Newcomer in the investment world, I apologize if this question seems straightforward and may have already been addressed elsewhere in this forum.
I'm currently contemplating the purchase of a newly constructed property and attempting to assess significant future expenses. I've been informed by builders that they provide a full warranty for the first year, followed by a warranty for major items for the next 2-3 years. However, I'm uncertain about the practical aspects of how these warranties function in case of issues. I'm curious to know how much you would recommend setting aside for the following:
Will it differ between SFR & MFH?
My anticipated holding period for this investment is over 10 years.
Hello Ryan, Welcome!
There's no such thing as a straightforward question when you're learning :-), and I'm glad you've reached out. Below is a brief overview regarding property warranties and some examples of what to set aside for potential expenses: **NOTE** This is not all-encompassing, mainly a start for your financial roadmap on this potential investment.
1. Warranty Functionality
Typically, the warranty provided by builders covers any defects or issues arising from their workmanship or the materials used. During the first year, most aspects of the property will usually be covered. For the subsequent years when only major items are covered, this often refers to structural elements, roofs, foundations, and sometimes major systems like HVAC.
Tips:
Always get a detailed written warranty from the builder specifying what's covered and for how long.
Document everything. If you notice an issue, take pictures, jot down dates, and communicate in writing.
2. Regular Wear and Tear
Even with a warranty, regular wear and tear won't typically be covered. Over a 10-year period, you might consider setting aside:
1-2% of the property's value annually. So, if the property is worth $300,000, that's $3,000-$6,000 per year. This can cover painting, minor repairs, and routine maintenance.
3. Capital Expenditures (CapEx)
CapEx refers to major repairs or replacements. Over a 10-year period, some of the items may not need replacement, but it's good to be prepared. Here's a general breakdown:
HVAC: Typically lasts 10-15 years. If it's brand new now, you may only need to replace it at the end of your holding period. However, budgeting for maintenance and minor repairs is wise. Set aside $50-$100/month.
Roof: Depending on the type, a roof can last 20-30 years. Minor repairs might be needed, so maybe budget $20-$50/month.
Water Heater: They typically last 10-12 years. Budget around $10/month for eventual replacement.
Appliances: Depending on the quality and usage, budget around $20/month for replacements.
Foundation & Structural: Hopefully, with a new build, these won't be issues, but setting aside $20-$50/month is a safe buffer.
Remember, these are rough averages, and actual costs can vary based on location, usage, and luck.
Keep us posted on your progress!
I just got an approval letter for a conventional loan for only 3% down. I didn't know that there was a thing for 3% down payment conventional loan.
Now that I have enough saved to buy 2 houses with 3% down, I wanna buy one with a conventional loan and one with FHA loan.
Has anyone done this before? Any idea how that works? Any advices and instructions to how make this work will be greatly appreciated.
Real estate can be a rewarding investment, but it also comes with various financial responsibilities, including taxes. Fortunately, there are several tax-saving strategies that property owners can utilize to maximize their returns while minimizing their tax liability. As a nationally recognized real estate oriented CPA, our firm very frequently discusses these strategies with clients who hold investments in real estate.
In this article, we will explore some essential real estate tax-saving strategies.
1. Understand Tax Deductions: One of the fundamental strategies for reducing your real estate tax liability is to understand and leverage tax deductions. Common deductions for property owners include mortgage interest, property taxes, and certain home improvement costs. By keeping track of these expenses and providing accurate documentation, you can lower your taxable income and, consequently, your tax bill.
2. Depreciation: Depreciation is a valuable tax strategy for owners of rental properties. The IRS allows you to deduct a portion of the property's value each year to account for wear and tear. This non-cash deduction can significantly reduce your taxable income, leading to lower tax payments.
3. 1031 Exchange: A 1031 exchange, also known as a like-kind exchange, allows real estate investors to defer capital gains taxes when selling one property and buying another. By reinvesting the proceeds from the sale into a new property, you can defer the tax bill until you eventually cash out. This strategy can provide a substantial advantage in building long-term real estate wealth.
4. Use Tax Credits: Some locations offer tax credits for specific real estate activities, such as investing in low-income housing or energy-efficient upgrades. These tax credits can be a powerful tool for saving on your tax bill while contributing to important community or environmental initiatives.
5. Properly Structure Your Investments: The way you structure your real estate investments can have a significant impact on your tax liability. Consider options like setting up a limited liability company (LLC) or utilizing a real estate investment trust (REIT) to take advantage of favorable tax treatment.
6. Keep Meticulous Records: Accurate record-keeping is essential for any real estate investor. Document every expense, improvement, and transaction related to your properties. Not only does this help ensure you're taking full advantage of available deductions, but it also provides essential protection in case of an audit.
7. Consult a Tax Professional: Real estate tax laws can be complex and ever-changing. To ensure you're making the most of available tax-saving strategies, it's advisable to consult with a qualified tax professional or accountant who specializes in real estate taxation. They can help you navigate the nuances of the tax code and provide personalized guidance based on your specific situation.
In Conclusion, Real estate tax-saving strategies are a vital aspect of optimizing the financial benefits of property ownership. By understanding and implementing these strategies, you can reduce your tax liability, maximize your returns, and ultimately achieve your real estate investment goals. However, it's essential to stay informed about tax laws and consult with tax professionals to ensure you're making the best choices for your unique situation.
Awesome article, Kislay. Very informative!
I have a couple of quick follow-up questions. Thanks in advance for your response.
Regarding Depreciation: For those new to real estate investing, the concept of depreciation as a non-cash deduction can be confusing. Can you provide a simple example that illustrates how depreciation benefits a property owner in practical terms? And, are there any circumstances where a rental property owner wouldn't be able to take advantage of this deduction?
On the Topic of 1031 Exchange: You mentioned that a 1031 exchange allows real estate investors to defer capital gains taxes. For how long can an investor continue to use the 1031 exchange strategy? Are there any limitations or potential pitfalls investors should be aware of when considering this approach?
Cheers,
KC
What sites do you use and recommend to skiptrace the returned letters to the NTC list?
Tips on other types of lists and how to market to homeowners would be helpful also.
Good Morning all,
I purchased my first investment property in January of 2022 right before interest rates skyrocketed. My plan was to live in the residence while I fixed it up and eventually either rent or sell for profit. Since then I have made a career change from law enforcement to sales and this last year I have had to adjust to a pay cut and learning a new industry.
Additionally, in the last year I have managed to put most of my extra money into the rehab of the first property. The good news is I have finished most of the projects and the house looks wonderful. The bad news is I am now in a saving phase and if I want to purchase a new property in 2024 I will need to get creative. My goal within the next 12 months is to purchase a duplex and begin the house hacking process of living in one unit and renting out the other for a year while repairs are made. I am currently in the Memphis, TN area, but I have plans to relocate within those 12 months and purchase in another market.
My main questions for anyone who has been through this or has wisdom on the topic is whats your favorite creative way to purchase homes when you do not have a large sum of money on a down payment? My interest rate for this current property is too low to refinance and pull out money and it will take me a solid year with my current financial situation to save upwards of 10k or more (I am getting married next year which is a key factor in not being able to save more than I would like to towards real estate). I used a 3% conventional loan on my first home, so I believe I am still eligible for that as well as a 3.5% FHA loan. I am just curious what the best practices are and what direction I should take as I plan to slowly build my portfolio over time.
Bigger Pockets has been great thus far and I am excited to connect with people and start this journey. Thank you for any feedback even if its just to send a friend request!
I am thinking about using a HELOC for down payments/holding money on hard money or private money loans to fund flips? Please poke holes in my thought process! Thanks!
Hi Devon,
Great idea to use a HELOC for down payments/holding money. Just a couple of thoughts -
Keep in mind that real estate investments, especially flipping, can be unpredictable. Market fluctuations, unexpected renovation costs, or delays in selling the property can impact your returns and strain the holding costs.
When using a HELOC (even just for down payment and holding), you're essentially leveraging the equity in your home. This means that if the real estate market takes a downturn or your investment doesn't go as planned, you could be at risk of losing not just the profits from the flip, but also your own home if you're unable to repay the HELOC.
Not at all trying to be downer, just food for thought as you iron out your strategy.
All the best to you!
All,
Just wanted to drop a quick note about my experience with VA home loans. I've navigated having two active VA home loans simultaneously. Sure, it involved a bit more coordination with the lender, but let me tell you, the extra effort was totally worth it.
One of the cool things about VA loans is that you can reuse the benefit, so map out your investing strategy if you have the advantage of using a VA loan option. Now, I know the funding fee for subsequent uses bumps up to 3.3%, which might seem a bit steep. But here's the kicker—sellers can often cover the closing costs, offsetting some of that additional fee.
Hey there…
Gifting my very bright nephew a REI book for his birthday. He is 22 and way ahead of where most are/were at his age. My question… which book would be best for someone starting out, eager to learn this business? I was halfway into my journey when I found BP so I'd love to know what spoke to some of you.
Thanks!
Jackie
A PadSplit can be very heavy in CF but be careful if you are renovating a house and adding extra rooms. This can make it difficult to finance the property.
Hi Matthew!
Wow, your journey with house-hacking sounds like a wild ride! The beachside duplex is such a clever move—living the dream by the sea while making bank on the other side. It's like turning your home into a money-making vacation oasis.
I love how you've found the sweet spot in managing it on your terms. The flexibility to host guests when you want and take breaks when you need them must be fantastic. And kudos for turning that knowledge into leaving the military and diving into full-time real estate investing. Nice move, and it sounds like it's paying off big time!
For anyone considering house-hacking, your story is definitely an inspiration. It's not just about the dollars and cents; it's about crafting a lifestyle that fits your vision.
I'm be curious about challenges you faced along the way. Any unexpected twists or lessons you wish you knew before diving in?
Cheers to financial independence and living life on your own terms! 🏡💰