The Heat of The Summer Market
It’s officially summer and the housing market is keeping a steady pace. There is more competition on the market and there are equally more buyers everywhere. While we are still in the type of market where homes can take up to 60 days or more to sell, if they are priced well, especially with the influx of additional buyers, they go quick and many times with multiple offers.
Invest vs. Flip
That being said, many of the buyers are investors looking for rental properties. These are not the investors looking for flip properties. The margin on flips has narrowed quite a bit, unless you get an incredible deal or completely restructure the home itself and build a new and bigger home, which is being done throughout California. Even then, the market needs to be watched carefully as some home sales have slowed or lowered, due to more listings on the market, increased competition or the proverbial ceiling on asking prices has been reached.
Individuals looking to invest in the real estate market are increasing in numbers and they understand the game. They are looking for a long term investment that will yield passive income over the long haul. These investors have the cash sitting and want to put it to work. For example, the return on investment on a rental of a $700,000 home is approximately $3500/mo = $42,000 per year. Let us add in approximately 3% appreciation of $21,000, that brings you a total approximate yield of $53,000 per year, which over 10 years nets about $530,000.
The $42,000 is passive income, which is only taxed federally. If you compare that to investors that flip, the tax is typically based on ordinary income and can vary greatly due to the length of time you hold the property and your classification. There is also capital gains to consider.
Something To Consider
If you compare investors that flip properties to the investors that buy and hold….the math is easy at this point. If a flip investor generates a $200,000 profit, but is being taxed on ordinary income at the estimated rate of 28%, which is a $56,000 pay out in taxes and that is leaving out capital gains. That is not a bad profit, but gaining that consistently is not always easy. You are playing the housing market, which is constantly adjusting.
The long term real estate investors with their vision, not only fair better tax wise by generating passive income, they grow their financial portfolio and are ultimately able to acquire more investment properties, generating even more passive income. Real estate investing, when done with a precise vision can yield long term gains.
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