Ever thought about investment properties?
I mean a building with multiple units, like a duplex or if you're fancy 3-6 unit building.
Exploring Investment Property Ownership: Your Guide to Multi-Unit Buildings, Landlording, and Tax Benefits in San Francisco
Ever pondered the idea of investing in real estate? Curious about the realm of multi-unit property ownership and becoming a landlord in the bustling city of San Francisco? Join us in this episode as we dive into these intriguing topics and beyond. Whether you're considering the potential of owning an investment property or simply interested in understanding the associated tax benefits, we've got you covered. Our insightful discussion aims to equip you with the knowledge needed to make an informed decision about venturing into the realm of investment property ownership.
Consider this
-The income you receive from rental units can qualify you for a high mortgage, because that is part of your income or projected income. Yes, lenders can use projected income on multi unit properties.
-You can essentially afford more house, better location if you live in one unit and rent out the others. Your tenants can offset your mortgage, depending on how many tenants and units you have they can pay for the whole thing.
-Muti unit buildings for investment properties are not a short term cash flow play but a long term value play.
Let me explain.
In the short term you might be thinking I can get the same CAP rate in other ways (stocks, mutual funds…) and get the same amount of return on my money. But that is a short term cash play mindset. A building will grow in value over time, as will rents. So if you think long term a building will give much more value than short term cash.
-If you are a W2 employee you get demolished in taxes, buying an investment property is a way to off set those taxes.
First of all, you have income that is not from a W2. Consult your tax person about this and you will be happily surprised and running to buy buildings
Second of all there is a thing in investment properties called depreciation, a property depreciates over time and you can write that into your taxes by using a term called cost segregation to accelerate this. Again, consult with your tax person.
Third of all when you own investment property you can deduct your expenses on your taxes because you have a business. (little advice from me to you, open an LLC when you own a building, your welcome) Its called net operating income, your income minus expenses
(not including your mortgage)
-Senate Bill 9 is a California bill that allows people to build up to 4 ADU’s on their property
This means that your property value can go WAY up if you buy a house with land that you can add an ADU. Accelerate the value growth on your property and create an income generating asset.
The other things to consider
-Rent control and eviction control laws in San Francisco. Again, its a long term strategy. If your in it for the long term it may make sense to you
-Being a landlord with the responsibility. (maybe getting a management company involved if it makes sense)
-Speak with your tax advisor for benefits of owning investment property on taxes, family attorney about creating an LLC, and your local realtor.
Terms
The Capitalization (CAP) rate is a metric used in real estate investment to evaluate the potential return on an income-producing property. It's calculated by dividing the property's net operating income (NOI) by its current market value, providing investors with a percentage that reflects the property's projected annual income relative to its cost
Return on Investment (ROI) for an investment property is a measure of the profitability of the investment, expressed as a percentage. It's calculated by dividing the net profit generated by the property (after deducting all expenses) by the initial cost of the investment and then multiplying by 100, providing insight into how efficiently the property is generating returns relative to its initial investment.
Net Operating Income (NOI) for an investment property is the total income generated by the property from rents and other sources, minus all operating expenses such as property taxes, insurance, maintenance, and management fees. NOI represents the property's profitability before considering factors like financing costs and income taxes.
Cost segregation is a tax strategy used in real estate investment where certain components of a property are reclassified for depreciation purposes. It involves identifying and separating assets with shorter depreciable lives, such as fixtures and certain building elements, from the overall property, allowing investors to accelerate depreciation deductions and potentially reduce their tax liability.
Depreciation in the context of investment properties refers to the gradual decrease in the value of a property over time due to wear and tear, obsolescence, and other factors. It's an accounting method that allows property owners to allocate the cost of the property over its useful life as an expense, providing tax benefits by reducing taxable income.
