Investing in Real Estate with Comfort Capital: Your Path to Wealth and Tax Savings
Video Clips
All video clips in this article come from the Real Estate Tax Advantages webinar done in conjunction between Comfort Capital and Farkas Tax Advisors Inc.
Are you looking to create and maintain wealth while reducing the taxes you pay to Uncle Sam? Look no further than real estate investing, especially in Manufactured Housing Communities (MHCs). At Comfort Capital, we guide you through a strategic investment journey that generates monthly returns, grows your principal balance, and offers unique tax-saving tools like depreciation and the 1031 exchange.
Understanding Depreciation and the 1031 Exchange
Depreciation, as defined by the IRS, allows you to recover the cost of property over time, acting as a tax allowance for wear and tear. This means you can shelter property income and even offset other real estate or active income if you qualify. The 1031 exchange is another powerful tool, letting you defer capital gains tax by rolling the proceeds from one property sale into another. These benefits are exclusive to real estate and are particularly potent when investing in MHCs.
Why Real Estate Outshines Other Investments
In today’s economic landscape, various investment options are available, but none match the wealth and tax savings potential of real estate. While stocks and bonds may seem safer due to their liquidity and lower acquisition costs, they are taxed at ordinary income rates, including capital gains tax. Fixed-term accounts like Certificates of Deposit (CDs) and Money Market Accounts might offer a stable 5% return, but they lack significant growth potential and tax savings.
Put differently, your 5% CD return is generally taxed at ordinary income, which when viewed after taxes, is closer to a 3.5% – 3.75% return. Real estate income, on the other hand, has the unique benefit of sheltering income (i.e. deferring) through depreciation, allowing investors to defer taxes and experience a true 5%+ income after taxes are taken into account.
Investing in Real Estate vs. Traditional Accounts
Imagine two investments: a real estate property and a money market account, both generating a 5% return. The money market account ends with its term, and its returns are taxed as ordinary income. In contrast, real estate can theoretically continue providing a 5%+ return indefinitely, with the potential for increased returns as rents rise and expenses decrease through effective management. Depreciation offers substantial tax savings, sheltering the income produced. This compounding effect allows real estate investors to pocket more money or reinvest earnings into additional properties, further enhancing return potential.
Why MHCs Are One of the Best Real Estate Asset Classes
Manufactured housing communities (MHCs) stand out as one of the most advantageous and lucrative real estate asset classes. In MHCs, landlords own the land while tenants own the mobile homes and pay lot rent. This setup leads to lower expense ratios since tenants maintain their own homes. Mobile home residents typically stay longer in the community compared to other housing types, making MHCs especially resilient during economic contractions.
The Power of Depreciation in MHCs
MHCs offer the highest depreciation per dollar invested. Most of the value lies in depreciable improvements like mobile home pads, roads, driveways, carports, and shared spaces, not the land itself. These improvements can be depreciated over 15 years instead of the typical 27.5 years, providing accelerated tax benefits. This front-loaded depreciation is unique to MHCs, making them a significant addition to your investment portfolio.
As a general rule of thumb, roughly 70-80% of the purchase price of a Manufactured Housing Community falls under depreciable assets with 15 years or less depreciation. In contrast, an apartment asset, where most of the value is derived from 27.5 years and above (think the physical structure), has only 20-40% of the total cost attributed to 15 years or less depreciable assets. The ability to have your invested dollar provide more upfront depreciation can be extremely powerful, especially if you have other real estate income that can be sheltered or if you’re designated as a Real Estate Professional (Article on this), where you can use the additional depreciation on other active income.
The 1031 Exchange and Compounding Returns
The key to creating and maintaining wealth in real estate is deferring taxes through depreciation and the 1031 exchange. This exchange allows you to roll the sales proceeds of one property into another, deferring any capital gains taxes owed. At Comfort Capital, we utilize the 1031 exchange on virtually every deal exit, rolling the sales proceeds into the next property and deferring capital gains tax while appreciating your investment’s value. This allows you to defer taxes and compound your cash-on-cash returns, resulting in significant compounding tax savings. Maintaining your position in a partnership like Comfort Capital is advantageous due to the compounding effect of tax savings and continued monthly distributions.
Why Partner with Comfort Capital
By keeping the tax dollars you didn’t pay the government in the partnership with Comfort Capital, your investment compounds “indefinitely.” Once the partnership refinances the property, you receive your initial investment back while still receiving monthly distributions that grow over time. This return continues “indefinitely,” multiplying your returns through continuous 1031 exchanges. This long-term strategy is key to compounding wealth while deferring the money owed to Uncle Sam.
Take Action Today
Real estate is a necessary investment for your portfolio. Traditional investments like stocks and bonds may deliver desirable returns but offer no tax shield. In contrast, real estate provides comfortable monthly cash-on-cash returns and utilizes several IRS tools to defer and limit the taxes you owe. The compounding benefit of monthly distributions, depreciable savings, and 1031 exchanges into up-legged properties is why investing in manufactured housing communities is vital for your investment portfolio.
If you’d like to learn more about MHC investing and the compounding benefits of partnering with Comfort Capital, reach out to us at [email protected] or call our offices at (619) 333-2825. Let Comfort Capital guide you to financial success and long-term wealth
Disclosure: This email summary is for informational purposes and to gauge potential investor interest. Prior to making any decision to contribute capital, all investors must review and execute all private offering documents, including the Private Placement Memorandum and its exhibits, which contains the complete information about this investment opportunity. The information contained herein is from sources believed to be reliable, however no representation by Sponsors, either expressed or implied, is made as to the accuracy of any information on this property and all investors should conduct their own research to determine the accuracy of any statements made.
