When it comes to managing personal finances, it can be tricky to know how to proceed. While many people start focusing all of their energy on taking care of the things they need at the moment, the truth of the matter is that there are a lot of things you can do to disrupt your finances that may be easy to ignore at first. For starters, it is crucial to move forward and identify tax issues, even if you haven't focused on them quite yet. Check out these short posts to learn more about how you could be faced with tax problems, and how to resolve the situation for the long run.
More homeowners are converting their single-family homes into multi-family homes to increase their value. With tax-advantaged vehicles like multi-family and single-family 1031 tax-delayed exchanges, you can increase your returns in both residential real estate markets. But which one is best differs among investors.
Residential Real Estate Returns
Whether you invest in a single-family or multi-family home, you first need to establish what sort of return you expect to realize. Real estate investors use a passive investment in the S&P 500 stock index as a benchmark. Residential real estate has run up an average annual return of 10.5 percent. Last year, though, residential REITS earned 30.9 percent. These large real estate funds scoop up properties selling at a discount.
Multi-Family Units
Multi-family units typically produce higher cash flows since the owner is collecting rents on two ore more properties. What's more, since owners are limited to a certain number of mortgages, with multi-family units, more income-generating opportunities can be financed for the same number of mortgages. When you go to sell a multi-family unit, the returns are generally higher.
Multi-family units do require more work, though, and they ramp up higher costs. Your cost calculations should include:
Single-Family Homes
For a beginner investor building a real estate portfolio, single-family homes are less expensive and easier to finance. To get or refinance a mortgage on a multi-family home, your lender may ask to see long-term leases on all the units to prove you have secured the future cash flow required to make mortgage payments.
And although the statistics show higher returns on multi-family homes, for the savvy investor, single-family homes provide more investment opportunities. The supply of multi-family homes on the market is much smaller. During a recession, many single-family homes are sold at a discount through foreclosures. When determining the potential return of single-family home, consider:
Both types of residential investments can benefit from multi-family or single-family tax-deferred exchanges. If you do a 1031 exchange, when you relinquish a property, you can defer income taxes on the capital gains as long as you invest the proceeds in like-kind property within 180 days.
To learn more, contact a resource that deals with single-family 1031 tax-delayed exchanges.
Share8 September 2020
