What we’ve seen since 2020 is that California real estate is one of the most desirable in the world. Living in California is highly desirable from the year-round weather and incredible quality of life, making the real estate market an excellent investment opportunity. The primary reason to consider investing in California real estate is that historically, California’s housing market appreciates higher than other areas of the United States.
Ways To Invest In California Real Estate
Before you consider getting into the California real estate market, you need to understand the 1% rule of investing. The rule states that to turn a profit, you need to consider the price of the investment property versus the income it will generate. In other words, the income must be at least 1% of the cost needed to purchase the home. As you understand the 1% rule, there are other things you need to know before you purchase a house.
Buy And Hold Or Flip
There are two ways to invest in a property to make a return. The first is to buy and hold for long-term revenue through renting. The advantage to long-term holding is that your home will appreciate over time while your renters can pay down your mortgage, lowering your debt. This strategy is excellent for long-term wealth generation.
On the other hand, flipping is buying a property, often below market value, investing labor and upgrades to increase the home’s value above current prices. It’s a short-term strategy to make quick money, but it can also be taxed higher than long-term capital gains taxes on homes sold after two years.
Prequalify To Submit The Best Chance Of Acceptance
Once you decide whether you’ll buy and hold or fix-and-flip the property, making an offer on the home you wish to purchase can be tricky. If you’re going cash, you have a distinct advantage over people who need financing, but for people with money isn’t an option. Getting prequalified through a lender shows the prospective seller you can get funding, making your offer more attractive.
Advantages To Investing In Real Estate
121 Exemption
Most average home buyers are unaware of the 121 exemption in the US tax code. The rules state that a homeowner who takes possession and use of a house for two years in a five-year window can claim up to $250,000 for single filers and $500,000 for married couples to be tax-exempt on any sale. In other words, if you buy a house, live in it for up to 2 years out of 5, then sell it, you can receive up to $500,000 in tax-free earnings on the sale.
1031 Exchange
Finally, one tax advantage to California real estate is the new 1031 exchange which allows an investor to transfer the profits of one home toward the purchase of another of higher value, making it easier to move up from a starter home to a larger pricier property.
Areas To Consider Investing
The appreciation that California homes show is much higher than the national average.
In Santa Monica, an area known to be highly desirable, there is a growing trend toward limiting what homeowners can make on their sales. Recently, mayor Sue Himmerlich proposed a municipal tax on homes sold over $8 million at $53 per $1,000 in sales.
So for investors in the area looking to cash in, you may be in store for a shocking tax burden soon. Instead, consider some of the other premier regions of California to invest in. Areas such as Irvine, Newport Beach, San Jose, or down south in San Diego – Another option is to explore Del Mar homes for sale that offer the same luxury prices minus the Santa Monica taxes.
Regardless of where you hope to park your money, California real estate shows year after year to be an excellent investment. For example, San Diego is ranked as the most expensive real estate in California but has shown astronomical appreciation in recent years.
In addition, highly desirable real estate in certain places (such as Rancho Santa Fe, Del Mar, La Jolla, and Coronado) boasts an incredible opportunity for an investor. Understanding the advantages of investing in real estate and areas to get involved are crucial to helping you make a significant return on your investment.
