At Navigation Real Estate, we offer a wide range of services to assist you in the purchase and sale of investment properties in Washington State.

Real estate as an investment Over time, real estate has proven to be a sound investment where the savvy investor can benefit from long-term capital appreciation, short-term cash flow and significant tax advantages. However, like any other investment, real estate also involves numerous potential pitfalls for the unseasoned investor.

A real estate investment can take many forms, but the two most common real estate investment opportunities for individuals include the long-term ownership of rental properties and the short-term purchase and sale of properties through a process known as “flipping”. When assessing your investment options, it is important to weigh your investment objectives against the amount of risk you are willing to assume.

When evaluating a real estate investment opportunity it is important to consult the various professionals experienced in this arena. To determine whether a real estate investment is appropriate for your individual needs, we recommend you consult:

1. A real estate broker/agent to evaluate available opportunities, price points and sale strategies
   
   
2. An accountant (CPA) to assess the tax implications of the investment
   
   
3. An attorney to advise you on liability, insurance, as well as whether you should utilize a business entity such as a limited liability company (LLC), corporation (S-Corp or C-Corp), partnership or sole proprietorship to purchase and operate your real estate investment(s)
   
   
4. Certified Financial Planner (or Chartered Financial Analyst) to counsel you on the advantages and disadvantages of a real estate investment in comparison to other investment opportunities such as stocks, bonds and commodities.

Rental Properties

For the investor seeking short-term cash flow and long-term capital appreciation, purchasing a rental property can be a lucrative investment opportunity. Some important points to consider when purchasing a rental property include:

• Research rents in the area where you plan to purchase your rental property in order to identify the monthly cash flow you can expect to receive from your rental property
  
  
• Consult a lender to explore financing options and to determine the monthly mortgage payment
  
  
• Confer with a real estate broker/agent who can assist you in locating rental properties such as distressed properties and foreclosures in your desired area
  
  
• Perform a cash flow analysis comparing your monthly mortgage payment with the monthly rental income to ensure that your investment will produce sufficient income to meet your investment needs

Flipping

In the Puget Sound, the combination of low housing inventory and low mortgage-interest rates has created a seller's market. This has resulted in thousands of investors buying and selling homes over a relatively short period of time.

The process of “flipping” involves the short-term purchase and sale of properties to capitalize on favorable market conditions. An investor may purchase and hold the property for eventual resale, or enter into a lease option where the seller remains in the property under a lease agreement with the option to purchase the property at a pre-determined price.

Flipping also entails the purchase and rehabilitation of downtrodden properties for eventual sale. The rehabilitation of a property is both capital and time intensive and should only be undertaken by an investor with the appropriate experience or a network of inexpensive laborers.

Whether you are considering the buy-and-hold option or the rehabilitation aspect of flipping, there are several things you should consider:

• Thoroughly research neighborhood pricing trends including past sales, pending transactions and current home listings
  
  
• Stay away from major renovation projects until you are prepared to absorb the capital contributions and time necessary to rehabilitate the property
  
  
• Educate yourself on the foreclosure and distressed property market to buy low and sell high
  
  
• Utilize qualified inspectors and contractors to avoid unexpected repair expenses
  
  
• Get an accountant (CPA) to advise you on the tax consequences of short-term real estate purchase and sale transactions
  
  
• Consult a real estate attorney to advise you on liability, insurance and business entities that you may utilize to purchase your real estate investment(s)

The 1031 tax-deferred exchange

When selling investment property it is important to understand the tax benefits of a 1031 exchange. In 1990 the Internal Revenue Service promulgated Section 1.1031 of the Internal Revenue Code to offer investors significant tax savings when selling investment property and re-investing the sale proceeds in “like-kind” property. The “like kind” requirement refers to the use of the property and must fit into one of the four classifications:

1. Property held for personal use. (Personal Property)
2. Property held primarily for sale. (Dealer Property)
3. Property held for productive use in a trade or business. (Business Property)
4. Property held for investment. (Investment Property)

The last two qualify for Section 1031 tax deferral, the first two do not. Both the property received and the property sold must be of "Like Kind".

Section 1031 essentially defers the capital gains tax on the sale of investment property when an investor purchases another “like-kind” property within a specified time period following the sale. The definition of “like-kind” property that may be purchased to receive tax-deferred treatment is quite broad in the real estate context and includes both developed and undeveloped real property.

In addition to the “like-kind” requirement, a 1031 exchange requires the proceeds of the initial sale be held by an “exchanger” prior to re-investment. Once the “like-kind” property is identified, the “exchanger” disburses the proceeds to the “like-kind” property seller. An “exchanger” must be a “qualified intermediary” such as a licensed escrow officer, attorney or other professional.

Pre-sale investment opportunities

Preconstruction investing allows you to purchase tomorrow’s properties at today’s prices. The purchase of preconstruction interests benefit the buyer in a hot real estate market, while providing the developer the benefit of securing a construction loan based on the investor’s interest in the project.

There are 3 general stages to follow when investing in a preconstruction real estate property:

Reservation Stage – The investor normally gives a minimal amount of cash funds to the developer, normally in the amounts of $5,000-$50,000 prior to the developer beginning construction. By putting a minimal amount of money down, you are forming a non-binding contract with the developer called a preconstruction reservation. In the case of a cancellation or price increase of the preconstruction real estate project the investor may receive a full refund.

Contract Stage – The contract stage begins when the developer and the investor enter in a binding contract to purchase the completed home or unit. At the contract stage, the investor is required to put down anywhere from 5% to 25% of the cost designated by the developer. The developer is prohibited from raising the price of the preconstruction real estate property. Remember, that before you sign that contract you may be eligible to back out of the reservation agreement and receive a refund of the reservation deposit.

Selling/Assigning Contract - If the developer offers a resale program to the investor, he/she is allowed to sell the preconstruction real estate property to another buyer. If a resale program is not offered to the investor then he/she must close on the property before it may be sold, rented out, or used for personal use.

When considering preconstruction investment opportunities, be advised that the prices are oftentimes inflated above market value to reflect anticipated price increases. Also, look at the future of the area and see if it’s going to have any major changes that can or will affect your property.

Questions
We welcome your questions regarding the purchase or sale of an investment property. Please feel free to contact us by telephone at: (206) 909-8777; (toll-free: 1-800-206-6612) or by email at: info@navigationre.com.