The end of the year is often a time to tie up loose ends and get one’s finances in order. For investors, it might mean reassessing their portfolio, making some tactical purchases, reallocating funds and making a strategy for the year ahead.
Whatever your goals as an investor, now’s the time to take stock and determine the best way to close out 2021 in order to position yourself for success in 2022. Here are some things to keep in mind.
Tax-specific moves
Minimize capital gains taxes
Jilliene Helman
For investors who have earned capital gains over the course of the year, now is the time to think about putting those capital gains into a new investment to avoid costly taxes on them.
“You might want to consider investing in an opportunity zone,” Jilliene Helman, CEO of Realty Mogul, told Inman in an email. “Any investor facing a capital gains tax bill can defer the tax by investing in an opportunity zone. Profits from the sale of any investment asset — including stocks, a business, or real estate — invested in a Qualified Opportunity Zone (QOZ) within 180 days from the asset sales date receives a full deferral of capital gains tax due through the end of 2026.”
Take advantage of 1031 exchanges
G. Brian Davis
Similarly, anyone who is looking to avoid capital gains taxes through a 1031 exchange, essentially swapping one investment property for another and deferring the taxes, would be wise to get moving on a deal as soon as possible. Within 45 days of selling a property, the replacement property must be declared. A qualified intermediary must also be used to oversee both transactions, holding the profits of the first until the second transaction is completed.
“You do want to speak with either a tax attorney or an accountant, about 1031 exchanges before doing one,” Spark Rental Co-Founder G. Brian Davis said during a December 2020 episode of his Live Off Rents podcast. “And you will need to bring in a qualified intermediary, which does not have to be a professional. They don’t need to be licensed or anything, but they can’t be you and they can’t be your immediate family member. And they can’t be someone who’s already serving as your agent, such as a realtor or an attorney, property manager, someone who is already working for you in some sort of agent capacity.”
Make capital improvements
Depending on the job and what the current demand is like for home improvements in a specific market, there may still be time to make capital improvements to a property too, which are tax deductible. Any permanent structural change to a house, like installing a new septic system, adding a porch to a property or installing new marble countertops all fall into this category.
Consider a REIT
Helman also advised that anyone who is concerned about inflation or stock market volatility consider participating in a private placement deal or a real estate investment trust (REIT) because the generated value from these investments has the potential to increase in an inflationary environment.
“Twenty percent of all U.S. dollars in circulation were created in the past 12 months,” Helman said. “And that figure closely corresponds to the appreciation many real estate markets have seen in the same time period. REITs or private placement real estate investments (especially those investing in equity specifically) can benefit from inflation relative to fixed income investments or fixed rate debt, as you can charge higher rents at the properties in an inflationary environment and capture additional income, potentially.”
“Fixed income [or] locked rate debt investments can get crushed by inflation,” she added, “as your yield becomes inferior to what the market is paying post-inflation.”
Property-specific moves
Consider buying another property
Doug Brien
If you have the available resources to invest in another property, consider whether or not it makes sense to do so now, factoring in your investment goals as a whole. Doug Brien of Mynd and Gary Beasley of Roofstock, experts in the single-family rental sector, recently gave a sound recommendation for investing in single-family rentals now, during a panel at Inman Connect Las Vegas.
“If you have a long-term view and the right financing … the risk is relatively low,” Brien said at the time.
Individuals interested in the short-term rental space may also want to pull the trigger now, while short-term rental demand is at peak levels and mortgage rates are still relatively low.
Look for sellers on a deadline
For any investor looking to buy a new property within the next month, Helman said a good strategy is to seek out deals with a seller who needs to close before the end of the year, since the investor, as a buyer, may have a bit of leverage to work with.
“Real estate is inherently an irrational market and there may be sellers willing to sell for cheaper in order to close before year-end for their own personal tax reasons,” Helman said.
Evaluate your existing portfolio
Maurie Backman
On the opposite end of the spectrum, with home prices continuing to skyrocket of late, it’s also a great time to unload properties that are no longer worth the responsibility.
“Because property values are so high right now and attractive mortgage rates are driving an increase in buyer demand, now’s a really good time to sell a home,” Maurie Backman wrote in a recent post for Millionacres on end-of-year tips for short-term rental investors. “Think about whether that makes sense for you.”
Price short-term rentals competitively
Depending on a short-term rental property’s location, demand can surge this time of year (in a ski town) or it can dwindle (in a beach town). Monitoring traffic and using dynamic pricing tools can help property owners get the most bang for their buck as demand fluctuates.
“Keep in mind that because of generally strong demand, you might manage to command a higher price for your rental than you normally would,” Backman advised on Millionacres. “See what other properties in the area are asking for rent, and come up with a strategy that works well for your home.”
