How to Choose High Quality Real Estate
Start a search for real estate investment opportunities, and you’ll quickly come up with a long list of options. Among the ones you find, many will boast of tax benefits. They’ll offer to help you save a certain amount of what you owe each year to the IRS.
When I speak to individuals, however, I warn against investing in real estate solely for the attached tax savings. There are other factors that may be more important for the return on your investment. Let’s look at choosing high quality real estate, with an eye for tax planning for high-net-worth investors.
Choosing High Quality Property
One of the most important factors to understand is to not let the “tax tail” wag the “investment dog.” What I mean by that is tax benefits are great… if the underlying investment is investable on its own merits. Several common types of property that you’ll see play into the strategy of real estate investing are:
Besides these strategies, you’ll find real estate properties fall into different asset classes. Some of the asset classes that are used in investment portfolios include:
- Convenient store
- Senior living facilities
- Student Housing
- Mineral rights (e.g. investments in minerals beneath the ground)
Selecting the Right Asset Class
When investing, you’ll need to choose an asset class and align it with a strategy in the right region. You’ll want to look for a property’s highest and best use. This requires the right level of capital and expertise.
For example, you could find a distressed apartment and take it on as a value-add property. You might develop a self-storage center or invest in a convenience store in a prime location. The decisions you make will depend on the market and geographical factors involved in the investments.
Investments in real estate property bring three potential benefits. First, they provide a steady cash flow. Second, the property typically appreciates in value. Third, there are often tax benefits tied to this type of investment.
Looking at Your Income Level
For high-net-worth investors, there could be certain tax benefits that come from investing in real estate. The key to making this strategy work lies in choosing the right type of property. The exact savings will depend on your level of passive income (i.e. what they earn from other investments such as real estate income).
To make sure you’re getting the most out of your efforts, your advisor should go over your options with you. This typically occurs during the third and fourth quarter of the year. It is a separate conversation, apart from other tax discussions.
Matthew M. Chancey, CFP®
Mobile (407) 832-0805