In the last few months if you have had to do any renovations, or construction on your home or rental properties, or if you have been reading the news, you are well aware of the drastic increase in the cost of lumber. In the last year, the coast of lumber has shot up over 250 percent. If you have any plans to renovate any of your rental properties or add accessory dwelling units, this will impact the cost of your project. 

What is the reason for the increase in prices?

When it comes to the cause of the increase in the cost of lumber, there are a number of factors. Some of the factors are systemic, and will persist for a long time. Some are temporary, and the cause of unique dynamics over the last year which likely will not be a problem down the road. 

There has been some concern that the cost of lumber has increased due to inflation. That likely isn’t the case. One major factor is just simple supply and demand. There is currently a huge demand for lumber, and the supply has been unable to catch up to the demand. So why has there been a huge increase in demand?

Anything that has happened over the last year needs to be viewed through the lenz of a global pandemic. For that reason, it is safe to assume that there will be some big fluctuations in both the supply and demand for various goods until the global economy has had a chance to return to normal.  

Increased demand

When the pandemic hit, many people who were renting homes and planning on purchasing a home in the future decided to not wait and purchase homes. The low interest rates were also a contributing factor. These people purchased and renovated their new homes which is part of the cause for the increase in the demand for lumber. 

Because people were no longer spending money on vacations and going out to eat, combined with the stimulus checks, they were flush with cash. This is a pandemic related cause which led to a number of people stuck at home who decided to work on projects and renovations around their home. This goes from room additions to tree houses as well as decks and other projects that require a large amount of lumber. 

Supply issues

As far as supply goes, there are a number of reasons both related and unrelated to the pandemic that explain why it has been unable to keep up with demand. One factor is an ecological plague that has been taking place since long before the global pandemic. 

In Canada there has been a plague of tiny mountain beetles that has destroyed 15 years of log supplies. That would be enough wood for 9 million single family homes. Canada has been unable to stop the spread of these mountain beetles because of the warming climate and it continues to destroy even more lumber stock as it spreads to different regions. 

Because the demand for lumber has been steadily increasing, lumber mills have been attempting to increase capacity to keep up. Lumber mills typically take around two years to be built and many began being built in 2018 and 2019. The demand continued to increase in 2020 which means the attempts to match the supply with the current demand is still about a year or two away. 

Covid related outbreaks over the last year have also been a cause in the slowdown of production. As the pandemic comes to an end and there are fewer and fewer outbreaks, the production of lumber should become more consistent. 

Unrelated to covid, there is also a labor shortage for lumber mills. As most young adults are encouraged to go to college in order to be qualified for most jobs, it creates a labor shortage for manual labor jobs like at lumber mills. The labor shortage is also a factor when it comes to the transportation of lumber as there is a shortage of truck drivers as well. 

Systemic causes

Another factor, though not the main cause, is trade related. The cause has to do with the lumber tariffs in place. The system that is currently in place creates a lot of uncertainty for lumber prices that causes companies to search for countries that aren’t impacted by the tariffs, leave the US market entirely, or pass the high costs on to the customers. This would only get resolved through legislation and doesn’t appear to be changing anytime soon. 

What to expect in the future?

Some of these factors will eventually work themselves out, especially those related to supply and demand  and the pandemic. Another cause is the seasonality of the cost increase. Prices tend to go up in the spring as construction projects increase, then decrease in the fall and winter. Because of the supply issues, those prices in the winter may not fall the same as the usually do, but should level off eventually. 

As the housing crisis in California has increased in severity, the state legislature has been introducing and passing a number of bills to relax the regulations on zoning laws and land use. One of the main focuses has been to spark small developments, or middle housing. SB 478 is a bill that was introduced in 2020 and passed the state Senate on May 26th and has been passed along to the Assembly for consideration. If the bill passes in the Assembly, it will then be sent to Governor Newsom to be signed into law. 

What does SB 478 do?

While some lots can be zoned for an increased number of units, many cities throughout California have restrictions when it comes to how much square footage can be built on a lot. This can effectively make a multifamily lot a single family lot. If SB 478 is signed into law, it would force cities to increase the minimum amount of square footage, or floor area ratio, on a lot.

This would apply for lots zoned for duplexes and up to 10 units. The bill would also set a minimum lot size for multifamily lots zoned for duplexes and up to 10 units. SB 478 would have a similar impact for multifamily lots that recent accessory dwelling unit laws did for single family lots. 

How many properties would be impacted?

Not every city implements restrictive floor area ratio rules. There’s a chance your multifamily lot won’t be impacted by SB 478. According to the Terner center of the 53 cities that had restrictions for floor area ratio, only 8 of the cities have standards that wouldn’t be impacted by the bill. While not every city uses rules about floor area ratio, most do have minimum lot sizes. Those with minimum lot sizes higher than what the bill proposes would be impacted and could no longer deny middle housing developments because of lot size

What is middle housing?

When most people think of housing they think of either the suburbs or high density major cities with mid-rises and high-rises. Middle housing is smaller developments like duplexes, fourplexes, and small apartment complexes. This creates more affordable housing by sharing land costs and putting more small units on each lot. This is ideal for people who want to live in a neighborhood as opposed to a big city. Right now California has a lot of high density urban centers and single family suburbs, and what is missing is middle housing.  These types of properties aren’t attractive to larger developers because of the smaller sizes of the lots. 

Conclusion

SB 478 wouldn’t be a huge change in the state of California, but it would have a big impact for smaller real estate businesses who want to develop middle housing and rent out more units. As with many of the bills over the last few legislative sessions, it is designed to chip away at the restrictions and delays that prevent housing from being built in a timely fashion that also meets the local demand.

One of the authors of the bill, Scott Wiener described it as a “wonky” type of “housing nerd concepts” which “are actually profoundly important because these are two issues and two strategies that sadly, far too many cities use to make it impossible to build multi unit housing.” 

Commentary

My great grandpa came to the United States without a penny to his name in the early 1900’s. He lived and worked in San Francisco saving up every dollar he earned and invested it in smaller apartment complexes throughout the city. By doing this, he eventually worked his way up to developing large commercial real estate and strip malls throughout the bay area. The business has now lasted three generations and has been passed on to his grandson.

Without middle housing, growing a real estate business can be difficult as it is an important stepping stone to larger developments. The cost of entry for large scale housing and commercial developments can shut most people out, but middle housing can be an opportunity to work towards even larger projects.  

Using the services of a good property management company means that not only is your investment protected and in safe hands, but you will ultimately save time and money in the long run.  Outsourcing your property management can actually add value to your investment while reducing your stress levels.  

Property management companies like Ziprent are experts in dealing with all the usual tenant management issues, alongside any emergency issues which arise such as evictions, late-night emergencies and inspections.  Real estate investment is a great way to grow wealth, and as more and more people become landlords, the need for great property management service is increasing. 

Property management companies are experts in dealing with any issues arising from your property, and this includes marketing and leasing agreements.  They know how and where to market your property to attract the right tenants, and what terms need to be included in any legal agreements. 

Here are some of the key benefits for investors and landlords who use property management companies:

Tenant Management

By far the most time-consuming element of managing investment properties is dealing with tenants.  Property managers will deal with all tenants and all their queries and concerns so you don’t have to.  

As a landlord, you want to find the right tenant who will look after your property, pay their rent on time, abide by the conditions of their tenancy, and prove to be reliable.  Finding and securing tenants is a time-consuming task and one which property managers deal with efficiently as they do it all the time.  What elements of tenant management can property managers deal with for landlords?

Collecting Rent

By outsourcing the collection of rent and fees you are able to secure a reliable and consistent cash flow.  Tenants know that they have to pay rent on time every month, but some of them do not do this.  Property management companies ensure that the rent is collected on time and keep a close eye on payments, and ensure that any breach of payment terms is dealt with quickly and efficiently. 

Communicating with Tenants

An important role played by the management company is to act as a middleman between the landlord and tenant.  This not only streamlines the process but ensures that all communication is handled professionally and in a consistent, timely manner. 

If you get unlucky and end up with a bad tenant, a good property manager will deal with the bad tenants efficiently and legally before things escalate.  Not only will they deal with communication with the tenants, but they are also responsive to any queries or concerns you have, so you have access to an expert whenever you need. They provide you with credible information relating to your property, the tenants, the market conditions, and growing your portfolio.   

Reviewing Applications

Screening tenants to ensure that you end up with high-quality tenants who are unlikely to default is a time-consuming and complex task.  A good property management company will know exactly what to look for when screening and placing potential tenants, ensuring that you end up with tenants who:

-Make rental payments on time

-Cause less problems

-Rent for the long-term

-Minimize damage to the property 

Experienced property management companies can do all the relevant due diligence you need in terms of finding the right tenant, identifying any red flags, and carefully checking the credentials of potential tenants. 

Lowering Vacancy Rates

No landlord wants to see their property empty.  Professional property management companies will ensure that your properties do not have high vacancy rates.  How is this done?  They not only market your property quickly and efficiently, they also know where to advertise, and how to advertise to secure the best tenants.  A good property manager will also ensure that the rent level set is appropriate to attract the right tenant for the property.  Research indicates that property management services reduce the vacancy rates of properties. 

Property Management

Maintaining your property is crucial to the long-term success of any real estate endeavor. This starts and ends with property management.

Repairs and Maintenance 

Repairs and maintenance of a property can be extremely time-consuming.  Not only will your tenant expect the maintenance to be done properly and quickly, as a landlord it is in your interest that you maintain your asset and ensure that your investment is protected. 

Property management companies save you the trouble of having to deal with DIY projects, find contractors and electricians and sort out timings for repairs.  Most property management companies have extensive networks of licenses and insured contractors who can do the work quickly and safely.    

Another key component of the service offered is the ongoing monitoring and identifying of maintenance issues early. This means that you can avoid large maintenance bills where small maintenance issues have escalated into expensive repair jobs. 

Outsourcing your property management means that they will ensure your property is maintained, saving you money on unscheduled repairs due to extensive wear and tear.  Property managers have online systems which enable tenants to send maintenance requests online so they can be dealt with quickly, preventing them from becoming bigger repair jobs.  

Property managers focus beyond reactive maintenance, to preventative maintenance and predictive maintenance. They ensure that contractors deal with maintenance issues quickly and any contractors used have the right tools and skills to ensure the issues are dealt with quickly. 

It Enables You to Systematize and Grow Your Business

Outsourcing property management saves landlords time. They deal with all the issues that are time-consuming and stress-inducing so you don’t have to.  Any time saved can then be invested in growing your real estate business, researching properties, networking, and dealing with finances.  Micromanaging properties is not only dreary, but it can also be challenging.   

For anyone who is serious about growing a profitable real estate rental portfolio, your biggest asset is not the properties but your time.  Skilled property managers can add value to your assets while ensuring that your assets are protected and continue to yield income for you.  

Outsourcing your property management will ultimately:

–Save you time

-Save you money 

-Protect your investment

-Facilitate business growth 

-Enable managers to advertise your property

-Relieve you from having to deal with legal notices or legal agreements

When it comes to building housing, there are a number of local and statewide regulations that restrict what type of housing as well as the number of units that can be built on a parcel of land. Zoning restrictions aren’t the only impediment when it comes to building housing. Construction of apartment buildings can often get tied up in court for years. This increases the overall cost of construction and discourages land owners from seeking to maximize the profits from their land. SB 10 seeks to address some of the major issues when it comes to building smaller apartment complexes. 

What does SB 10 do?

The current zoning laws can prevent property owners from building small housing complexes on their land. What SB 10 does is allow for local governments to authorize smaller complexes of up to 10 units. The law still allows for local governments to maintain control over new projects. They can decide which ones to approve as well as if it requires ministerial or discretionary approval. 

Does SB 10 apply to all parcels in California?

There are some limitations to the parcels of land for which SB 10 would apply. For example, any parcel in an extreme fire hazard region would not benefit from the legislation. The language of the legislation suggests it would apply to a broad swath of land in metropolitan areas of California like the Bay Area, Los Angeles County, Orange County, and San Diego County. These areas are all both transit and job rich areas which is the main focus of the legislation. If a parcel is near any mass transit stop or job center, the owner could take advantage of SB 10 if it is passed. 

Preventing lawsuits and litigation

With the current law in place, any housing project can be mired in litigation and appeals for decades. The potential for high legal fees and delayed construction, some landowners opt to not build more housing despite the demand. SB 10 would ensure those who choose to build more units on their land will no longer be blocked for years in court. 

Opposition to SB 10

As with any legislation, there will always be some push-back. Because local governments still maintain control over project approval, there may be less push-back to SB 10. One regular push-back is the concern for community character. Since local governments would approve housing projects, that would maintain the local aesthetics and character. 

Opportunities for landlords

Smaller housing developments up to ten units would allow for landlords with fewer resources to grow their business. Building more units and equity can help in investing in more land and more projects over time. There’s a demand for smaller housing projects which larger developers aren’t interested in. Freeing up land to use for up to ten units will give the space for an ambitious landlord to grow their real estate business. With cities now required to meet their housing quotas and statewide agendas becoming more aligned with growth, it creates an opportunity to take advantage of expedited zoning changes and project approvals. 

Legalizing more housing

Opportunities for landlords are currently limited by zoning laws. With laws like SB 9 and SB 10, those restrictions can be lifted if they are passed and signed into law. Recent laws passed allowing for two accessory dwelling units on single family lots and it stands to reason that even if SB 9 and SB 10 don’t pass, similar laws will pass in the future. It would be a good idea to reach out to architects, and contractors as well as your local government to see options are possible on your property.

What are Capital Expenditures (CapEx)?

Money spent improving or adding to a property that goes beyond everyday maintenance and repairs is considered capital expenditure.  Often referred to as CapEx, capital expenditures are used by investors for investment properties, business assets, and equipment.  CapEx relates to expenses that are considered ‘big ticket’ items that need replacing less regularly such as appliances, roofs, plumbing systems, and roofs.  

Effective CapEx planning and budgeting could save you time and hassle in the long run.  Having a solid understanding of CapEx, how to estimate them, budget for them, and how they are taxed all affect your investment profits, so it is essential you know all you need to know about CapEx.  

Estimating For CapEx

In the same way that estimating repairs and maintenance on a house can be challenging, it can also be difficult to estimate the CapEx.  Various factors come into play when estimating CapEx including the condition of the property, its age, and the type and condition of it.  The CapEx on a 1920s family house will be different from the CapEx on a single story family house built in 2010.  

However, you can make an educated guess as to the level of CapEx if you have all the right information to hand.  Details about the condition of the property, the roof, and the appliances will help you estimate the CapEx costs.  If a new roof was installed 3 years ago then it is unlikely to need a full repair this year.  CapEx costs can be substantial, so seasoned investors usually set aside some CapEx funds every month. These funds act as reserves if a major repair is required. 

A good method of estimating and budgeting for CapEx is to make a comprehensive list of all the big-ticket items that may need to be repaired in the next 10 or 20 years.  Once you have this list you can budget for expenditure which could be incurred.  Big-ticket items usually include the following:

-Water heating system

-New roof

-New major appliances

-Driveway overhaul

-Plumbing overhaul

-New flooring

-Landscaping

-Windows

-Paint

-Structure

-Cabinets 

-Kitchen and bathroom remodels 

Once you have a list, you should estimate the lifespan of the item, and then the cost of repair.  This will help you break down the anticipated CapEx expenses and account for them yearly and monthly. 

Replacement Costs and Time

While the above method is a simple way of getting started when estimating CapEx and budgeting for it accordingly, there are other considerations you will need to be mindful of. 

It is impossible to predict the lifespan of the items listed above, they don’t break down as and when expected.  Sometimes a new roof could spring a leak, and other times a 25-year old plumbing system keeps working fine.  You need to ensure that you are realistic with your estimates and your budgets for repair.  What you don’t want is to be faced with an expensive roof repair you had not anticipated for another 10 years. 

Therefore, it is always best to save for any big-ticket item repairs and always have a contingency budget for emergencies.  Please note, however, that any money you set aside for repairs are not operating expenses.  These funds are reported on taxes when they have been spent on repairs, so having the reserves will impact your cash flow.  

Normally, you would expect things such as the roof, driveway, structure, and plumbing to have a 15-25 year lifespan from when they were installed.  Appliances tend to have a shorter lifespan of between 5-10 years.

Budgeting for CapEx

The best way to budget for CapEx is as mentioned above – make sure you set aside monthly reserves.  You can either estimate the level of reserves you need by having a list of big-ticket items and their lifespan, or you can use the following to help you calculate CapEx reserves for budgeting:

-Percentage of the value of the property

-Percentage of the revenue generated

-Set amount per big-ticket item

-Set amount based on the age of item and replacement cost

Always remember that if you purchase a property that has a 20-year old roof that you think might need repairing in the next few years, then your monthly reserves will have to be built up quickly.  Budgeting is difficult because you cannot predict exactly how much you might need so it is easy to overestimate, but at the same time, you don’t want to underestimate in case you don’t have the reserves needed in the event that a CapEx repair is needed. 

Understanding Maintenance

CapEx is considered to be an investment into your real estate business, and your balance sheet will show any CapEx expenditure as an investment.   Determining whether an improvement, overhaul, or repair is a CapEx is important, but can be confusing.  The important question is whether you are returning the asset to its former condition or to a like-new condition. 

There is a big difference between everyday maintenance and repair, and CapEx. If we take the example of a roof repair, if you replaced a few missing tiles this would not be considered a CapEx.  However, if the entire roof was replaced then this would be deemed to be a CapEx as you will have effectively extended the life of your asset. Other examples of repairs (and NOT CapEx) would include:

-Replacing handrails

-Replacing smoke alarms

-Replacing door handles

-Replacing a driveway

The Inland Revenue Service has information on their website that helps you to clarify whether the cost incurred is a CapEx or an expense.  If you use a property management company they will keep you up to date with any maintenance issues that arise. 

Not undertaking big-ticket repairs in a timely manner could result in more expensive and extensive repairs being required at a later date.  Investors could also find that they are only able to recover lower rents on account of the state of the property.  So, don’t delay carrying out the required CapEx works, as it could cost you more in the long run. 

It is never a good idea to overlook CapEx for anyone who invests in real estate.  Estimating and budgeting for CapEx will enable you to make smart decisions about your investment. 

Rental properties can generate revenue and income, but they can also lead to losses and one of the most common reasons for losing money is not factoring in all the relevant costs and expenses.  Large-scale repairs can be rare but they can quickly deplete your reserves and profits, so ensure you have enough money set aside for CapEx. 

Even in a pandemic, rent all over California continued to increase. While places like San Francisco saw a decline in rent, places like Fresno and Oakland, and California as a whole saw rents rise and due to the housing shortage that exists statewide, that trend won’t be reversing anytime soon. In order to help address the housing shortage California lawmakers drafted the housing bill SB 9 which would allow homeowners more autonomy over their own land. 

What does SB 9 do?

If passed, SB 9 would give home and landowners more control over their property while limiting the ability of municipalities to stop the construction of additional housing through zoning restrictions. A city would only be allowed a by right approval, or ministerial approval, meaning the city would be forced to approve a proposal so long as it meets a fixed set of standards. This means that if a homeowner wanted to convert a home into a duplex, or split the property into two lots and build a second home, or two duplexes, the city would be required to approve

SB 9 is separate from the laws which allow both an ADU (accessory dwelling unit) and a junior ADU on a property. There were some concerns owners would be able to build a duplex on each lot, along with an ADU and  junior ADU for a total of four units on each lot. SB 9 would limit the number of units to two duplexes per lot, which means if one lot were split into two, it would allow for a total of four units, one duplex per lot. 

Are there limits?

There are some limits when it comes to landowners and developers. If a homeowner or developer has two lots adjacent to each other, only one of those lots can be split into two lots. There are also other limits specific to farm lands and high risk fire areas. Proposals also must adhere to objective local zoning and design standards. There would also be limits to demolition of existing structures and the lot splits would need to be of similar size, a minimum of 1,200 square feet each. The law wouldn’t apply in historical districts, farmlands, wetlands or any other environmentally sensitive area. SB 9 also puts restrictions on destroying current low income housing or rent controlled housing as well as units where tenants recently moved in. 

Economic Opportunities

No matter where you go in California there is a housing shortage. SB 9 would allow for about ⅔ of current housing to convert into duplexes and split lots to build additional housing. This is a huge opportunity for property owners to create inter-generational wealth by building multiple homes on each lot. Land is always at a premium in California, especially since the most populated areas are near the coast and there’s obviously no land to develop west, and it doesn’t take long going east until you’re too far away from urban centers. Land is in such high demand, in many areas, people will buy new homes just to demolish them and build a new one. Splitting up a lot to add more housing has a tremendous amount of value and gives owners an opportunity to build more equity. 

Concerns and opposition

When it comes to the opposition for increasing density, it mostly boils down to people liking things the way they are and they don’t want much change. With SB 9, cities can at least set design standards which would allow for all new homes to work with the local architecture keeping the character of the neighborhood the same. Here are some examples of lots which weren’t restricted by single family zoning and were split into two, as well as two lots where duplexes were built. From the street, it’s hard to tell these apart from a normal single family home restricted by single family zoning. 

A good property manager can be worth their weight in gold. They can help manage the more complicated and tedious aspects of owning rental properties, including dealing with tenants. At their best, property managers take over the day-to-day tasks associated with running your rental business. Their performance will heavily impact your bottom line, so it’s important to find your perfect match. 

Here are 10 questions to ask before choosing a property management company to ensure you (and your tenants) are satisfied.

1) What are your fees?

One of the very first questions you need to ask is how a property management company’s fees are structured. Are they within your budget? Be on the lookout for fees that are suspiciously low. Are there any hidden costs on top of the basic management fee? While their service may seem like a bargain up front, there could also be vacancy fees, setup fees, leasing fees and more.

Keep a close eye on how the fees are structured, including basic rates and extra charges. A good fee structure should incentivize the manager to find great tenants who stick around, so be aware of how evicting a tenant and placing new tenants is handled in their pricing.

2) How do you screen tenants?

Renting to high-quality tenants is incredibly important. A bad tenant might cause damage, fail to pay rent, or in the worst case, need to be evicted. A good property management company should have a robust screening process in place that includes a credit check, background check, and proof of stable income.

It goes without saying that a property management company must clearly adhere to local regulations, as well. Ask questions about landlord-tenant laws. Do they know the answers or where to find them? If not, consider it a red flag.

3) Do you have references?

Reviews are perhaps the best indicator to the quality of a management company. If they are good at their job, then they will be very open about what people have said. If you can’t find testimonials on your own and they won’t provide references, don’t award them your business. 

However, be fair. If you encounter bad reviews, it’s worth prying. Give them the opportunity to explain. After all, few businesses can satisfy every customer, every time.

4) How do you communicate?

Since the property management company will be looking after one of your most valuable assets, it’s important to know that they can be relied upon. Do they provide regular updates and reports to their property-owner clients? 

There should be clear channels for communication between the company and you, as well as the company and your tenants. Ensure emergencies will be dealt with efficiently and other issues and inquiries will be handled professionally.

5) How do you deal with maintenance?

Maintenance and upkeep are vital for any property, so it’s important to know if it’s something your prospective company will handle. If the company does handle maintenance, then you will also want to know whether it is included in the management fee or if it will cost extra. 

6) How will you market the property?

If you want to attract and keep great tenants, then the property needs to be marketed effectively. How often will the company hold viewings while the property is vacant?

The best management companies are willing to go above and beyond—not only in getting the property rented, but also in renting to the right quality of tenant. This means using professional photographs to entice renters, advertising on high-traffic channels and ensuring that the property is in move-in ready condition.

7) How do you handle rent?

It’s important to know exactly how the management company will handle rent. While you may have a preference, ideally the property manager will have an online payment option. Processing rent online is great, as it’s quick, easy and reliable. Most online payment systems also provide options like direct debits and recurring payments.

Going hand in hand with rent payment is how you get paid. Be sure to ask the property manager about their process, including their payment methods and schedule. Finally, it’s important to ask how the management company determines rental rates and handles rent increases. 

8) How many properties do you manage?

This point is particularly relevant if you have a large portfolio. How many units does the property manager currently manage? It’s important to understand the company’s capacity—especially if you intend to grow your portfolio with them. Will they be able to take on more units in the future?

Also, watch out for companies with small portfolios. Few clients can suggest inexperience or lost business.

9) Do you handle inspections?

While many companies do provide this service, it’s not true for all. If they don’t conduct inspections, you will need to find a separate company that can provide this service. If they do provide inspections, is there an extra fee?

10) How long have you been in business?

You want an experienced manager looking after your portfolio, particularly if you’re a new investor. Perhaps more importantly, how long has the current property manager been with this company? Property management is a high turnover role. If an individual has been with a company for an extended duration, it is a very good sign.

As a real estate investor, the success of your property portfolio is a key part of your overall financial well-being. So, you need a property manager who will treat your rentals with the same care that you would. If you make sure to ask the right questions, you will find a trusted partner who can be relied on.

Real estate investing can be an exciting and fruitful opportunity to generate more income and solidify your financial health. Out-of-state property investing takes this to the next level. By exploring markets other than where you live, you may find it that much easier to set yourself up for success. 

But it’s important to realize that investing out of state can also be risky, particularly if you are new to real estate. This guide will help you understand both the benefits, the drawbacks and the best way to achieve your financial goals.

Why Should You Invest Out of State?

There are clear benefits to investing out of state. Firstly, it allows you to diversify your portfolio. When all your properties are in one city or state, you are in a precarious position. One event—like a natural disaster or a factory going bust—could wreck your entire portfolio.

Out-of-state property may also be cheaper. If you live in a high-cost area, such as New York, then real estate investment may not be realistic for the average person. By expanding your search out of state, you can find gems that are better suited to your level of investment.

Finally, not all property markets have the most investor-friendly laws. You may be in a city or state where investment isn’t incentivized or laws highly favor tenants. In these instances, it’s wise to look elsewhere.

What Is Your Investment Strategy?

If you do plan on investing in property out of state, then it’s important to go into it with a plan. A clear investment strategy will help you streamline processes, stay focused and avoid pitfalls. 

Investing for cash flow, appreciation or both

For long-term property investing, there are generally two strategies: cash flow investing and appreciation investing.

Cash flow refers to the rental income left over after all expenses have been paid. Investing for cash flow involves seeking a property that can seemingly produce strong, consistent rental income long-term. For this strategy to be successful, it’s important that the property meets several criteria:

-It can be purchased at a discount. 

-It is located somewhere with strong rental demand. 

-Average rents of nearby properties are sufficient.

-Property expenses are low enough to turn a nice profit.

-All of the above are provable mathematically. 

While you can sell the property whenever you’d like, the idea is to keep it for the long-term and reliably generate income.

Investing for appreciation, on the other hand, focuses on choosing properties wherein the overall value of the real estate will theoretically increase over time and can then be sold for a profit. In this case, the strategy relies less on renters and more on fundamentals like the neighborhood, the city, community development, large employers moving nearby, and so on. Ultimately, the intention is to sell the property for well above what you paid rather than generate ongoing income through rents.

Alternatively, you may opt for a mixed approach that focuses on both cash flow and appreciation. Finding a property in this sweet spot would allow you to generate a good income while you own the property and also make a great return once it’s sold.

Flipping

Flipping is a short-term investment strategy where the aim is to buy a property that is undervalued (for reasons that will be explained) and then sell quickly for a profit. The advantage is fast cash and eliminating the expenses of holding property. 

Typically, there are two situations where a property is undervalued and therefore prime for flipping. Either the owner is under financial distress or the property needs extensive work done. Both mean buying at a discount. In the second case, renovations are also necessary prior to selling.

How To Find the Ideal Market for Investment Properties

Once you’ve decided on your strategy, the next step is to choose an appropriate out-of-state market. The United States is a wonderfully diverse country—and so are it’s housing markets. While one area may be great for cash flow, another may be better for appreciation.

Here are some of the best markets for cash flow investment:

-Pittsburg, PA

-Boise, ID

-Cleveland, OH

-Birmingham, AL

-Memphis, TN

-Jacksonville, FL

-Tucson, AZ

There are several factors that make a market strong for cash flow investment. The most important include the potential yield, cost of housing, wage growth, unemployment and rental demand. Essentially, the market needs to be healthy and attractive for the renters you hope to entice.

Here are some of the best markets for appreciation investments:

-Los Angeles, CA

-Seattle, WA

-Boston, MA

-New York, NY

-Austin, TX

-Denver, CO

-Nashville, TN

There are a number of factors that determine whether a market is good for appreciation investing. The biggest factor is demand. Coastal cities and economically important metropolises are typically in high demand, but fast-growing emergent cities are a great choice, too.

It’s important to do your due diligence when looking for the right investment market. Tools offered on sites like Mashvisor can greatly help with the process.

Build a Team 

The final issue you need to consider is building the right team. As you are investing out of state, you may well be thousands of miles away. So, you need a team you can rely on to deal with issues that may arise. 

Here are a few key players and their roles:

• The right property manager can handle many of the headaches associated with things like ongoing maintenance. 
• A good estate agent can help you get the best price when buying or selling and navigate the more technical aspects of closing the deal. 
• Finally, a contractor will be invaluable if you need to do repairs or renovations.

Out-of-state investing can be both exciting and lucrative. It allows you to diversify your property portfolio while also taking advantage of the best investment conditions across the country. However, there are certainly pitfalls that you want to avoid. 

By having a clear investment strategy, doing your research before choosing a market and building a team you can rely on, out-of-state investing can be a great addition to your portfolio… even if you’re a newbie.

Investing in real estate can be a really effective tool in your wealth-building toolbox. In addition to income generation and potential appreciation, there are a number of tax incentives that make investing in real estate very attractive. 

However, if you thought staying in the good graces of the IRS was complicated before you began building an investment property portfolio, get ready. Navigating the waters of real estate tax can be complicated. But don’t let this added layer of difficulty scare you away from reaping the benefits! 

For landlords with a small portfolio, this guide will provide everything you need to know about real estate taxes.

Disclaimer: The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial or other advice. Please consult with a CPA or tax professional when seeking tax advice.

Real Estate Taxes

There are a number of taxes your property portfolio will incur. Read on to learn about the most common types.

Income Tax

Rental property can be a fantastic source of income, which makes it a popular investment choice. But with income, comes tax. Put simply, income from a rental property is treated the same as any other income. However, unlike regular income, rental income can be offset by certain other factors (more on that later), potentially lowering your tax bill.

The important thing to keep in mind with rental income is that everything must be clearly and accurately tracked and reported to the IRS. You’ll want to keep separate records—and even a separate bank account—to completely isolate the performance of each investment property. A good rental management tool can go a long way in helping you keep these records.

For income tax rates in 2021, click here.

Property Tax

Property tax is an “ad valorem” or assessed value tax. This means that the tax rate is calculated based on what a property’s value is understood to be. So, an empty lot would hold less value and have a lower tax rate than the same lot with a house built on it. 

Property tax is calculated by the local government. Funds are used to pay for local services like water, roads and schools. To calculate property tax yourself, multiply the value of the property by the tax rate. Pre-built tax calculators can help you figure it out.

Note that property tax and real estate tax differ by definition, although many incorrectly use the terms interchangeably. Here are the facts: Real estate tax is based solely on the property, while property tax can apply to other tangible personal property, too.

Capital Gains Tax

Finally, capital gains tax is triggered when an investment property is sold for profit. The tax is made up of two separate elements: long-term and short-term capital gains. 

Short-term capital gains are anything you’ve owned for a year or less and are taxed as normal income. Long-term capital gains, on the other hand, come into play for property owned longer than a year when sold. These rates are much lower.

Long-term capital gains tax rates for the 2021 tax year

FILING STATUS	0% RATE	15% RATE	20% RATE
Single	Up to $40,400	$40,401 – $445,850	Over $445,850
Married filing jointly	Up to $80,800	$80,801 – $501,600	Over $501,600
Married filing separately	Up to $40,400	$40,401 – $250,800	Over $250,800
Head of household	Up to $54,100	$54,101 – $473,750	Over $473,750

Tax Incentives

Fortunately, there are a number of tax incentives that can help property investors save a lot of money come tax time. Plus, real estate tax benefits include generous ways to finance new investment opportunities.

Deductions

Deductions are one of the major benefits to owning investment property. For example, repairs and improvements can be deducted from your taxable income to reduce your tax bill. 

As property ages, its value depreciates (at least in accounting terms). In essence, wear and tear slowly reduces the value of your property over time (27.5 years for residential property and 39 years for commercial property). This depreciation can then be deducted from your tax bill.

Other expenses like travel, equipment, office space, marketing expenses and even legal costs are tax deductible, as well.

Appreciation

While you pay capital gains tax when you sell, until you do so, appreciation in the value of your property remains tax-free.

Refinancing

Rather than selling, you may want to refinance instead. Refinancing is a fancy term for taking out a new mortgage to pay for the old one. This transaction comes with benefits like improved rates and lower payments. More importantly, it allows you to access the equity in your home. All the associated costs are then tax deductible, and the cash you gain access to is tax-free!

Other Tax Benefits

Finally, there are other tax-lowering opportunities you may want to explore. Section 1031 of the U.S. Tax Code allows you to swap your property with a “like-kind” or similar property without having to pay any capital gains tax (for now). To qualify, you must take 100% of the gains from the sale and reinvest in a like-kind replacement property within 180 days.

To be sure, 1031 exchanges are not truly tax-free. Instead, you are deferring payment on capital gains until a later date (i.e., when selling the replacement property—unless you repeat the 1031 process again). 

You can learn more about 1031 exchanges here.

Opportunity zone investing is yet another means of reducing your tax burden. This program was designed by the government to incentivize the revitalization of some of the poorest and most distressed areas of the country. Investment into any of over 8,000 regions designated as opportunity zones allows property investors to defer, reduce or eliminate capital gains tax.

You can learn more about opportunity zones here.

While it may take time to wrap your head around the ins and outs of real estate tax benefits, it’s absolutely worth doing. Landlords with small property portfolios enjoy a vast number of tax breaks. Be sure that you aren’t leaving any money on the table! And with more and more incentives introduced every year, there is no better time to start investing.