There’s no one way to do things.
That reminder extends to investing in real estate. Some investors get started in real estate accidentally. They inherit a home or they move out of the place they’re living in and instead of selling it, they wisely decide to rent it out.
Other investors are more strategic. They have a plan in place for acquiring properties, and they stick to the plan acquisition by acquisition.
There are a variety of ways to buy investment property. Unless they’re paying in cash, most buyers will get a loan from a bank or other financial institution. Others will use the leverage in their growing portfolios to increase what they can borrow and buy.
There are also 1031 exchanges which can help you buy real estate and defer taxes.
We’re exploring how to buy and why you should buy more than once in today’s blog.
Borrowing to Buy: How to Finance an Investment Property
Two important things you need to know if you’re going to buy property through lenders: First, you have to find investor-friendly lending institutions. Second, there’s a limit to how many loans you can take, and that limit right now is 10. The number is set by Fannie Mae.
Most banks will only approve up to four loans per borrower, and those are going to be your larger financial institutions. If you really want to buy 10 investment properties with 10 different loans, you’ll have to do some serious research.
To qualify for a loan, you’ll need cash for a down payment and an acceptable credit history. If you have a mortgage on the home you’re currently living in for example, lenders will want to know you can cover that plus the mortgage on your rental property.
How to Perform a 1031 Exchange
With a 1031 exchange, investors can sell one income-producing property and use the proceeds from that sale to buy another property or a series of properties that are similar. So, you can sell your $400,000 rental home and instead of paying capital gains taxes on the profits you’ve earned, you can invest those profits into another property or two properties. This is a great way to build your portfolio, add to your inventory, and save on taxes.
Specific steps need to be taken when you want to buy property with a 1031 exchange. First, you’ll want to make sure you qualify. The 1031 exchange is for investment properties. You cannot sell the home you’ve been renting out for a decade and then reinvest the money on a property you plan to occupy.
There’s a requirement that you exchange with a like property or properties. This doesn’t mean you have to sell one condo unit and buy another condo unit. The new property you choose simply has to be an income-producing investment just like the one you’re selling. The new property must also have a value that is the same or higher than the original property. If you walk away from the exchange with any profit, you’ll be liable for the tax.
1031 Exchange Timelines and Intermediaries
Pay strict attention to the timelines or you’ll throw yourself out of compliance. You’ll need to identify a replacement property within 45 days of selling your original property. Then, you have 180 days to close on the new sale. The entire exchange must take place within the 180 days (meaning you don’t have 45 days plus 180 days – the clock does not reset).
Talk to your property managers about a referral to an intermediary because it’s also important that you use a professional arbitrator for this transaction. You cannot take any of the cash from the sale of your property. The intermediary will hold your funds until they can be reinvested in your new purchase.
If you want to buy rental properties buy you’re still not sure how to make it work, we can help. Contact us at Assured Management, Lakewood property management experts serving residential landlords in West Denver and the surrounding areas, including Littleton, Golden, Wheat Ridge, Arvada, and more.