Tag: 1031 exchange process

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Real Estate

Section 8 Multifamily Ownership to Build Wealth

Hand presenting model house for home loan campaign

The Section 8 Housing Program offers financial assistance to access low-cost housing, sometimes referred to as the housing choice voucher program. And is one of the most reliable real estate investment opportunities known so far.

Since the government takes care of a large chunk of rent payment, the section 8 multifamily subsidized housing program has a massive advantage over traditional rental contracts. We examine how a shrewd property owner can tap into the program and build wealth.

According to the latest figures, about 2.2 million households by low-income earners receive subsidized rent through the section 8 housing choice voucher program.

What is the Section 8 Program?

Under the program, the government pays a percentage of the tenant’s rent directly to section 8 landlords whose property is in the listing. The U.S. Department of Housing and Urban Development Management (HUD) funds the program by paying, on average, 70% of a section 8 tenant’s rent and utility bills. A family must typically earn under 50% of the median income in a given area to qualify for HUD Section 8 relief.

Section 8 Multifamily Home Ownership

Homeownership and maintenance under the program can involve financial support from the HUD. The owners can also access conditional government subsidies when renovating, building new homes, or putting up properties for a mortgage.

The homeowner must set aside units to house the low-income American population under the section 8 housing list.

Section 8 landlord application can be lengthy and costly, involving a lot of paperwork, a waiting period, and property inspection. It can take up to 5 months to get approval.

Multifamily homes are properties with up top units and still qualify as a single residence from lending standards. These can be townhouses, duplexes, triplexes, or apartments with up to four units. Five units and above are multifamily but usually require a commercial mortgage.

Most multifamily dwelling property owners rent them out to residents. They are great for generating a higher monthly rental income with lower maintenance costs, so you can rely on commercial property investment to build wealth over time.

Vouchers under the Section 8 Housing Program

Section 8 includes two types of vouchers for the tenants– The Housing Choice Voucher Program and the Project-Based Voucher. The Housing Choice Voucher program allows tenants to choose any unit within the section 8 program. The Project-Based Voucher ensures that the federal rental assistance stays within the selected housing unit and is often more profitable for the owner.

Advantages of Section 8 Multifamily Home Ownership

1. Easy Bank Financing

For real estate investors with a record of handling rental assets, the bank can use the projected rental income from the units to finance down payment programs for multifamily homeownership.

2. Certainty of Rental Income

Upon qualifying for the Section 8 program, the HUD agrees with the property owner on the expected rental income, per the Fair Market Rate. The landlord will receive monthly payments from the government, even when there’s a recession.

3. Occasionally Higher Rental Rates

As an incentive, the government often includes an annual 5 to 8% incremental increase on rent payments. The rate could translate to a better deal than what they would get from the open market.

4. Increased Occupancy Rate

Qualified and listed property multifamily homeowners get access to a vast pool of would-be tenants on the waiting list. The list can have 2 million or more Americans at any given time. That means minimal vacancy issues, reducing your marketing budget significantly.

5. Stability of Rental Income

The federal subsidies make multifamily homes in the Section 8 program suitable for long-term tenancy, as the tenants are likely to stay longer in the units.

Source: Morning Invest(Youtube Channel)

Building Wealth through section 8 Multifamily Home Ownership

Among several real estate investment opportunities one can look for investing in several multifamily homes as a remarkable way to achieve long-term cumulative wealth. Here are some tips to consider when investing in section 8 multifamily homeownership:

a) Choose and manage tenants wisely

While renting out the multifamily units under Section 8, you pay off your mortgage from the tenants’ rent. Hence, liabilities go down, while in almost every instance, the property’s value goes up.

In this case, there comes a time when the mortgage is zero, and the income is primarily profit. Therefore, you can obtain more multifamily property, which you can scale to millions of dollars in wealth.

b) Ready Investors

The multifamily concept is more investor-friendly as compared to single-family units. In this case, when you need financing, you bring the deal to the table while investors bring the money on board. Later, the profits get split as agreed.

c) House ‘hacking’

When you own a multifamily home, you can live in one of the units while renting out the rest. The tenants’ rent caters to your housing expenses, and you can save up over time.

d) Add more rooms

A sure-fire way to increase your rental income is to follow the BRRRR (buy, renovate, rent, refinance, repeat) strategy. Additionally, it would be best if you thought about increasing the number of rooms.

There’s a healthy market for multifamily homes with more than four bedrooms, but a chronic shortage for them:

For example, a single home will make you $150 in profit per month, but a duplex will rake in $300, while four-unit multifamily will fetch $600 within the same timeframe.

Bottom Line

Scaling up wealth from multifamily units has a longer time horizon, is not entirely problem-free but is assured, especially when listed in the Section 8 program, whereby there is the assurance of monthly government payments. It gets better over time as you can hire property managers from top commercial real estate investment companies that also offer a few tax benefits like 1031 exchange process to run it on your behalf, and you can adjust rental prices upwards after periodic renovations.

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Real Estate

Top 10 Things to Watch in Commercial Real Estate in 2022

Top 10 Things to Watch in Commercial Real Estate in 2022

Thanks to increasing demand and a recovering economy, the real estate market is on an upward trend for 2022. There is a rise in activity in all the asset classes, with the leaders being industrial and multifamily.

In 2022, this upward trend will continue as investors and tenants alike demand more real estate variety. The mortgage interest rates forecast for 2022 is 3.6%, which could impact the market. That said, this is what to expect from commercial real estate investing in 2022.

1. Brick-and-Mortar Retail Stores

The pandemic brought about a surge in online shopping, while sales in traditional brick-and-mortar stores declined due to social-distancing requirements. However, there has been a rise in the share of eCommerce retail sales from 16% to 19% in 2020 compared to pre-pandemic 2019.

Brick and mortar stores vs E-Commerce year to growth rates

Even though online shopping offers advantages like convenience and saving on time, many consumers still prefer shopping in person. Brick-and-motor shops allow consumers to shop for items that require accurate sizing and a proper fit.

More online business owners will likely push the demand for brick-and-mortar properties. For instance, Amazon recently announced its first-ever physical store for men’s and women’s fashion, Amazon Style. The store is set to offer an elevated shopping experience and will open later in the year.

2. Return-to-office

Even though offices remain the hub for business activities, employees now have flexible work-from-home options. Employees can skip the daily work commute for a few days a week. During the height of the pandemic, millions of employees worked from home.

However, as things slowly return to normal, statistics show that an increasing number of employees prefer the more flexible work-from-home model.

Real estate investors must keep an eye out for days when all the employees are in the office for teamwork, which creates a need for bigger office space. That maybe calls for a rethink of the workspace design, as buildings have to conform to the new reality of preventing communicable diseases.

3. Senior Living

With increased life expectancy, there is a growing demand for senior living homes and skilled nurses. The demand is not just about buildings as investments, but the increasing need for places where the elderly can feel safe, protected, and cared for.

It’s expected life expectancy will rise to 85.6 by 2060. Baby boomers are growing old and will need skilled nursing and more senior living homes.

Covid-19 caused a decline in the move-ins, leading to a drop in occupancy rates. Even though there is a growing demand for senior homes now, percentages are still lower than what they were pre-pandemic.

4. Housing Markets

Post-pandemic, consumers are looking for affordable rents and home prices, which in turn will limit home price appreciation and rent growth. Millennials aged 26 to 35 are in the prime first-time homebuyer age and need affordable housing despite the slight increase in mortgage rates to 2.9%. Rising rents, as high as 7.1%, will further drive millennials to purchase homes.

The markets for home purchases and apartment rentals are usually polar opposites of each other. When the rental market is strong, the housing market is soft, and vice versa. The pandemic created a desire for more space, as more people adopted a work-from-home model. This directly affects the rental and housing market, driving them to record highs.

5. The Federal Reserve and Interest Rates

Inflation is expected to continue above the trend and will likely decrease as the year progresses. The majority of the Federal Reserve members predict three interest rate hikes in 2022. They also expect that the increased interest rates will help fight inflation.

Long-term real estate interests will remain low, providing attractive financing conditions for investors. The consumer price index rose to an all-time high in 30 years. However, this does not account for the unpredictable swings during the pandemic’s short period.

The bottlenecks in the supply chain are still present and will continue to be for some time. The shortages in key commodities and goods are likely to continue and fuel high prices in the middle of the year. However, things are likely to cool down towards the end of the year.

Fed Expects Rate Hike for 2022

6. Self-storage

Self-storage outperformed expectations during the pandemic with an average profit margin of 41%, higher than other real estate niches. The increased strength in the apartment and housing markets positively affects self-storage.

Due to the pandemic, more and more people needed to move stuff out to create space for study and work-at-home situations. Further, millennials are starting families, meaning an increasing number of people will look into self-storage. The same goes for college graduates living in cities where living space is at a premium. Thus, before getting into real estate one might want to get complete understanding of several tax benefits like 1031 exchange process to further save money on the profits and investments.

7. Conventions and Business Travels

During the height of the pandemic, business-related travel halted, with most meetings and conventions moving online. Hotels, entertainment, and restaurants catering to business meetings can expect a recovery in 2022.

Selling a new product or closing a major deal is always best done in a face-to-face meeting, thus increasing the need for hotels, meeting spaces, and entertainment spots.

8. A Rise in Mixed-use Developments

An overarching trend is the migration of urban user to decongested areas, leaving vast office spaces unused. To utilize the available urban spaces and provide better value, commercial real estate investors will likely turn to mixed-use developments.

That way, commercial developers can stem the tide towards residential properties by having all amenities, such as retail, commercial, and residential properties all under one roof. Mixed-use developments sound the best way to attract a new market.

9. Digital Real Estate

Digital communications surged during the pandemic since people relied on them for work, e-commerce, and entertainment. Even as the economy opens, people continue to rely on digital communications because of the conveniences they offer.

This leads to a demand for cell towers, data centers, and logistics facilities, which counts as growth in commercial real estate.

10. Smaller is Better

What the market has reaffirmed is that nothing stays static forever, so there is some wisdom in moving with the times. Currently, companies are hesitant to commit to long-term leases, hence the shift towards shorter-term leases.

Further, as employees seem to prefer the hybrid working model, it makes sense to opt for small working areas, or even smaller ones situated closer to workers’ residential areas. So investors are likely to target smaller suburban offices.

Final Word

While interest rates are set to rise during the year, it doesn’t create much of a worry for commercial real estate players as they expect a commensurate rise in the economy. Also, a few top commercial real estate management companies smoothen the process for investors to get through the hustles involved. That said, some of the trends you should expect from the commercial real estate market include a rise in hospitality spaces, workspaces, and brick-and-mortar retail spaces.

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Real Estate

1031 Exchange: What you need to know for 2022

Do you intend to sell or purchase any investment properties in 2022? When you sell a rental property, capital gains tax and depreciation recapture tax can eat into your profits, but all you need is a legal loophole. You can simply use a 1031 tax-deferred exchange to obtain the gains.

As a tax deferral tactic, 1031 exchange, also known as Starker exchanges or like-kind swaps, are used by some of the country’s most successful real estate investors. 2022 is an excellent year to purchase or sell a home because values have risen above those of the previous decade’s real estate market.

The Internal Revenue Code of the United States, Section 1031, permits you to avoid paying capital gains taxes on the sale of an investment property. It is done by reinvesting the earnings in a like-kind property or multiple like-kind properties for the same or more period.

What is a 1031 exchange?

A 1031 exchange is a swap of one investment property for another. Exchanges are usually taxed, but if they meet the 1031 criteria, you’ll pay no tax or only a modest amount at the time of the transfer. You can change the structure of your investment without having to pay out or declare a capital gain (as defined by the IRS), allowing your money to grow tax-free. Even if you make a profit on each trade, you won’t have to pay tax until you sell for cash many years later, when long-term capital gains tax will be the only tax you’ll ever have to pay.

The majority of exchanges must be of the same nature. You can exchange an apartment complex for raw land or a ranch for a strip mall; the laws are surprisingly liberal; you can even trade one enterprise for another, but be aware of the gullible.

The majority of exchanges are delayed, since the chances of finding someone with the specific property you want who wants the identical property you have is limited. In a delayed exchange, you’ll need a middleman who will store the cash after you’ve “sold” your property and use it to “buy” the substitute property for you. A swap is a name for this three-party transaction.

Benefits of a 1031 tax-deferred exchange 2022

The main advantage of a 1031 tax-deferred exchange is the obvious tax deferral. By switching from one property to another, you can defer taxes on investment properties you own or manage indefinitely. This allows an investor to make a greater down payment on a higher-value property than they might otherwise, which is a terrific way to build wealth and diversify one’s investment portfolio.

1. Market circumstances are exchanged.

Let’s pretend you’re worried about your home. You may be able to trade some of your basic traits for more stable classifications that will aid your survival and growth.

2. Swap to cut down on care.

Similarly, if the upkeep is too much, you can consider relocating some of your higher-class assets to buildings that require less maintenance.

3. Trade to take advantage of a growing market.

You might even relocate your properties to a more desired or promising location to better position them for future profitability.

The nicest part is that you can do as many or as few transactions as you want.

You can keep moving your money around to maximise your returns and create your ideal portfolio.

1031 exchange rules

● Investment property should be the like-kind property

According to the IRS.gov website, a like-kind investment must be “of the same sort or character, even if they differ in grade or quality.”

● Same Taxpayer

The property being sold/exchanged and the property being purchased must both be purchased by the same person.

● Investment and Commercial property

Section 1031 of the Tax Cuts and Jobs Act, according to the IRS, “applies primarily to real estate exchanges and does not apply to personal or intangible property swaps.”

● Value of the property

The net market value of the property you’re buying must be equal to or greater than the one you’re selling to qualify for a 100 per cent tax deferral.

● Time Frame

– Rule of 45 days

Within 45 days of the surrendered property’s sale closing escrow, the replacement property must be identified (by having a written offer accepted).

– Rule of 180 days

The replacement property’s escrow must close 180 days after the relinquished property’s escrow closes.

What is boot?

You can do a partial 1031 exchange if the property you surrender is worth more than the replacement property, but you’ll have to pay federal income taxes on the difference, known as the “boot.”

You’ll owe the $500,000 difference in federal and state income taxes if you sell a home for $3,500,000 and want to trade it for a property worth $3,000,000. In this situation, the ‘boot’ would be subject to capital gain rates.

The capital gains tax rate is determined by your income tax bracket and the length of time you owned the investment property and can be as low as 0%, 15%, or 20%.

Rules for identifying replacement properties

During the 45-day identification window, real estate investors have three main choices for locating one or more replacement properties:

– The three-property rule states that an investor may identify up to three properties, regardless of their value, and must acquire just one of them.

– The 95 percent rule states that an investor may identify an unlimited number of properties, but he or she must acquire 95 percent of the total value of those assets.

– The 200 percent rule states that an unlimited number of properties may be identified as long as the total worth of the identified properties does not exceed 200 percent of the surrendered property’s value.

Types of 1031 exchange

Deferred exchange

The interval between the sale of your present home and the acquiring of a new property is separated in a delayed exchange.

You have 180 days from the time the sale ends to:

● Hire a reputable intermediary to handle the sale and place the proceeds in a trust to be utilized to buy a comparable property.
● Choose an exchange property and purchase the new home

Reverse Exchange

You must move the new property to exchange accommodation ownership, pick a property for exchange within 45 days, and complete the deal within 180 days to qualify the substitute property before selling the old one, you can still do a 1031 exchange.

Constructional Property Exchange

● By the 180th day of the exchange procedure, all of the equity from the sale must have been spent on upgrades or as a down payment on the new home.
● By the 45th day of the exchange procedure, you as the buyer must have received essentially the same property as that which you indicated.
● Before the title may be transferred to you, improvements must be done.

Conclusion

A 1031 exchange is a tax-deferred strategy for generating money for smart real estate investors. The countless difficult-moving aspects, on the other hand, demand not only a thorough comprehension of the rules but also the support of a professional.