With tax advantages (Go Zone) and other incentives (SRAP, MDA), many investors fell prey to unscrupulous or unknowledgeable agents and brokers pushing properties just to take advantage of these incentives. It is unfortunate that this happened, but in some ways it has made it a great market place for serious investors who work with a broker who truly helps minimize risk and secure the investors objectives.
There are so many ways to make money in real estate investing. I am familiar with many, but my specialties lie in the analysis of residential (single family and multi-family) properties. This includes developing raw land for residential use as well. I will touch on just a few here that offer exceptional opportunities.
Go Zone
Go Zone has been extended through the end of this year. It is expected that this will be the last extension so if you are looking to take advantage of this, NOW is the time to do so. Go Zone offers the ability to depreciate 50% of the improvements on a property in the first year. The property has to have not been put into service (see more info on Go Zone). This depreciation can be carried back to recoup taxes as well as forward to help mitigate future tax liability. Just because it sounds good though – don’t always jump just because it looks good on paper!
Go Zone is an excellent incentive when used as a part of your overall real estate investment plan. Some agents have no problem selling you an overpriced property that will never cash flow, just so you can get go zone depreciation. Stay away from multi-family right now. The market is inundated with duplexes and fourplexes from people buying overpriced for Go Zone. Unless you have something really special – stay away. It simply makes no sense to spend $80k-$100k a door when you can buy foreclosed units for $40k-$50k a door, sometimes less. Single family homes are the best way to go. Their are a handful of communities where you can pick up existing inventory that will cash flow and offer a high chance of good appreciation. Single family homes give you the best exit strategy as well – much easier to sell a home than a duplex.
Foreclosures
Due to many investors being taken advantage of over the past few years, there are numerous foreclosure and really great deals in the multi-family market, specifically in duplex units. It is not uncommon to find fairly new duplexes in the $80k-$100k range that will reach rents around $1500/month (both sides). Many of these deals reflect double-digit CAP rates which are almost unheard of in the residential market.
There are also opportunities in “flipping” properties. The best deals are for those that have cash and a stomach to sit on something for several months. The properties that have the most potential for return on investment also require the most work and may take a few months to complete if you are working to adhere to a stricter budget. If you have the stomach for it, and the cash to put up, deals can be found with 30% or more cash on cash. I have personally assisted investors with deals that provided over 100% cash on cash in all cash transactions. Rehab loans are harder to come by in the investment arena. An owner-occupant (someone looking to live in the property) can look at FHA 203k programs (I have a great lender for this), but investors are finding it harder to get loans to rehab and hard money is so tight right now that when you can find a hard money lender willing to fund a project, the rates and points will eat away a large portion of your profits.
Overall “Short” Analysis (Summary)
If you need tax incentives, make sure you can cash flow. Properties in select areas can cash flow easily with 25-30% (most lenders requirement now) and the single family market is an easier exit strategy. Look for indicators of higher potential appreciation areas. If you are just looking for straight positive cash flow (passive income), and are not as concerned about the exit, look more at duplexes because now is the time to buy right.
Contact Me with any questions or to assist in putting together a more detailed investment strategy. I look forward to working with you.
