Welcome to the latest edition of THE MONTHLY BOOST! This month, we focus to provide you with a comprehensive analysis of the current state of the U.S. capital markets, specifically focusing on the multifamily sector. The market dislocations we have experienced over the past year have presented both challenges and opportunities. Let's dive into the details!
Navigating Market Dislocation | U.S. Capital Markets Multifamily The U.S. multifamily market finds itself in an odd spot. On the one hand, fundamentals remain strong, with healthy occupancies even if they have softened somewhat from record highs and rising rents. Conversely, increasing expenses erode NOI, and the capital markets are dislocated. For existing owners with long-term financing in place, many are holding, while those with near-term debt maturities will be forced to act.
Navigating National Market Multifamily occupancies vary from 93%-95%, depending on the source. This range suggests an overall healthy market but one that is off from all-time highs. The U.S. is still under-housed despite the under-construction pipeline of one million units. Fundamentals will be pressured in markets with the highest development concentrations as a share of existing inventory. Generally, these are the same markets with the strongest demographic and in-migration trends.
Top 15 Markets by Units Under Construction
Top 15 Markets by Units Underway as % of Inventory
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What Is Depreciation Recapture, And How Does It Work?
When running your real estate business, you can account for the wear and tear of your property and any furnishings and appliances you own via depreciation. You can divide the costs associated with these items over several years through depreciation based on the schedules of asset classes that the internal revenue service (IRS) publishes.
Depreciation recapture refers to the portion of a gain you realize from selling a rental property taxed as ordinary income instead of capital gain. In other words, when you sell your property, the IRS taxes you on your depreciation deductions.
What is Depreciation?
Investment properties naturally degrade over time due to use, weathering, and general wear and tear. It just happens. Your roof ages, wood slowly decays, and your appliances don’t work as well as they once did.
To qualify for depreciation:
You must own the rental property
You must own it for at least one year
The property is being used (i.e., endures wear and tear) for your business or to produce extra income, like rent
What is Depreciation Recapture?
If depreciation is the teen who throws a party when their parents are out of town, depreciation recapture is the neighbor who calls and complains.
The IRS knows that rental property investors reap the benefits of depreciation, and they want their cut. If you sell your rental property, the IRS “recaptures” all the money you saved over the years via depreciation deductions, and the depreciation recapture tax rate is a hefty 25%.
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Top 5 Cash Flow Markets For Less Than $200k in 2023
Where have all the cash-flowing properties gone? With high-interest rates, low inventory, and purchase prices not budging, it’s becoming harder and harder to find your margins. It’s even harder to find a cash-flowing property when your investment budget is modest. Read More >>
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The Anatomy of Failure: Lessons Learned from Recent Failed Multifamily Syndications ✔️ Importance of Due Diligence ✔️ Market Volatility Effect on Underwriting ✔️ Debt and Equity Balance ✔️ Ineffective Asset Management ✔️ Misaligned Partnerships ✔️ Q&A Session
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