SOURCE: Atlantic & Pacific Real Estate, LLC

Atlantic & Pacific Real Estate, LLC

May 01, 2013 06:00 ET

Five Reasons Why Investors Will Turn to Real Estate in 2013

Is Now the Time to Buy Your First Investment Property?

SANTA ANA, CA--(Marketwired - May 1, 2013) - If you're thinking about it, you might not be alone. An estimated 250,000 first-time real estate investors will enter the marketplace in 2013.

"With the economy rebounding, it's not surprising to see so much real estate interest," said Wendy Forsythe, Executive Vice President/ Head of Global Operations for Atlantic & Pacific Real Estate, LLC, a national, full-service residential brokerage firm with agents across 22 states and the District of Columbia. "People are looking for places to put their money -- places where they can get returns without excessive risk. In terms of both income and tax opportunities, real estate can offer a combination of potential benefits which are difficult to match."

There are a number of reasons for investors to look into real estate right now. Let's take a look at the most compelling.

Housing Market Improvements

One reason for investor interest is that the housing sector has been improving. Existing home sales in January were 12.3 percent higher than a year earlier, according to the National Association of Realtors. The association adds that inventory -- the number of properties for sale at a given time -- was at the lowest level since April 2005.

"There are several schools of investment thinking," says Forsythe. "One approach is to buy and quickly sell, while another is to buy and hold for the long term. Experienced investors sometimes do both, holding onto some properties while quickly turning over others depending on the individual property and their financial analysis."

A Hot Rental Market 

Figures from real estate research firm Reis, Inc. show that at the end of 2012, apartment vacancies nationwide stood at 4.5 percent. That means that in many markets, it's tough to find a rental unit, important news for investors.

"With the loss of so many single-family homes to foreclosure during the past few years it's not surprising that the rental market has been strong," said Forsythe. "Alternatively, new construction will absorb some demand and real estate remains a localized commodity. Because neighborhood and community market conditions can vary, it's important to speak with a professional from Atlantic & Pacific Real Estate regarding local investment options."

Multiple Financing Options

According to NAR, more than a quarter of all January existing home sales were financed with cash and investors are believed to account for most of those purchases. However, several forms of investment financing are available:

First, investors can obtain financing directly from lenders who offer such loans. In today's environment, you'll need a good down payment, solid credit and strong reserves.

Second, in certain cases it's possible to buy rental units with FHA and VA financing.

"Both the FHA and VA programs allow borrowers to purchase properties with one to four units," said Forsythe. "However, you can finance through the FHA or VA if you occupy at least one unit as your primary residence. Buying a duplex, triplex or four-unit property can be a good way to enter the real estate marketplace."

For those who qualify, FHA financing is available with 3.5 percent down, while VA borrowers can purchase property with nothing down. Closing costs are an additional expense, but eligible expenses may be added to the loan amount.

Third, sellers will sometimes offer to "take-back" a mortgage and finance the transaction directly. As Forsythe explained, "Some investors prefer seller financing if they can get attractive interest rates and terms as part of the transaction."

New Rehab Opportunities

Many investors have traditionally sought properties which can be purchased, fixed-up and quickly re-sold. For some time, a 2003 HUD rule acted as a barrier to such transactions as it generally forbid FHA financing in cases where a home had been re-sold within 90 days of acquisition. While these guidelines were intended to stop illegal flipping, it was found that the 2003 HUD rule inadvertently punished legitimate investors and rehabbers. As a result, it has been waived until the end of 2014.

Potential Taxes Benefits

Investors, like homeowners, are generally able to deduct mortgage interest and property taxes. However, because investment real estate is a business activity, other deductions may be available for such expenses as depreciation, management, repairs and association fees.

When it's time to sell properties held more than a year, investors can benefit from long-term capital gains rates, which are currently lower than short-term capital gains rates. In addition, rental properties in general may qualify for tax-deferred exchanges.

"The country is now engaged in a wide-ranging debate regarding taxes, spending and the deficit," said Forsythe. "While it's possible that some rules will change, as a matter of policy we want a strong housing market that attracts investors. Given the importance of tax benefits -- and given the complexity of our tax rules -- investors should check with tax professionals to find out which specific deductions are available to them through investments in real estate."  

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