Is it alright to only invest in residential real estate? For people who take real estate investments seriously, it’s a known fact that you shouldn’t stick with just one kind of investment. For them, residential and commercial properties are both viable options. With proper diversification, you can rope in big profits in Fayetteville and beyond.
There are other questions that probably plague your mind; for instance, what tax advantages you have, whether the real estate market in Fayetteville will take a hit because of the pandemic, and if monthly cash flow will be consistent or not.
It’s good that you’re asking these questions—because it indicates that you’re serious about investing in real estate. And as far as real estate facts that you must know are concerned, we’ve rounded them up in this blog.
1. Commercial Real Estate is High Risk—and High Reward
If you think North Carolina isn’t a good place for commercial real estate investments, think again. While it’s true that businesses are operating in a post-recovery economy, the GDP is growing, we have a great influx of entrepreneurs, and there are around 900,000 small businesses operating in the state at the moment.
In fact, since 2017, North Carolina has been back in business—and it’s been a good run. Seen in this light, it’s natural that the prospect of investing in commercial real estate should appear promising. Whether it’s hospitality or office buildings, investment in commercial real estate can rope in long-term profits.
Something most people don’t know about commercial real estate is that there are longer lease terms compared to residential real estate. You can get a lease for up to 10 years, which is great news in terms of stable cash flow.
However, experts would also contend that CRE is both high risk and high reward since you might have to spend a great deal in improvements if your new tenants come in with specific demands and requirements.
2. Residential Investments: Shorter Leases Are Not Bad
Leases for residential properties, as we have already mentioned, are shorter. But is that necessarily a bad thing? Not exactly.
Let’s say the market fluctuates in your—the landlord’s—favor. If so, you can increase the rent rates. CRE doesn’t give you the same advantage, since you will have to wait for as many as ten years before you can take advantage of a fluctuating market.
Additionally, residential real estate is also less vulnerable to economic upheaval. One of the biggest facts that prove this is how house prices are rising even in the midst of a pandemic. Maybe this was because the prices took a hike right before the pandemic—but they have stayed more or less stable even during the pandemic.
The reason for this is simple: there will always be a demand for housing since people will always want a place to live in. This pandemic has taught us many things, and one of those things is that owning a home has become one of the top priorities for the American population. In fact, the millennial population prizes buying a home more than they value marriage and children.
Moreover, residential real estate is also easier to finance. While the rewards with commercial real estate are bigger, the investment and the risk are bigger as well. Residential real estate is something you can dive into with 15 years at least or 30 years at most of financing. The loan can then be paid off in some 5 to 10 years, which makes it an affordable investment.
And if you think finding a property in Fayetteville that costs less than $100k is difficult, hire Philip and have a look at the real estate listings online for Fayetteville, Fort Bragg, and beyond.
3. Tax Advantages
Many people don’t actually realize that investing in real estate actually comes with several tax advantages. There are deductions to be factored in—such as mortgage interest, capital gains, property depreciation, and maybe travel costs too if you’re traveling a lot. These deductions are written off, especially if they’re geared toward rental properties.
Property depreciation too, works in your favor—as opposed to popular opinion. Basically, you need to understand the following conditions when it comes to yearly axes and real estate:
- The value of the property
- Recovery period
The Modified Accelerated Cost Recovery System is used to calculate depreciation value which is then deducted and categorized as a net loss—this goes despite you receiving positive cash flow. As an investor, you can save money, every year, through simple depreciation.
Other tax benefits that come with real estate investments include:
- Capital gains: There are taxes on long-term capital gains
- Passive income: Supplementary income
- Pass through deductions: According to the Tax Cuts and Jobs Act of 2017, pass through businesses can get a deduction on their taxable amount
- 1031 exchange: These are either non-taxable or have limited tax as investment swaps
- Retirement accounts: IRAs and the like can evade taxes while investing in real estate
- FICA tax: the Federal Insurance Contributions Actdictates that the 15.3% tax for employees and employers must be split. If you are self-employed, you can offset it and benefit from the income on rental properties.
4. Stable Cash Flow: Myth or Truth?
One of the best routes you can take as an investor in residential real estate is to buy and hold. By this we mean to say that you continue paying mortgage payment and receiving rent every month. Think of it as getting a paycheck every month without having to work—it’s a good deal, especially if you’re investing in order to make your older years more comfortable without work.
However, we’d advise that you keep some cash reserves saved on the side because repair expenses can pop up at any time.
As you keep paying your mortgage, your cash flow becomes even stronger, and ropes in equity. You will, however, need a tenant if you have to keep that cash flow running. Without a tenant, you’ll have to continue paying the mortgage without anything coming in to support you financially, and that can be disastrous.
As a rule, then, finding a tenant should be one of the first things on your mind. don’t forget that the real estate market in North Carolina is growing, and that you might find it hard to locate a tenant when there are so many competitors around. Talking to a professional realtor might help.
And Where Do You Find an Expert Realtor in Fayetteville?
Well, you can find him online if you reach out to Phillip Fehler, Broker of Fathom Realty’s website. An expert realtor from Fayetteville, NC, Philip helps clients with real estate concerns, such as selling a house in North Carolina, finding Military Housing in Fort Bragg, and more.
Philip Fehler’s website is multi-purpose and provides resources for first time home buyers in Fayetteville, information about houses for sale in North Carolina, guidance about house relocation and downsizing, and much more. Talk to an expert from his team directly to get more information about your concerns. You can get in touch with him here or give him a call at (910) 381-1341.