Property Management Blog

Factors to Consider in a Real Estate Investment Analysis

System - Thursday, January 7, 2021

Investing directly into real estate is done for a variety of purposes. Historically providing steady cashflow and modest price appreciation, a real estate investment is often used to create wealth accumulation or portfolio diversification purposes. But purchasing large assets like real estate can require extra planning and due diligence compared to other investment vehicles. 

Real Estate Investment Strategies

When you're investing in real estate, you must first determine the investment's purpose and what type of owner you want/have the time and capabilities to be. 

Are you a young DIYer with limited funds looking for a property to hold for thirty years? A fixer-upper with a high rent-to-price ratio may be best. Perhaps you're closer to retirement and want a more hands-off stream of steady income to supplement your savings. New construction in a managed association may be more your style. 

That is a great time to involve your financial advisor, as these decisions affect your entire investment portfolio. 

Key Real Estate Investment Evaluation Criteria 

When evaluating and comparing properties, you should get some key rates and assumptions to ensure that any financial analysis accurately captures the actual value, risks, and property opportunities. Some of those are the vacancy rate, discount rate, and maintenance reserve allocations. Not to mention the local economy that can influence real estate appreciation, cap rates, vacancy rates, and rents. 

Vacancy Rate

When a tenant leaves a property, it takes time and money to prepare that property for the next occupant, not to mention the time it takes to find your new renter. 

Even extremely hot markets will see some level of vacancy rate simply from turnover. You should capture the amount of time you expect a property to be vacant as the vacancy rate.

Discount Rate

Comparing one property to another can be difficult because each has a different stream of income and expenses. How much more valuable is a roof that will need a replacement in ten years compared to one that needs it in six, for example? 

Discounting all of the cashflows from the property back to present-day values through a discount rate helps solve this problem. Discount rates are highly subjective and differ as market conditions change. Still, some factors to consider in setting it are: 

  • What types of returns can you achieve on other investments of a similar risk profile?

  • How liquid is the property's income? And

  • What is the current market mortgage rate?

Maintenance Reserve Allocation

Maintenance costs on properties can be chunky; the property can go months and months with no expenses but need to have a water heater replaced at $3,000, or a roof for $20,000. A successful real estate investor should understand what these maintenance expenses will be for each property they evaluate and set aside enough of their income to cover these expenditures when they become due.

Real Estate Investment Exit Strategies

While a financial advisor can help guide you through every stage of the investment process, planning a proper exit strategy may be one of the most critical times to seek their guidance. Throughout the period you own real estate, you'll take a depreciation expense as a tax deduction, lowering your taxable income from the property and also lowering your basis, i.e., book value, of the property. 

When the time comes to exit an investment, the difference between your basis and the property's sales price will be taxable income; often adding up to tens of thousands of dollars in taxes owed. There are strategies to minimize this tax burden, though.

The 1031 Exchange

The 1031 Exchange, often referred to as a like-kind exchange, allows an investor to roll over the proceeds of selling one property into another property without paying taxes on the capital gains. The rules and processes governing the exchange are complex. 

But generally speaking, the exchange can happen simultaneously with the property's sale, or you can place the funds in escrow for a future purchase or new construction within a set time.

Step-up in Basis on Inheritance

Perhaps one of the simplest ways to avoid paying taxes from selling your property is to simply never sell it. Obviously, this must fit into your overall financial plan. Still, if a property is held until death and then transferred as a part of the estate, the beneficiary acquires the property with a starting basis equal to the then market value. 

All of that depreciation tax-shield used is wiped away, and the beneficiary's accounting is practically the same as if they had bought the house outright at the then market value.

Investing in real estate is more hands-on and involved than merely investing in public markets, but the returns and portfolio benefits outweigh the cost of that extra work. For novices, there are often missed costs that make real estate investing less profitable than initially projected.  And adding leverage can increase your overall risk exposure, often much more significantly than a first time real estate investor might think. 

If you think real estate may be something you're interested in, perhaps it is time to sit down with a trusted advisor and begin exploring how you can grow your wealth.

Guest article by Brad Owen, CFP®, RLP®, RMA®. He's a senior vice president and partner of EP Wealth Advisors' San Diego office. EP Wealth Advisors provides personal financial plans, customer investment portfolios, and integrated tax and estate planning for their clients. The firm is a Barron's Top 100 Registered Investment Advisor in 2020, an FT300 in 2020, and RIA Channel's #13 ranked RIA in the nation.  


  • Our review is limited to and in association with financial planning. It is intended to serve as a tool containing general information that should help you develop subsequent discussions with the appropriate professionals. Please consult a tax professional, real estate professional, or attorney before implementing any strategy referenced or discussed. EP Wealth Advisors is not a real estate company. 

  • The content of this report is believed to be accurate as of the date of the presentation and cannot and does not accurately forecast future economic, market, or financial conditions. For this reason, any subsequent economic, market, financial changes that occur after the publication of this report may cause the analysis encompassed herein to become inaccurate. Any references to future market or economic forecasts are based on hypothetical assumptions that may never come to pass. No report, chart, or analysis can accurately forecast the future. 

  • All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter your portfolio's performance. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. There is also no assurance that a portfolio will match or outperform any particular benchmark.

  • Content should not be construed as legal or tax advice; EP Wealth Advisors ("EPWA") do not engage in law or accounting practice. You should consult your legal and tax advisors before implementing any recommendation contained in this presentation.

  • EPWA is a registered investment adviser with the U.S. Securities and Exchange Commission ("SEC") and offers fee-based advisory services. Registration with the SEC does not constitute an endorsement by the SEC, nor does it imply that EPWA has attained a certain level of skill or ability.

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