Understanding Rentals CE Class Recap
The first thing to understanding a rental property is to know how to determine the value. In this case, we use the income approach. You want to look for the capitalization rate, aka the cap rate.
- Capitalization Rate aka Cap Rate
- Measures the performance of a property
- Cap Rates are always based on Cash
- Cap Rates are always annual
- The Cap Rate Formula
- Income minus expenses, divided by the acquisition cost
$12,000 (annual income)
$10,000 / $100,000 = 10%
A tool you can use to get the value of a rental property is Rentometer.com
Rentometer uses active rental listings and reports
It will weigh against the area
Expenses can be tricky. You can get reports from the seller and ask to see their tax return schedule E.
Here is a link to the Google Sheet. You will need to make a copy to be able to edit. Go to File and scroll down to make a copy.
Residential property depreciates at 27.5 years, and commercial is 40 years. Both are in a straight line.
You do not depreciate the land.
Your annual depreciation percentage would be
3.63% for residential
2.5% for commercial
I have been told by accountants to calculate the land at 20% (please seek advice from a tax adviser for an amount)
$160,000 X 3.63% = $5,808 per year in Depreciation
Investment properties are subject to capital gains when you sell.
To calculate the gain.
Acquasition cost minus depreciation = your basis
Net proceeds from the sale minus your basis = capital gain
- A 1031 exchange is a swap of properties that are held for business or investment purposes.
- The properties being exchanged must be considered like-kind in the eyes of the IRS for capital gains taxes to be deferred.
- Replacement property to be of equal or greater value (or taxes will be owed)
- You have 45 days after closing to identify a new property(s)
- A total of 180 days after you close to close on the replacement property.
- If used correctly, there is no limit on how many times or how frequently you can do 1031 exchanges.
Tenant Landlord Estoppel Certificate
estoppel noun a rule of evidence whereby a person is barred from denying the truth of a fact that has already been settled.
Here is a copy of the Tenant Landlord Estoppel Certificate.
You will need to make a copy to be able to edit. Go to File and scroll down to make a copy.