Sue McAllister had an interesting article in today’s San Jose Mercury News. The topic of the article focused on who is buying homes in our declining real estate market. Her conclusion; first time home buyers and investors made up the majority of today’s home buyers.
Below is an example detailing one investor’s reasoning for purchasing a single family home in Los Altos as an investment.
I represented the seller of a property in south Los Altos that closed escrow in December 2008. The buyer completed a 1031 exchange, selling two properties in southern California and “trading up” and purchasing a single family home as an investment property in Los Altos. Each of the properties in southern California had good cash flow and a reasonable rate of return (apparently, he owned them for quite some time).
One may ask why this investor took two properties that had good cash flow and a reasonable rate of return and traded up to a home in Los Altos that would (initially) have a much poorer rate of return and less cash flow? Usually, one doesn’t buy a $1,350,000. home and rent it out for $4,500. per month and call it a good investment. The answer…
(1) Short term: the ability to locally manage the investment property – it tends to be easier and less expensive.
(2) Long term: the Los Altos investment property will eventually be converted into a personal residence and the investor’s current (personal) residence will be sold. This allows the investor to take the 500K capital gains exclusion on the sale of their personal residence yet maintain a residence in Los Altos.
This type of transaction has tax implications and the 1031 exchange has specific rules to follow, but with proper planning this type of investment can save an investor tens of thousands of dollars. This investor analyzed the real estate market in Los Altos and saw the potential to make a wise investment that made sense with his overall investment objectives. Smart guy!
Note: Should you be interesting in investing in real estate, make sure that you have a well qualified tax consultant to answer questions specific to your tax situation. Without one, you can get yourself into a lot of financial trouble.