Real Estate Investing and Depreciation Overview

Class Schedule and Attendance

• Class Overview
  • Reminder of upcoming classes:
  • Next week: Instructor will be out on Monday and Wednesday.
  • However, will be available via email and Blackboard for inquiries and grading.
  • Future Class Schedule:
  • Wednesday, the 22nd: No class.
  • This marks the last day of class leading into finals.

Classroom Conduct and Etiquette

• Open for questions and concerns regarding the course.
• Reminder to utilize the calendar on Canvas to stay updated on assignments.
• Apology for occasional technical issues, such as power generator installations affecting class communications.

Investment in Real Estate

• Class Focus: Lecture on relative investments in real estate, specifically outlining six types of real estate investments.
• Instructor's Perspective: Shares personal biases towards different investment types to aid student decision-making in real estate.

Types of Real Estate Investments

1. Residential Real Estate

   • Defined as properties for living, such as single-family homes.
   • Pros:
     • Steady demand based on increasing population –
     • More demand leads to higher competition, particularly for properties priced below the area’s median.
   • Cons:
     • Potential market downturns.

2. Commercial Real Estate

   • Defined as properties used for business purposes.
   • Example: Convention centers, office spaces, etc.
   • Pros:
     • Higher potential returns compared to residential.
   • Cons:
     • Higher risk, expensive properties, fewer prospective tenants than residential real estate.

3. Industrial Real Estate

   • Includes warehouses, manufacturing plants, and storage facilities.
   • Pros:
     • Lower prices, usually less foot traffic.
   • Cons:
     • Highly specific and fewer market opportunities, less appeal to general real estate investors.

4. Retail Real Estate

   • Properties designed for selling goods or services directly to consumers.
   • Example: Shopping malls, storefronts.
   • Pros:
     • Provides significant income potential through leasing.
   • Cons:
     • Higher risk and the instructor has not found appealing opportunities to invest in retail.

5. Mixed-Use Real Estate

   • Properties accommodating multiple uses, such as residential above retail spaces.
   • Pros:
     • Greater flexibility in potential uses of the property.
   • Cons:
     • Requires complex zoning approvals; higher management complexity.

6. Land

   • Raw land investment with no immediate cash flow.
   • Cons:
     • Higher risk due to speculation on land appreciation; no income generated until potential development occurs.

Depreciation in Real Estate Investing

• Definition:
  • Depreciation is a capital expense as defined by the IRS, intended for recovering costs of income-producing properties over the expected life of the property.
• Important Concepts:
  • Phantom Expense:
    • It's an expense not paid out in cash, allowing investors to deduct depreciation from taxable income.
  • Key Categories of Depreciation:
    • Commercial Properties: Depreciated over 39 years (approximately 2.56% per year).
    • Residential Properties: Depreciated over 27.5 years (approximately 3.64% per year).
• Methods to Accelerate Depreciation:
  • Cost Segregation Study:
    • Enables quicker depreciation on specific property improvements.
  • Bonus Depreciation:
    • Allows investors to depreciate certain improvements up to 100% in the first year, newly introduced in the Tax Cuts and Jobs Act of 2017.
  • Tax Considerations:
    • Depreciation recapture tax of 25% is applicable when selling the property, potentially offset by 1031 exchanges.

Cash Flow Considerations in Real Estate

• Positive Cash Flow:
  • Revenue from rents exceeds total costs (operating expenses + mortgage payments).
• Negative Cash Flow:
  • Total expenses exceed income, leading to financial loss.
• Cash Flow Strategy:
  • Understanding how cash flows can impact overall investment returns and management of rental properties.

Real Estate Investment Risks and Rewards

• Capital investments in real estate require careful risk assessment.
• Key Considerations:
  • Market fluctuations can lead to losses; no guarantee that property values will appreciate consistently.
  • Knowledge and projections can mitigate risks – due diligence is critical.

Investment Strategies and Tools

• Limited partnerships allow for shared management of properties and risk diversification.
• Real Estate Investment Trusts (REITs):
  • Organizations that own and operate income-generating real estate.
  • Tax considerations focus on ensuring 95% of income distribution to avoid double taxation.
• Investors must stay aware of trends within local and national markets affecting property values and availability.

Conclusion and Final Remarks

• Open for questions before concluding the lecture.
• Future Lectures:
  • Next class facilitator will cover additional material concerning investment strategies.
• Instructor Availability:
  • Although absent from physical classes, will remain reachable via digital platforms for discussion and assistance regarding course materials.