California remains one of the most expensive places in the United States. Here, the average home price is already over $600,000. From 2019 to 2020, the cost also increased by nearly 10%, according to Zillow.
The good news is price increases may be slightly lower than the rest of the country. In 2021, Zillow forecasts that US houses will be 10.5% more expensive than the previous year.
The growth of California home prices also pales in comparison to hot states, such as Utah. In the Beehive State, a typical house will cost you almost $400,000. But the price already soared by at least 12% in the previous year.
Meanwhile, although many Californians have left the state, the Golden State’s population growth still reached 7.3% between 2010 and 2019. Within the same period, it welcomed close to 3 million new residents.
In other words, if you’re a real estate investor, California remains a viable option to put your money into. However, you need to be smarter, so you can maximize your profits and lower your costs as much as possible.
Here are three tips to help you:
1. Invest in Properties within Qualified Opportunity Zones
The 2017 Tax Cuts and Jobs Act introduced a new economic incentive to spur development in distressed and low-income communities around the United States. Thousands of census tracts have been selected to be part of the qualified opportunity zones.
The places are within 50 states, but most of them are in California. In the Golden States, nearly 9,000 census tracts have been identified.
Investors who wish to participate in the program may need to form a partnership or a corporation. They must also be willing to construct new buildings or improve existing ones and then sell them for a profit within 30 days.
They then need to send these proceeds to the Opportunity Investment Fund. In exchange, investors can enjoy some tax incentives, particularly on the capital gains tax.
For example, they can defer paying this tax until December 31, 2026, as long as they reinvest the capital gains into the fund. They can also reduce their capital gains tax between 10% and 15%, depending on how long they keep the gains in the fund.
2. Get a Homeowner’s and Fire Insurance
Despite the benefits of having homeowners’ and fire insurance policies, many property investors still fail to get them. Usually, there are two reasons: they are not mandatory, and they can be costly.
However, in places like California, these are essential, especially if the property is within high-risk areas. These may be cities, counties, or towns near a fault or close or within the wildfire zone.
How much is home insurance? According to Value Penguin, a homeowner pays about $1,400 annually or less than $150 monthly. In California, it may reach around $1,800 a year.
In some cases, a property in a high-risk area may not qualify for a homeowners’ insurance policy. The next best option is to get a stand-alone fire insurance coverage under the Fair Access to Insurance Requirements (FAIR) plan.
3. Consider 1031 Tax Exchange
Whether you like it or not, the IRS will have to collect capital gains tax on any property sale. On the upside, you have many options to avoid that for as long as possible without doing something illegal. One of these is the 1031 tax-deferred exchange.
In this arrangement, you sell a property and then buy a like kind. It doesn’t have to be the same type of property. Instead, they may be similar in terms of use, such as commercial buildings with different types or numbers of rooms or sizes of spaces.
Then, you need to meet the other requirements. For instance, you should identify the property within 45 days and buy another one within six months. The new property’s value should not be less than that of the old one, and you need to invest all the sales proceeds in the new real estate.
Although you don’t get any from the sale, you can still earn income from the properties you bought by having them rented. Moreover, you can continue with this exchange for as long as you can.
When you invest in something, such as real estate, you should be prepared to win some and lose some. You must also depart from a good amount of money.
However, when you do it smartly, you can reduce the risks of significant losses, make the most of the assets available, and reduce investment costs.
