If Oklahoma City real estate investing is your choice, then it is important to get an estimate of your reutrn on investment. This is different from the retun of investmnet, that is getting you money back it cost you to get in. Return of investment is defined as the percentage you make on your money while that money stays in the investment. When you exit that investment depending on whether you do a tax deferred exchange or a cash out, my team 's estimate will give you an annualized return with both a pre-tax and a post-tax analysis. Personally my recoomendatio9n is to 1031 exchange until you die which morbidly is the ultimate real estat tax break, and let your heirs start over with the deppreciation schedule. Beyond that dark humor remark, let's talk about the other factors.
Holding Period. It may seem unusual to start with this, but it is the basis of your stategy. Are you holding long term for cash flow or short term for flipping. When I do you analysis I typically put in at least 5 years with a amximum of 10. Remember the word estimate. Going even 7 years is a crap shoot, but if the goal is both cash flow and appreciation especially in the current market conditions, I think you should paln for the 7 to 10 year range. Even with 3% appreciation with Oklahoma City prices, I can get you around a 20% annualized pre-tax return. That is terrifc for a conservative investment like long term real estate. FYI, I don't do well with flippers since especially ow they need reality testing oin their unrealistic goals, at least in my state.
Investment in the home. Leverage is great to show big returns on paper, but is isn't possible right now, and it is a greater risk. Figure at least a 20% down payment, closing cost, and depending on whether you are buying fixed or or not, what it takes to get the property rentable. My suggestion for most investors, build in any cost for excellent condition at closing into your loan. The cost of $5000 is a few dollars a month on a 30 year note, versus not having the cash for the next one. Investment oin real estate likes numbers to cut down on how big a vacancy rate affects you.
Expenses. Always figure maintenance. Even new homes can have problems. If it is an older existing hoime, consider buying a service contract, formally known as a home warranty. if can limit repairs not covered by you landlord insurance policy to usually $60 per occurence. Property management is something i always figure in, since the majority of my investors are form outside the state. I like to put it in there anyway since I want a kitchen sink analysis for you.
Vacancy Rate. Since we brought it up, this has to be factored in. If anyone gives you an analysis without it, run away, they don't know what they are doing, or even worse they do. Once a property is purchased and it doesn't have a tenant, you have to figure at least 30 days. When a tenant leaves there is often "make ready" time since a renter doesn't always keep the property pristine. At the least even in a good market figure 5% ina price range that has high demand and 10% where you are going for the executive type renter.
Depreciation. If you take the land out of the purchase you are left with improvements. The Feds let you depreciate your real estate invesmtne at 27.5 years, with an adjustment for the first and last years. In Oklahoma where land is reasonable in cost, that usually means 85% of the purchase. So when figuring taxes on your passive income basket, if you have $300 a month positive cash flow, and $300 a month in depreciation, no tax paid! If the loss is greater then it carries forward as long as you have investment. In the exit strategy, we will discuss the ramifications of this.
Reinvestment. This boils down to three choices and the first one is to spend your positive cash flow. Since I want to help you build reitrement or pay for your one year olds college education, I don't recommend this, unless it is a question of putting food on the table. I would advise you to either find a safe haven that might pay you 5% on your money, and then if after a timthe balance of profit is high enough, that one house just paid for the expenses of buying another.
How to sell. This is going to be a bigger issue if capital gains tax is going up which many predict. If you want to cash out you are subject to two main taxes. After your basis is adjusted by holding period, the therie is a 25% tax on your depreciation, and a 15% capital gains tax. That can be as low as 10% if you are in the lower tax bracket, but I haven't seen that yet. Your other alternative is a 1031 tax deferred exchange. This where you tax your profit, use a thrid party to hold it, and even own for a very brief moment, then investment in mor eproperty. On a really good investment, this can turn into as many as three properties. Just be sure they are like kind. They don't have to be single family for single family but they do need to be income producing type properties. To go into a lot of detail would turn this post into War and Peace so we will save that for another time.
Thanks for taking the time to read this. I couldn't cover everything, but at least you know some basics. I have specialized in investment properties for 17 years of my real estate career. I have receive training through CRSOklahoma City real estate, one of the safest places for long term thinking, email me at joe@joepryor.com. We have all the resources for a turnkey appraoch, and we will give you an anlysis on every purchase.
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