs, saving 10% (annually) of the total cost of your property taxes, mortgage costs, and insurance payments is recommended.

Mistake # 4: Having A Shoddy Lease Agreement

Take time to research and find the lease agreement which offers you the best protection and suits your particular needs. 

There are several online services offering standard and customizable lease agreements which could save you money in legal fees. To get you started, we’ve compiled a short list:

Once you’ve made your selection, it is always good practice to have your lawyer review it. 

Mistake # 5: Not Enforcing Lease Terms

Being a nice landlord is good practice. Neglecting tenants is not. But that doesn’t mean you should be lax when enforcing the terms of the lease, which, after all, were accepted by your tenants upon signing.

If you said late rent payments would incur a penalty, charge it. If you outlined that no pets are allowed and you later discover your tenant hiding a puppy, enforce the penalty—no matter how adorable the puppy.

If your tenants realize you are lax about the agreed terms, they will act in like manner.

Mistake # 6: Delaying An Eviction 

The most common reasons for tenant eviction are:

  • Non-payment of rent
  • Habitual late payment of rent
  • Damage to the property
  • Disrupting other tenants
  • Tenant refusing to move out after the lease has ended

Not starting eviction proceedings as soon as legally possible can be a very costly mistake. If you run into problems with a tenant and are unsure about your rights or how to proceed, contact an eviction attorney right away.

Mistake # 7: Not Conducting Thorough Move-In/Move-Out Inspections

Aside from normal wear and tear, tenants should return your property in the same condition it was when they first moved in.

To avoid misunderstandings, use this thorough guide provided by Zillow.  

 

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Julie and her team of experts are ready to help you achieve your investment goals, even advising you on the best methods of buying and managing income properties.

We look forward to helping you with any real estate investment questions you may have. Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.

Why Is The Bay Area Great For Real Estate Investment

Nearly 7.8 million people now call the San Francisco Bay Area home, with the fastest growth rates in Alameda, San Francisco, and Contra Costa counties (U.S. Census Bureau April 2019). The population of the nine-county region grew by over 600,000 people since 2010 — a nearly 8.5% increase — outpacing the growth rate in any other part of California. How did all this growth come about?

“You don’t need an expert to tell you that it’s obviously related to the strong economy of the Bay Area,” says Hans Johnson, a demographer with the Public Policy Institute of California, noting that the region is now struggling to accommodate its rapid pace of job growth and very low unemployment.

Of course, with this extreme growth comes plenty of opportunities for sound real estate investments. The following excerpt from the July 2018 report by the Bay Area Council Institute/ McKinsey & Company mentions factors that have made this area so ripe for investment:

The nine-county San Francisco-Silicon Valley Bay Area has been the international innovation hub since the 1970s, one of the nation’s most resilient regions for the past fifty years, and the fertile ground on which Apple, Facebook, Google, and other corporations have grown into top companies by global capitalization in just the last decade.

Even though these economic success trajectories have been almost unprecedented, the Bay Area economy is still currently on the upswing, rather than having reached a peak or started a decline. Much of the growth has occurred in clusters of highly-productive industries. These have thrived due to factors such as the Bay Area’s unparalleled workforce, world-class higher education system, premier startup ecosystem, and the almost limitless opportunities created by the region’s dense concentration of venture capital that funds innovation across a broad range of established and emerging industries.

Here are our professional findings for why you should consider investing in Bay Area real estate.

A Resilient Market

The steadfastness of our local market projects a significant influence on real estate values.

“Financial-market cycles have been around for hundreds of years, from the Dutch tulip mania of the 1600’s through today’s speculative frenzy in digital-currencies,” says Patrick Carlisle, Compass chief market analyst in the Bay Area. “While future cycles will vary in their details, the causes, effects, and trend lines are often quite similar. Looking at cycles gives us more context to how the market works over time and where it may be going much more than dwelling in the immediacy of the present.”

A look at Bay Area housing price cycles over the past 30+ years shows a market that recovers relatively quickly from economic downturns and disruptions to the financial system, offering investors positive returns in the long term.

Outpacing Inflation

Property price appreciation generally tracks inflation by +/- 2%. Based on the inflation rate of 2% for the past 12 months, a real estate investment should have seen (at minimum) a 0-4% appreciation.

A look at price gains in Bay Area properties over the last two decades, however, shows a market that consistently outpaces this norm.

Price appreciation, however, is a secondary attribute.

Your main focus should be on the net return on your real estate investment generated by rental income.

High Rental Prices

The Bay Area rental market is unlike any other in the country. Unprecedented growth of tech companies has fueled the market over the past few years, placing upward pressure on rents and downward pressure on vacancies.

Rents in the Bay Area are among the priciest in the nation. After two years of low-to-negative growth, Bay Area rents picked up steam in 2018, especially in the second half of the year, according to a quarterly survey of large apartment complexes by RealPage. At the start of 2019, the average asking rent for all sizes of apartments in the San Francisco, San Jose, and Oakland metro areas stood at $3,335, $2,789 ,and $2,302 respectively.

RealPage predicts that rises in rents will slow a bit this year—to 3.7% in the San Francisco metro area, 3.9% in San Jose, and 2.2% in Oakland—thanks to a big jump in new construction.

While the correction is welcome, the Bay Area’s economy—with an annual growth rate of 4.3% over the past three years, strong population growth, rising incomes, low unemployment, and a new wave of tech-company IPOs slated for 2019 and 2020—offers a solid underpinning for the rental market in the foreseeable future.

Julie and her team of experts are ready to help you achieve your dream of real estate investment. We look forward to helping you with any real estate investment questions you may have.

Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.