Greg Friedman, Peachtree CEO, joins ‘The Exchange’ to discuss a rising trend in commercial real estate private credit loans, and how private creditors can benefit from the pullback in direct bank lending to commercial real estate.
No matter what business you run, when you’re designing your website, you’re not really designing it for your business—you’re designing it for your customers. Users of your website need to be able to easily find your website and navigate it to find the solution to their problem. This process is all part of their user experience (UX), and providing them with a positive experience should be your main motivation behind every design choice you make.
As business leaders themselves, the members of Young Entrepreneur Council understand what it takes to produce a thoughtful website that keeps the user experience in mind, and here, they each share the one rule or lesson they think about when trying to create a better user experience for their website visitors and how this thinking helps shape their final design.
When designing a better user experience, I remember the importance of simplicity. Keeping the interface clean and intuitive enhances usability and reduces cognitive load for visitors. This principle shapes my final design by guiding decisions on the layout, navigation and visual elements. I prioritize streamlining information and delivering clear messaging. Simplicity enables visitors to find what they need quickly, understand the website’s purpose and engage effortlessly. It also builds trust, professionalism and a positive user impression. – Ian Sells, JoinBrands.com
Use the same fonts, colors and layouts throughout your website. This helps the website appear simple and appealing to the eye. Every page of the website should give off the same vibe, which creates a central theme for the website. The user should feel comfortable on each and every page they visit. It’s fine to have a unique website design as long as it is consistent! – Robert De Los Santos, Sky High Party Rentals
Focus on function over aesthetics. Is your website mobile-friendly? How quickly will your page load? Is the overall design and feel of your website consistent? The website layout should be clear and consistent. The language, message and positioning should also be clear. Will your website guide your prospects or make them feel dumb? An intuitive layout, design and messaging will convert your visitors into customers by addressing their problems and providing them with solutions. But being intuitive and thoughtful doesn’t translate into being boring! Just because it’s purposefully designed doesn’t mean it should be boring and predictable. Add some creative elements that will make the user experience unique and memorable. – Candice Georgiadis, Digital Day
To offer a seamless user experience to my visitors, I prefer to go with a responsive design for my website. So, for me, the priority would be to optimize my site for all devices, such as desktops, smartphones, tablets and more. People have diverse preferences and prefer accessing content through different devices. Plus, they might not always be in front of their desktop screens when exploring your content. So, it’s important to optimize your website for different devices and various screen sizes to make sure that you don’t offer a clunky user experience to your visitors. – Jared Atchison, WPForms
If you’re looking to appeal to a broad base, the technology needs to be intuitive. Technology should make our lives easier, not harder. The iPhone changed our lives because it came with no directions and we used our fingers. When designing our tech, we always create it so that my daughter and my dad can use it without directions. In fact, they are often my first two testers! UX isn’t simply based on how well the software works. Don’t get me wrong, that’s half the equation, but users tend to use programs they feel the most comfortable and confident using. And the experience most often begins with the description. One of our latest technologies uses artificial intelligence. We left “artificial intelligence” out of the app description so that users aren’t intimidated. Create tech, but remember the user! – Bill Mulholland, ARC Relocation
Like a party, a website must anticipate and engage guests’ needs. Why? People stick around where they feel understood and entertained. Just as you’d arrange the music, food and decor at a party to create a certain vibe, design your website to evoke the feelings you want your visitors to have. It’s all about empathizing with your users and making their journey enjoyable and memorable. This mindset shapes every design decision we make. – Idan Waller, Bluethrone
One rule I have when trying to design a website that offers a better user experience is to come up with a site that loads instantly. The average visitor expects a website to load in three seconds or less. It’s important that the website is not heavy so I can offer a decent experience to my visitors. This means that I have to be extra careful when selecting a website theme and its customization. Plus, I like to consider moderation when it comes to the use of visual content, such as videos, as well as optimize the images for the right size to ensure that the website’s load time isn’t affected. The design of my site might not be as fancy as many others out there, but the experience it offers will certainly be better. – Stephanie Wells, Formidable Forms
Effective use of white space is crucial for improving the user experience. When you strategically incorporate white space, readability is enhanced and the overall interface becomes visually pleasing. It separates elements, provides clarity and highlights important information. White space contributes to legibility, reduces eye strain and creates a sense of organization. It is particularly important for mobile devices, optimizing content and ensuring a comfortable user experience. By utilizing white space effectively, websites become more inviting, engaging and easier to navigate. – Sujay Pawar, CartFlows
When I’m trying to improve the experience users have on my website, I look toward content diversity. Some people love reading content, others prefer listening and another group likes watching. Creating a wide range of written, video and audio content with different formats is a surefire way to create a better experience for everyone who visits your website. – Chris Christoff, MonsterInsights
Always remove as much friction as possible. The smartest way to do this is to keep your UX as simple as possible. Adding unnecessary steps or new concepts that the user doesn’t understand creates more friction both in terms of effort and the “cognitive load” the user has to undergo in order to use it. The concept of “cognitive load” itself is massively underappreciated by many product developers. It’s the unseen killer of UX because it’s not as easy to measure as other issues, such as the number of steps to complete a task. Put yourself in your user’s shoes and try to anticipate how your UX might be perceived by the uninitiated. – Andy Karuza, NachoNacho
10 Key Rules To Improve Your Website’s User Experience Read More »
Home prices have increased steadily month-over-month since February. In fact, home prices went up a whopping 4% between February and May alone, according to the CoreLogic S&P Case-Shiller Index released in July.
And while today’s prices are still slightly below year-ago numbers, the continued uptrend has many wondering: Has this latest housing downturn already come to an end?
According to one major industry player, it has. Here’s what they have to say—and the data that might just back them up.
The National Association of Realtors’ (NAR) latest pending sales report shows pending home sales were up slightly in June—the first increase since February of this year. This, combined with a dearth of inventory and subsequently rising prices, has the trade group’s chief economist calling the recession officially over.
“The recovery has not taken place, but the housing recession is over,” says Lawrence Yun, NAR chief economist. “The presence of multiple offers implies that housing demand is not being satisfied due to lack of supply.”
That lack of supply Yun mentions has been a problem for years. But recent mortgage rates—which are considerably higher than what the majority of homeowners have on their current mortgage —have worsened the issue, keeping many existing homes off the market. According to Redfin data, the number of for-sale homes is down 12.5% compared to last year as of June. Zillow data from 2021 also shows that the U.S. market is about 4.3 million homes short of demand.
That’s why, despite the recession being “over” by Yun’s assessment, we won’t see a total about-face in the market anytime soon. This means there won’t be skyrocketing prices like we saw in 2021, nor will rampant bidding wars likely be the case. According to Redfin, about 40% of homes sold for above listing price in June—down 15% compared to last year.
Instead of a complete turnaround, the near-term housing market will likely look more stable than we’ve seen over the last year or so. Mortgage rates have “topped out,” Yun posits, and NAR estimates the average 30-year fixed mortgage rate will finish out 2023 at 6.4%. For 2023, Fannie Mae projects a 6.6% average, and the Mortgage Bankers Association predicts 5.9%.
All of these projections are lower than today’s 6.9% rate, but they don’t amount to any significant drop. And until rates fall more considerably, they likely won’t cause any major influx in demand that could rock the market. According to Yun, “a rush of buyers” would take what he calls a “meaningful decline” in interest rates.
That meaningful decline isn’t likely until next year or beyond, according to most. Here’s a look at how major industry players think rates will shake out by the end of 2024:
These slightly lower rates could spur minor increases in demand, sales, and prices, per NAR’s estimations. While the group expects home prices to remain fairly steady this year, with a small decline of just 0.4% across the year, by the end of 2024, the organization predicts prices will increase by 2.6% and sales by more than 15%.
Though mortgage rates play a role in how much inventory hits the market, so do home builders. And they’ve been largely under-building since the crash of 2008.
While that likely won’t change this year (housing starts are projected to come in 5.3% under last year’s numbers by the close of 2023), next year could mark a turning point. NAR expects 1.55 million starts next year—up 5.4% for the year. Keep in mind, though, starts on single-family homes take about 8.3 months from start to completion, so it could be a while for that supply to trickle down to consumers.
“It is critical to expand supply as much as possible to widen access to homebuying for more Americans,” Yun says. “Home prices will be influenced by how much inventory is brought to market. Increased homebuilding will tame price growth, while limited construction will lead to home price appreciation outpacing income growth.”
We’ll just have to see how it all plays out.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
Andy Walden, Black Knight VP of enterprise research strategy, joins ‘The Exchange’ to discuss affordability in the housing market, expectations for downward pressure on rentals, and why supply is driving the hottest U.S. home markets.
5 ChatGPT prompts to become a better negotiator
Negotiation is everything. If you can empathize with someone to get what you want without compromising on your boundaries, you’ll be positioned to succeed in every field. But not everyone is born a great negotiator, most of us need some help.
While your default setting might be, “my way or the highway,” that likely won’t work in every scenario. Whether you’re sealing the deal on a big purchase, securing investment at the right valuation, making a sale with a tough customer or simply negotiating with your team, learn how to do it better with a few tips from ChatGPT.
When trying these prompts, have a specific situation in mind. Dig into a client challenge that’s been bugging you recently, explain an employee conundrum that you’d just love to solve, or visualize the future and get ahead of anything that’s likely to come up.
Your opening line sets the tone for the entire interaction. It asserts your position and puts someone in the state of mind to argue or concede, so it matters a lot. Keep in mind what you want to achieve and craft that opening sentence with the endgame in mind. Get ChatGPT’s help by using this prompt.
“I’m trying to [outline what you want to achieve] with someone who [explain the other party’s stance] and I want to reach an outcome where [explain your negotiation goals]. Help me craft a strong and persuasive opening statement for negotiations that sets the right tone and stands me in good stead for reaching an optimal outcome.”
You don’t always need to barrel in with your strong opinions and let everyone know where you stand. Sometimes hanging back, keeping your cards close to your chest, and asking great questions can mean the other person shows their hand too soon. They share information you can leverage to bring them around to your way of thinking. Here’s how you help that process along.
“I think that once the other person realizes [the truth you believe the other person is unaware of] they will [explain how they could agree to your plan]. Provide me with a list of insightful questions to ask during negotiations to help me find new ways in, as well as understand the other party’s motivations to make this more likely.”
If you can predict the other party’s objections in advance, you can plan exactly how you will handle them. You’ll know what to say and nothing will catch you off guard. Even if you pretend your solution is off-the-cuff, the outcome of this exercise is effective. They feel seen and heard and you have the chance to think. Get ChatGPT’s assistance in handling objections before they arise.
“How can I anticipate and address potential objections or concerns raised by the other party during this negotiation, ensuring a smoother and more successful process? Some objections I believe they have are [explain their problems] but I’d like to pre-empt every possible issue.”
You win, they win. Wins all round. If everyone left the conversation happy with the way forward, that would mark a successful result. No lasting resentment, no feelings of inferiority or axes to grind, just a plausible solution and a plan of action. There is nearly always a win-win to be had, you just might need a little assistance in finding it. Let ChatGPT make some suggestions that you can explore or discard as needed.
“Assist me in generating creative win-win solutions that benefit both parties and foster a collaborative atmosphere during negotiations. Potential win-win solutions I have thought of are [explain any you have in mind] but I would like to think of more so I can assess before presenting them.”
As soon as you get emotional, you lose. Letting anything other than your best self lead a negotiation will see you make irrational, illogical and temper-driven statements that only serve to harm your case. Don’t let that happen. Take deep breaths and ask for a minute to think so you can get some perspective. Do whatever you can to maintain your pokerface and keep your cool. Get ChatGPT’s advice on how to do exactly that.
“In a heated discussion, I sometimes find myself [explain the ways you might lose your cool]. I don’t want to do that here. Give me strategies to keep my composure when engaging in this discussion, so I can continue to direct the conversation positively and achieve my ideal outcome.”
Leverage ChatGPT to develop and refine your negotiation skills by using the language model as your personal AI negotiation coach. Start strong, ask better questions, pre-empt objections and find the win-win. Finally, keep your cool to ensure your hard work doesn’t go to waste. Use these prompts for valuable insights and guidance to handle any negotiation like a pro.
While real estate is often a significant investment, it also often requires you to move quickly to obtain great properties. Moving quickly, however, can be difficult, especially if you’re working as an investor and you have funds tied up in other properties.
To move on strong opportunities as soon as they present themselves—and with cash offers that can set you apart from the competition—having convenient, fast access to short-term funding as opposed to a traditional loan can be a game-changer.
A bridge loan can present that opportunity.
A bridge loan—also known as a swing loan—is a short-term financing option that is meant to serve as a source of funds until the buyer either secures permanent financing or eliminates some specific existing debt. The debt repayment period typically lasts between six months to a year.
Conventional buyers use bridge loans to purchase a new home before selling their existing home. While some investors may use a bridge loan for something similar when offloading one property in favor of another, they may also use a bridge loan to pay off an existing property or other debt obligations to receive funding for another. Or they may use it to help with a down payment.
Bridge loans are most often used in real estate by sellers who need to relocate before they’re able to sell their home. They’re also regularly used by real estate investors for a variety of reasons. Investors often use short-term funding from bridge loans to do the following:
Knowing how a bridge loan works is important in deciding if they’re right for you.
Bridge loans are a type of specialty nonmortgage financing that leverages equity in an existing property or investment, most often a home, to offer quick, short-term access to capital. It’s designed to cover a transitional period. In most cases, buyers temporarily may have a mortgage on their first home, a mortgage on a second property, and the bridge loan itself.
For this reason, bridge loans tend to require a low debt-to-income ratio, a high credit score, and a certain percentage of equity in your property. In many cases, banks may require a minimum of 20% equity in a home before you’re eligible for a bridge loan, as that will be used as collateral to secure the loan.
While terms and conditions of bridge loans vary significantly based on a number of factors— including the requested loan amount, the lender you choose, and your specific situation—you can expect that it will cover a period of six months to a year.
Some bridge loans may require you to make set payments every month, while others may have a specific payment schedule requiring set amounts to be paid at the beginning and/or end of the loan period in a lump sum payment. In these cases, you may have interest-only payments month to month, and then the lump sum payment at the end of the loan term.
Because bridge loans are very short-term loans compared to traditional mortgages or other long-term loans like home equity loans or home equity lines of credit (which may have a draw period of around 10 years and a 20-year repayment period), they’re likely to have higher interest rates and therefore, higher monthly payments.
The good news is that they also have much faster application-to-close processes. You may be able to obtain a bridge loan approval—and funding—in as little as 10 days with some lenders.
There are plenty of bridge loan pros for real estate investors.
If you’ve got money tied up in one property and need cash to close on an investment quickly or for a down payment, a bridge loan can offer that flexibility. They’re an outstanding temporary option, offering temporary financing while you secure permanent financing, reducing cash flow concerns significantly.
Bridge loans can be completed and funds can be in your account in as little as 10 days. That’s much faster than some other types of loans, including home equity loans or lines of credit, which can take anywhere from two to six weeks on average for approval. This is a huge advantage in real estate, where you need to move quickly.
Plenty of credit unions, big banks, and online lenders offer bridge loans, giving you flexibility and the ability to shop around for rates if you plan ahead.
If you don’t have the cash to put down the down payment you want on a property, you could easily end up with PMI, which is just an extra cost, and many investors prefer to avoid it when possible.
While closing costs vary significantly by the lender offering the bridge loan, you can expect to pay between 1.5% to 3% in closing costs. This is less expensive than other options, including refinancing a mortgage, which you may do to remove PMI and could cost closer to 2% to 6% in closing costs.
Just as there are pros of bridge loans, there are also some cons of bridge loans that real estate investors want to consider. These include the following disadvantages that bridge loans typically involve.
Because bridge loans are not a long-term financing solution, you’ll pay interest rates that are much higher than you would with a traditional mortgage (or even second and third mortgage payments, depending on your properties). Bridge loan interest rates increase and decrease like all other rates, but average around 6% to 10%, based on the prime rate.
A short repayment period can be an advantage, but it can also be a negative. Short repayment periods mean not only higher interest rates, but a higher monthly payment, and if you’re paying off a significant part of the loan in a lump sum balance (especially since this is at least a second loan), that may be difficult to pay off for some investors.
Bridge loans are meant to be used for bridge financing during a transitional period. It’s very likely that you’ll need to find a long-term solution for financing, potentially including a second mortgage if needed.
Bridge loans require high equity in your home, low debt-to-income ratios, and a strong credit history. Not everyone will be eligible, especially if you’ve already got an expansive portfolio of investment properties with loans attached.
Once you take out a bridge loan, it will impact your debt-to-income ratio until you pay it off. That ties up more of your home equity, so you likely won’t be able to apply for other financing (like a home equity line of credit, which some investors may use to access funding to repair, remodel, or secure additional properties).
Any time you’re using collateral to secure financing, there’s a risk. You could lose not only the new investment property, but the first home, too. While well-planned investments typically prevent this from happening, there’s always a risk—especially if the market takes a turn and a home sells for much less than expected.
Interested in using a bridge loan as a short-term loan option?
The first thing you need to do is assess whether it’s a fit for your needs and your existing situation. To do this:
Once you’ve done this, start researching vendors. There are plenty of options, including credit unions, big-name banks, private lenders, and online lenders. Most will list basic loan terms online, but you’ll need to talk to a lender directly to get the full details. If possible, shop around to find the lowest interest rates and the best loan terms that work for your needs.
After choosing a lender, apply. Almost all lenders have secure online loan application processes. Your finances and credit history will be reviewed, and depending on the lender, they may require a property appraisal. You’ll be given a detailed loan overview that will include your interest rate and repayment schedule.
Loan approval may happen in as little as 10 days, depending on the loan officer. Funding will arrive in your account, and you can start investing!
If you need to borrow money to secure a new property or help make a down payment, bridge loans are a solid option for real estate investors. You should, however, consider your needs and whether bridge loans are right for your real estate transactions.
Home equity lines of credit, a home equity loan, construction loans, short-term loans, and long-term loans are all bridge loan alternatives for real estate investors. They have varying pros and cons, ranging from extended draw periods, different repayment periods and terms, and different interest rates. Some may also have restrictions about how you use the funds, while others don’t.
Take time to research your options, ideally before you start prowling for new investments, so that you’re ready to act quickly. However, when in doubt and when you need funds fast, bridge loans can be a great option.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
Home prices are on a tear again across much of the nation after falling for much of last year. That means giving back to homeowners the equity they lost.
Home prices in June hit record highs in 60% of U.S. markets, according to a new report from Black Knight, set to be released Monday. Its national home price index hit a new high in June, up 0.8% from June of last year — a stronger annual growth rate than May.
Nearly every major market saw gains month to month, with the overall index gaining 0.67% from May to June.
Home prices are rising again, because there is far too little supply to meet the current demand. Higher mortgage rates have been a huge deterrent for current homeowners to list their homes for sale because they don’t want to trade up to these higher rates on another purchase.
That home price growth has made homeowners wealthier again. Home equity levels are now back to within 3% of last year’s peaks.
Total equity hit over $16 trillion with tappable equity, which is the amount most lenders will allow you to take out while still leaving 20% equity in the home, rising to $10.5 trillion, just 4% off its 2022 peak. Per homeowner, that is roughly $200,000 in cash sitting in the house, ready for the taking.
As a result, negative equity, or so-called underwater borrowers, are nearly nonexistent in today’s market. Just 344,000 homeowners currently owe more on their homes than the properties are worth.
While that number is a 70% jump from this time last year, according to Andy Walden, Black Knight’s vice president of enterprise research strategy, “everything is relative.”
“There are less than half as many underwater homeowners than there were in 2019 before the onset of the pandemic, with only 3.9% having less than 10% equity, down from 6.6% in 2019,” Walden said.
Of course, all of this virtually destroys home affordability for today’s potential buyers: Affordability stands at a 37-year low.
As a comparison, current homeowners, most of whom carry mortgages with rates between 3% and 4%, need just 21% of the median household income to make the average monthly mortgage payment — principal and interest. Prospective homebuyers today are looking at paying more than 36% of their income on that payment thanks to higher home prices and higher rates.
The average rate on the popular 30-year fixed mortgage hit 7.2% on Thursday, according to Mortgage News Daily. Just two years ago it was around 3%.
“The small relative share of income needed for existing homeowners to meet their mortgage obligations, along with the strong credit quality of today’s mortgage holders and an acute focus on loss mitigation by the industry at large, are all contributing to today’s 16-year low in seriously delinquent mortgages,” Walden said.
Correction: Just 344,000 homeowners currently owe more on their homes than the properties are worth. An earlier version misstated the number.
Record high home prices mean you may have cash hidden in your home Read More »
Business leader discussing growth with team
There’s a Zig Ziglar quote that says your attitude determines your altitude. The saying encourages those who hear it to develop a growth mindset, embracing challenges as opportunities. Instead of viewing setbacks and less-than-ideal circumstances as signs it’s time to throw in the towel, teams with growth mindsets forge ahead. They continue to put forth effort until they find a solution, seeing each attempt to succeed as part of the learning process.
Adopting a growth mindset can lead to high performance, even during challenging economic times. When sales take a dip and customers seem more on edge, your team may take it personally. But this can lead to what’s known as a fixed mindset, where individuals give up easily and ignore insightful feedback. It’s the opposite of what you want for your team and business. Here’s how to foster a growth mindset among your employees during belt-tightening times.
Fostering a growth mindset doesn’t mean sugarcoating the facts. When consumers spend less, it impacts nearly every business in some way. If you’re a telecom company, maybe you saw a surge in new customers during the pandemic. They needed reliable ways to stay connected from home, including high-speed internet. But now your company’s experiencing a drop as customers look to consolidate and minimize household expenses.
Whichever way the economy is influencing your company’s sales volume, be honest about it. Set realistic expectations with your team about sales forecasts. Let them know you anticipate ups and downs. The good times may be over now, but they can and will return. Plus, lower sales don’t mean there won’t be any wins at all.
Survey research shows people tend to spend their money differently during a recession. The essentials, such as rent and groceries, become higher priorities. Consumers might be less willing to fork over their paychecks for something frivolous. But they’ll occasionally treat themselves to a movie or a new outfit. These are the opportunities your team should still view as chances to bring in business and build future customer loyalty.
Remember how a growth mindset perceives challenges as opportunities instead of an indication that it’s time to quit? Well, leaders who want their teams to see obstacles as opportunities plan for them. They realize there will be setbacks regardless of the economy’s performance. Whether the market’s having a heyday or dropping fast, obstacles are part of being in business.
Preparing for the unexpected is wise, but so is anticipating which setbacks are most likely to happen. Outlining weaknesses in your operations and approaches can become lessons in ways to improve. Maybe there are shortcomings in your lead-gen strategies. They’re not as obvious when the economy’s roaring, but they become stumbling blocks when prospects cut back.
Knowing these hurdles will appear during tough times is a chance to task the team with a problem-solving project. Bring them together to share insights about what they’re hearing customers and leads say about the company’s approach. There could be a “Holy crap!” idea in there somewhere. Have the group try out their ideas, framing them as experiments in discovering what works. It’s all right if something doesn’t pan out as long as they persist in finding what does.
Employees are less likely to listen to feedback when they don’t feel leadership cares about their well-being. While managers often must find an appropriate balance between positive reinforcement and constructive criticism, staff members should feel it’s OK to make mistakes. Employees should also feel leaders welcome their ideas.
Asking direct reports for their opinions is a good thing, but not if you’re only paying them lip service. If it’s only the ideas of leaders that get implemented, employees will stop talking. They’ll perceive they’re just there to take orders and believe they have to deflect from their mistakes to survive. Staff members may also think leadership doesn’t value customers’ experiences, leading to disengagement and burnout.
Gallup’s research shows only one in five employees strongly agree that leaders make decisions in their customers’ best interests. Those who do are four times as likely to feel pride in their organizations’ products and services. Staff are more invested in exceeding clients’ expectations when they feel leadership truly cares. When customers’ needs change in a tough economy, empathy from leaders can determine whether employees follow orders or innovate.
People with growth mindsets don’t see challenges as threats. They see obstacles as a chance to discover something new or solve an ongoing problem. Economic uncertainty is one of the many hurdles businesses face. However, it can cause employees to give in to feelings of anxiety and defeat.
Leaders who foster a growth mindset during cutbacks teach their teams to learn from what’s happening. They’re transparent, strategic and supportive. It’s not about succeeding as soon as possible. It’s about trusting the process and acknowledging what the team knows today that it didn’t yesterday will enable them to succeed tomorrow.
How To Foster A Growth Mindset In Belt-Tightening Times Read More »
Paying property taxes can feel like an incredible burden, especially when you own rental properties. Operating expenses, financing costs, and property taxes can feel like they take any profits you’d earn from your rental property, making it difficult to get ahead.
Tax deductions are often a way to reduce liabilities and increase profits, but are property taxes deductible?
Unfortunately, investment property real estate taxes aren’t deductible on Schedule A, like the deduction homeowners may take on the home they live in full time. But, the good news is there may be a way to write off the hefty cost of property taxes and increase your profits.
Here’s everything you must know about rental properties and real estate taxes.
Property tax is the tax real estate owners pay to own commercial or personal property. The local city or county government determines the property’s assessed value and calculates the property taxes accordingly.
Most state and local government agencies rely on property taxes as income, and all states charge property taxes, although the tax rates vary by location.
In any state, if you fail to pay your property taxes, your taxing authority will place a lien on the property or hold a tax lien sale. This means you must satisfy the lien before selling or transferring the property and could be subject to large penalties and fines.
You pay property taxes whether you finance the property with a mortgage, pay mortgage interest, or pay cash for the property.
A property tax deduction is money paid for state and local taxes that homeowners may be eligible to deduct from their federal income taxes. It reduces the income taxes owed on property taxes paid on an eligible property.
Home and property owners must pay real estate taxes whether they live in the property or rent it to tenants. If you are the owner of record, you must keep up with the property taxes owed to avoid liens on the property.
You should include the total cost in your rent charges to ensure you have enough to cover the monthly mortgage payment, property taxes, and other operating expenses and still make a profit.
You may be eligible to write off property taxes paid on a primary residence, vacation property, or land each tax year. You may also deduct property taxes paid on cars, RVs, and boats.
Did you notice that we didn’t mention rental property tax deductions? That’s because the property tax deduction for your principal home or vacation homes doesn’t apply to rental properties.
Still, there are ways to get a lower tax bill as a real estate investor if you prove your real estate investments are a business and not passive income.
Technically speaking, real estate investors cannot deduct property taxes paid on Schedule A (Itemized Deductions), but there is a way around it, which we’ll discuss.
In general, you also cannot deduct property taxes on the following:
If you have an escrow account to handle your property taxes, you can only deduct the taxes paid for the tax year. Your property tax bills will show how much property tax you paid, regardless of how much money you might have put into your escrow account.
Your lender determines how much money you must put in your escrow account based on the local taxes and any other accounts you have included in your escrow account, such as homeowners insurance. They may collect more money than they pay, as some lenders require a cushion to ensure your account isn’t short.
For example, suppose you paid $10,000 into your escrow account, but your lender pays only $5,000 for your real estate tax liability. In that case, you may only deduct the $5,000 paid if you’re eligible for the deduction. Your lender will reassess your escrow payment each year to ensure you don’t overpay or underpay the amount needed.
The Tax Cuts and Jobs Act of 2017 (TCJA) limited homeowners of a principal residence to a maximum deduction of $10,000 for property taxes on their full-time home. In addition, the TCJA increased the standard deduction, and only taxpayers claiming itemized deductions can take advantage of the property tax deduction.
This limits the number of homeowners who can take advantage of the deduction. With a higher standard deduction, it won’t benefit many taxpayers to itemize deductions.
However, if you actively participate in your real estate business, you may be eligible to deduct the full amount of your property tax payments on your investment properties, regardless of the $10,000 limit on owner-occupied properties.
There are two ways you can claim the property tax deduction. The proper method depends on whether you claim taxes on a primary residence/vacation home or rental property.
To claim the property tax deduction on your principal residence, you must have itemized deductions that exceed the standard deduction.
For 2023, the standard deduction is $13,850 for single filers and $27,700 for married filing jointly taxpayers. If your total deductible expenses, including property taxes, exceed these amounts, you may claim the property tax deduction.
To verify the amount of property taxes paid, check your property tax bill or paid receipt from the county when you paid them. If you have an escrow account, you can log into your county assessor’s website and see the total amount of taxes paid on the tax records or contact your mortgage servicer to determine the total amount paid.
When claiming the property tax deduction, you must file IRS Form Schedule A, which provides an itemized list of the eligible deductions into which property taxes fit.
How can you deduct local property taxes paid on a rental property? You don’t live there, so it’s not a principal residence, but it’s also not a vacation home. So, can you deduct your tax payments and get the tax benefits?
There is one loophole: write off local real estate taxes as a business expense. However, to do this, you must prove you have a real estate business and aren’t just trying to earn a passive income from a property.
Here’s the problem: generally, the Internal Revenue Service considers real estate income passive, which is not eligible for business tax deductions. But there’s a loophole. If you can prove you materially or actively participate in the real estate business, you may be able to deduct the real property taxes paid as a business expense.
In true IRS fashion, there are a couple of ways to qualify:
Since the real estate taxes paid are a part of your business administration activities, you aren’t subject to the same $10,000 limit that the Tax Cuts and Jobs Act implemented.
This means you may deduct a larger amount of taxes paid, reducing your liabilities and increasing your profits. You’re still subject to the $10,000 limit on your primary residence, but any rental properties owned will not be subject to the same rules.
To claim your investment property real estate taxes, you must report all rental income and expenses, including property taxes, on Schedule E of the federal tax return. Ensure you have ample proof of the amount paid for taxes by providing your paid tax bill or the receipt from your local government agency.
As a real estate investor, you want to limit expenses and increase profits. While it takes a little work to prove you qualify, here are a few ways to maximize your property tax deduction.
If you don’t meet the IRS guidelines for materially or actively participating in real estate, you lose the ability to write off many expenses, including property taxes.
Don’t let your activity be considered passive if you want to make your real estate business a major source of income.
If your state or county allows it, prepay your property taxes to get the deduction in the year you need it.
This works well when you have a lot of capital gains to pay taxes on, such as after selling a property for large capital gains.
Working with a tax advisor or attorney can help determine what steps you can take to maximize your property tax deduction and any other deductions to maximize your profits and save money on your tax liabilities.
If you wonder if “are property taxes deductible,” it depends on the type of property in question. If you itemize deductions, you can likely deduct property taxes on your primary residence; however, it’s not that simple for rental properties.
To be eligible to deduct taxes on investment properties, you must meet the IRS guidelines regarding real estate professionals, and then you can deduct the expenses as a business expense.
Dreading tax season?
Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
Are Property Taxes Deductible? | BiggerPockets Blog Read More »
Former U.S. President and Republican presidential candidate Donald Trump looks on as he speaks during a campaign rally in Erie, Pennsylvania, July 29, 2023.
Lindsay Dedario | Reuters
The independent financial monitor for the Trump Organization told a New York judge she identified issues of incompleteness and inconsistency in certain disclosures to lenders and others by the company owned by former president Donald Trump.
Barbara Jones, the monitor, told New York Supreme Court Judge Arthur Engoron that Trump and his company defended the Trump Organization’s disclosure practices in the areas she had flagged, but will change how they disclose information in light of her claims.
“In the interest of cooperation and transparency, Defendants have agreed to address in future disclosures to lenders the items I have identified and otherwise adjust their practices based upon my observations,” Jones wrote in a letter filed in court Friday.
CNBC has reached out to lawyers and representatives of the Trump Organization requesting comment about Jones’ claims.
The former federal judge was appointed in November as a financial monitor as part of a case where the company, Trump and several of his children are being sued by New York Attorney General Letitia James for alleged widespread fraud related to financial statements.
The trial in the case is set for Oct. 2.
James, last year, requested an outside monitor after becoming concerned that Trump was trying to move the legal structure of his companies out of New York to avoid her jurisdiction.
Engoron wrote that James’ request was justified given the “persistent misrepresentations throughout every one of Mr. Trump’s [Statements of Financial Condition] between 2011 and 2021.”
Jones, in her letter to the judge, noted that the Trump Organization is comprised of assets held by the Donald J. Trump Revocable Trust, which acts as a guarantor for loans and owns commercial and residential real estate, hotels, golf courses and licensing ventures, among other things.
During her review of nine loan agreements, more than 75 financial disclosures and thousands of supporting documents, Jones said she observed that “information regarding certain material liabilities provided to lenders … has been incomplete.”
Those liabilities, she noted, included “intercompany loans between or among Truth entities and Donald J. Trump, certain of the Trust’s contingent liabilities, as well as refundable golf club membership deposits.”
Jones wrote that “the Trust also has not consistently provided all required annual and quarterly certifications attesting to the accuracy of certain financial statements.”
She noted that the company’s annual audited financial statements for certain entities, which are prepared by an outside accounting firm, “list depreciation expenses.”
“However,” Jones added, interim financial statements given to third parties, which are prepared internally by the Trump Organization about the same entities, “inconsistently report depreciation expenses.”
The attorney general, in her lawsuit, alleges the defendants committed widespread fraud involving years’ worth of false financial statements related to the company’s business.
James is seeking $250 million and a bar on the Trump Organization from doing business in New York.
James alleges that Trump massively overstated the values of assets in statements to banks, insurance companies and the IRS to obtain more favorable loan and insurance terms for his company, and to lower its tax obligations.
Trump Organization monitor tells judge about disclosure issues Read More »
