The Best Places to Invest in Real Estate 2021
With high buyer demand, decreased supply, and low mortgage interest rates, the housing market looks good in 2021. So, let's dig into some of the best places to invest, along with how to get your foot in the door in an in-demand real estate market. We'll also be looking at tools to identify properties, investment strategies, and some of the tax deductions you should expect to make use of in your first year of rental property ownership.
What are some of the best places to invest in for 2021?
- High availability of housing
- High rental rates relative to housing prices
- Diverse economy offering employment opportunity at every income level
- Dallas has the lowest homeownership in the U.S. because it's more affordable to rent than buy
- In 2018, the Dallas City Council unanimously voted for a comprehensive housing policy that would produce 20,000 new homes in three years to lure the middle class back to the city.
- Since 2016, Dallas has added 50,000 new apartment units.
- From 2020 through 2029, the Dallas Fort-Worth (DFW) area is projected to add almost 1.4 million people!
- 4th largest city in the US
- From 2020 to 2029, Houston is expecting a population growth of 1.24 million residents.
- Lots of industry! Houston is home to the busiest port in the U.S. in terms of foreign trade; Amazon is building a one-million-square-foot distribution center there in 2021.
- Home values went up roughly 26% over the last five years and are expected to grow 9.9% during 2021.
- 4th fastest-growing region in America according to the 2020 Census.
- Atlanta is expected to add 1.2 million jobs over the next 30 years and 2.9 million new residents.
- In November of 2020, the median home price was up 15% from the same time last year. Homes priced below $200K are selling "6 or 7 times faster" than homes greater than $350k.
- One of the most landlord-friendly states.
- A diverse economy serving the health, tech, tourism niches, and more.
- Property prices are up 10.2% since this time last year. Although the cost of homes is not expected to remain this high throughout 2021, Las Vegas is still a city to watch because of high demand, low inventory, and low mortgage rates.
- Working remotely has inspired renters from more expensive areas to move to Las Vegas, mainly from Southern California.
- In 2020, builders signed contracts for over 10,000 new homes.
- Nevada has no income tax.
What should I look for in a long-term investment property?
When you're planning to invest for the long term, you should have a specific set of criteria for acquiring a new rental property. We recommend that you look for appreciation, that you evaluate the growth numbers, and that you take a holistic view of the economy. These things feed a successful long term investment property.
Dallas is a great market, and it illustrates everything we're talking about. There's a lot of potential for growth in Dallas. For example, 15.7% growth is expected in 2021. A real estate investor will make a lot of money with that kind of growth!
The challenge with Dallas and markets like Dallas is that they can be hard to get into. If you want to buy something in the Dallas proper area, you'll find that you have to spend a bit more than you might have planned. If you find that you cannot locate a great investment property in downtown Dallas, there's nothing wrong with going out to the suburbs.
You can find and buy an affordable home in the outskirts of Dallas. With that property, you'll be able to hold onto it for a while. The rental income will be steady, and the rental value will continue to increase. As its value increases, this property will deliver a lot of appreciation, and it won't be long before it becomes a cash cow.
What should I look for in short-term investment property?
We prefer long-term investment strategies, but we know they're not for everyone. If you're only interested in holding onto a rental home for a short amount of time with cash flow in mind, you'll need to focus your search on areas where it's still cheap to buy a property. You'll want to make sure that the rent in these areas is high enough that you can generate an income that makes it worth it.
Before you buy, it's essential to research the community’s average market rent. Compare that rental amount to the purchase price, and crunch your numbers. Mynd can help you calculate how much rent to charge.
You also want to look at vacancy rates because that will impact your cash flow. You can find vacancy and occupancy rates on sites like Zillow Research. Buy a home in a market that has high occupancy rates. That will translate to lower vacancy, so you'll have an easy time establishing positive cash flow. A vacant property doesn't bring in any rent. Not only are you losing rent, but you're also paying to keep the house up and losing money on utilities, landscaping costs, and other expenses. You're not counting on appreciation as a short-term investor, so you cannot invest in a rental home that's likely to stay empty.
When you're sourcing potential investment properties, don't forget to calculate your maintenance costs. You don't want to buy a property that has a 15-year-old HVAC. If you have to replace that unit while you own the property, you're going to lose money. Think about what you'll need to spend on rehabs or renovations. Think about what will be required to get the rental market’s property ready. If you have to pay $5,000 to $10,000 for a new HVAC and you're only cash flowing $200 a month, you'll have a hard time earning any money off your investment.
What is cap rate, and why is it important for real estate investing?
Cap-rate is the measure of how quickly your investment will make its money back and start producing a profit expressed as a percentage. Buyers tend to want a higher cap rate, meaning that the purchase price is low relative to the net operating income (NOI). NOI is a company's profit after operating costs are subtracted but before subtracting income taxes and interest.
A higher cap rate can be a red flag, however. It may mean the property is in an area where increasing the rent isn't likely, and appreciation is low. Ask about how the cap rate is calculated. It's essential to know the occupancy rate, whether expected rents or current rents are being used in the calculation, and the demand for investment properties in the area. A lot cap rate may mean the property is in a pricey or desirable area.
A good cap rate is considered to be around 10%, although some investors will accept a cap rate as low as 7%. Remember that cap rates also vary by market and that the calculations fail to account for appreciation, risk, and opportunity. It's just one metric in your investment arsenal.
What is cash-on-cash return (CCR), and why is it important for real estate investing?
CCR is how much money your money makes you every year expressed as a percentage. CCR only expresses your initial investment, as opposed to return on investment (ROI), which considers everything your investment entails, including the cost of the investment, taxes, repairs, fees, etc. 8% - 12% is deemed to be good CCR. However, some investors won't settle for anything less than 20%.
When you compare CCR to a real estate investment trust's (REIT) dividend yields, you can quickly determine if your property is worth the investment. REITs allow you to invest in companies that own or finance rental properties. Many of them are publicly traded on stock exchanges. If you can make as much money just passively investing in REITs, then investing in a property is likely not worth it, given all the work it takes.
How can I improve cash-on-cash return?
You can invest in Class C or D properties, which are more affordable because they are less desirable. These are properties that are:
- At least 30-years old
- Require significant rehab
- They require more maintenance
- They are found in older or declining neighborhoods with less than ideal school districts and potentially crime
- There's a greater risk of turnover and eviction
- Rent collection may be challenging
- They tend to appreciate less if at all
- They have increased CCR due to their affordability
Such properties are often found in gateway cities, which are cities that used to be considered the gateway to the American dream. However, when their dominant industries left, these cities could not recover.
Gateway cities have great potential for revitalization because
- They usually already have transportation infrastructure
- Are often connected to hospitals, universities, and museums
- Are close to metropolitan areas
- They may be qualified opportunity zones, which are designated areas where investing in the community and your property earns you tax benefits. Opportunity zones are designed to encourage revitalization.
What are some popular investment strategies?
Invest in Rental Properties
Investing in real estate to generate passive income is one of the least complicated investment strategies. Success in this strategy requires:
- Regular maintenance
- Writing great rental listings
- Screening tenants
- Tenant appreciation that encourages lease renewals
Buying and Holding Properties
This strategy is also known as rehabbing. Ideally, you'll perform just enough improvements to increase the value of your rental property. You may also want to perform these improvements while you have tenants. Tenants who appreciate the improvements may consider renewing their lease because of the improved living conditions.
There are significant differences between house flipping and rehabbing. House flipping entails buying a house for below market value, rehabbing it just enough to sell it at a profit, and then repeating the process once the home is sold.
A live-in flip is when you live in the house while the improvements and repairs are performed and then sell it afterward. The benefit of this investment strategy is that you could end up paying no capital gains taxes on a property. The cap is $250,000 for single filers and $500,000 for a married couple filing jointly.
To perform a live-in flip, you have to meet the requirements stipulated in section 121 exclusion:
- The property must be your primary residence.
- You had to have lived in the property for two out of the five years before the home sale.
If you have to move before you complete your live-in flip, there are a few reasons you may be able to get a partial exclusion from capital gains taxes.
- Job relocation
- Change in Health
- Military deployment
- Unforeseen circumstances
Wholesaling is a popular investment strategy for people with bad to no credit. Wholesaling is when you find a great deal on a house, put together a contract for it with the seller, and then use what's known as an assignment of contract to transfer the agreement to an interested buyer in exchange for an assignment fee.
While most real estate investments are considered passive, wholesaling is very demanding. In addition to finding buyers and sellers, you need to know how to spot the right property. That means:
- Being able to find a good candidate for flipping.
- Being able to find a good candidate for renting.
- Estimating the cost of improvements that will add value to a rental.
- Estimating rehab costs.
- Estimating the costs of significant improvements (like replacing an HVAC).
- Estimating potential rents, cap rate, cash-on-cash return, and operating costs.
Wholesalers tend to make $5,000 or less per deal, although more is possible. It's also possible to practice wholesaling remotely if you have a team put together. It's an investment strategy that could be particularly effective when there's either a strong buyer's market or a strong seller's market because, in both cases, people are hungry for deals.
BRRR: Buy, Rehab, Rent, Refinance, Repeat
- Buy a home.
- Rehab is just enough that you can attract quality tenants.
- Rent it.
- Take a cash-out refinance so that you have better loan terms and cash.
- Use the money you've earned from renting, and the cash from your cash-out refinance to repeat the process.
The cash that comes with a cash-out refinance is not taxed as income because it's a loan!
Rental Debt Snowball and All Cash Rental Plans
These two strategies are variations of the same idea: "snowballing" your money to minimize or avoid debt.
- Rental Debt Snowball: This entails snowballing all your income to pay off your mortgages one by one.
- All Cash Rental Plans: This entails snowballing all your income so that you buy a property debt-free.
BURL: Buy Utility Rent Luxury
BURL is an investment strategy where you buy properties with comparatively higher cap rates so that you can rent properties with lower cap rates. The thinking is that properties with reliable rental yield balance out luxury properties that take longer to pay off their debts and generate less income. However, the luxury properties are expected to appreciate more over time, making the investment worth it.
Investing in Real Estate Using a Self-Directed IRA (SDIRA)
With a self-directed IRA, you can combine all the tax benefits of a 401(k) or Roth IRA with the advantages real estate has over other forms of investment. There are two types of SDIRAs.
- Custodian Managed: This is an SDIRA managed by a financial expert.
- Self-managed: Also known as a checkbook controlled, this is an SDIRA where the investor opens an LLC to make and manage their real estate investments,
With a 401(k) SDIRA, your taxes will be deducted at the time of withdrawal, whereas with a Roth SDIRA, your taxes will be deducted at the time of deposit. Whichever option you choose, your operating expenses have to be covered by the money from the IRA.
If your account is self-managed, you can partner with others to fund purchases. You can also take out a non-recourse loan, a loan that uses your property as collateral. The advantage of such a loan is that if you end up defaulting on your property, you'll lose your property, but your IRA remains untouched.
Many people choose to have their SDIRA managed professionally to benefit from their business acumen and their knowledge of IRA tax law. IRA tax law is known to be complicated. If you make a misstep, you may end up penalized and missing out on the IRA's benefits. All that responsibility falls on you if you choose to self-manage. So, a managed SDIRA is a popular option.
What tax benefits come from investing in real estate?
There are many tax benefits to investing in real estate. Here are some of the ones you're likely to use in the first year that you own your property.
20% Qualified Business Income Deduction
Also known as the 199a deduction, QBI deduction can provide upwards of 20% in tax savings for pass-through businesses owners on their taxable income.
- Sole proprietorship
- S corporation
- Real estate investment trusts (REITs)
- Publicly traded partnerships (PTPs)
To qualify for the deduction, business owners must meet specific criteria. They must hold interest in at least one rental real estate enterprise (RREE), which is one or more real estate property used to make income via rent collection. The owner must also rigorously document their extensive involvement in the RREE.
- Keep separate books and records must be kept for each rental real estate enterprise
- Perform 250 or more hours of qualifying rental services for each RREE must be performed.
- For 2019 and after, taxpayers must maintain contemporaneous records documenting:
- Hours of service
- Services performed
- Dates of service
- Who performed the service
While meeting the criteria might seem simple, it's advised to consult with a real estate professional because of the rigorous demands of documenting 250 or more hours of qualifying rental services. Providing such documentation is something Mynd excels at!
Depreciation is when you write off a portion of your investment property's value and improvements made to it. The write-offs are done throughout the property's useful life, the IRS's term for how long a property is expected to generate income, which is 27.5 years for a rental.
When you sell your property, you will have to pay a tax on the amount you didn't pay because of depreciation. This tax is known as depreciation recapture. Whether or not you take depreciation, the government will tax you as if you did. So, you might as well take advantage of it!
100% Bonus Depreciation and Section 179
100% bonus depreciation and Section 179 are two deductions that let you take 100% of eligible items depreciation in the year they're put into service. 100% bonus depreciation will be available until 2023, at which point it will go down 20% every year until it's phased out in 2027 (unless Congress legislates otherwise). 100% bonus depreciation is taken automatically, so you have to opt-out if you don't want it. If you take it, you will have to pay depreciation recapture.
Section 179 requires that your business be profitable for you to make use of it. Meaning that if your business made $20,000, but your eligible deduction is $30,000 that you'll only be able to deduct $20,000 in the year that the item is put into service. However, you can deduct the rest the following year. The Section 179 website lists all eligible items.
Not having all your eggs in one basket is age-old wisdom, and it's more accessible now than ever! That's all thanks to advancements in remote property management. Working remotely is one of the big 2021 real estate investment trends. Even the real estate business has gone remote! And with Mynd's knowledge center informing your decision, you can find success from anywhere!
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