Category: Tax

01 Jul 2017

7 Reasons You Should Be Investing in Real Estate

 

Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.~Andrew Carnegie

Real estate investment is one of the fastest and safest ways to build wealth and grow your net worth in this country. 

Just to be clear, when I talk about real estate investing, I’m not talking about buying a home to live in.  That sort of investment takes money out of your pocket every month.  When I talk about real estate investing, I am talking about buying cash-flowing rental property that puts more money into your pocket. 

Source: Creative Commons – Mark Moz

There are 7 main reasons why you should have real estate in your portfolio:

1. Cash Flow Opportunities

Tenants pay rent. After expenses, what you have is monthly, recurring mostly passive cash flow.  This is a benefit that most real estate investors expect and understand. 

This is also something that differentiates real estate from investments in stocks.  Cash flow does not happen for the vast majority of stock holders.  Typically, you only make money when you sell the stock after and if the stock value has gone up.   

2. Appreciation

Sometimes properties lose value, but over the long term the value of real estate will nearly always go up. This happens while the loan is being paid down, so as your property gains value or equity your net worth increases.

Sometimes appreciation is a product of growth in the market and sometimes appreciation can be “forced,” by making targeted improvements in a property.

We invest in apartment buildings.  For our apartment buildings we work toward both types of appreciation.  We buy in markets where we expect market values to rise over the next few years. 

We also buy buildings that are renting under market because the apartments are old and in bad shape and the previous owners are unable to charge market rents.  By rehabbing the apartments, we are able to start charging more rent and increase the value of the building.  This is called “forced appreciation.” 

When we sell the properties in approximately 5 years, we also recoup any appreciation in the market that may happen because neighboring properties are also selling for more. 

3. Federal tax benefits

There are many tax benefits to owning property.  Many people aren’t aware of them, but they’re one of the best benefits to owning real estate. 

The government long ago decided that it wanted to encourage property investment, so there are many benefits that help people substantially lower their taxes including depreciation, mortgage and property tax deductions, no self-employment tax on rental income and more.  Because of the many tax benefits, real estate investors often end up paying less taxes overall even as they are bringing in more income. 

4. Leverage:

The ability to leverage is one of the greatest benefits of real estate investment.  There are 4 ways to use leverage to enhance your real estate strategy and investment options

1) You can leverage with money. 

This is by getting a mortgage and/or having investors invest with you.  You leverage other people’s money (OPM) to buy a property.

An example of how we leveraged money was when we invested in a 77-unit apartment building in Albuquerque, New Mexico. 

We got a loan from a bank for 80% of the value of the building.  We also partnered with other investors to pay the 20% of the down payment plus the rehab.  We invested our time and leveraged other people’s money to buy this property. 

2) You can leverage with time. 

If you passively invest in projects, you can leverage other people’s time. 

The active investor will find the deal and manage it, while the passive investor provides the funding. You can invest in real estate while using OPT.  If you’re part of a syndication, you’re also able to take advantage of OPM because you’re piggy-backing off of all the other investors to get into the deal.

You are also leveraging time when you have property managers doing the work for you, and all you need to do is collect the profits each month. All of these time-leveraging strategies give you more time while still putting your money to work in real estate.

3) You can leverage other people’s experience.

If you’re new and don’t have experience, you can leverage the experience of others. 

When we were just starting out we were able to leverage the experience of others to help us get in the door and get our properties. 

Our next-door neighbor Lydia is a bad-ass real estate investor goddess.  She is the vice president of an investment fund and has personally worked on over $1.5 billion worth of syndications. 

She had done most of her syndications under the aegis of her employer and wanted to work on her own deals.  She was incredibly busy with her job though.

We had more time available, but not her experience.  We were able to do a lot of the leg work and she was able to (much more quickly than us) evaluate and underwrite deals. 

We partnered with her and her husband to find deals.  With her vast experience on our team resume it was very easy to open doors and get brokers/lenders to take us seriously. We leveraged her experience to dramatically expand the breadth of our own knowledge while making money in real estate in the process.

4) You can leverage with the property itself.

The more units you have the more leverage you have within the property itself.

If you have a single-family rental, if you lose a tenant, your place is empty you are losing money.  You have zero income yet still have to pay the mortgage, insurance and property taxes.

If you have two units and you lose a tenant, you’re still making 50 percent of your income.  If you have 10 units, and you lose a tenant, you still have 90 percent of your income.  If you have 100 units, and you lose one tenant you’ll still have 99 percent of your income.  You get the point.

Source: Wikipedia Commons

Leverage also works in the positive.  If you leverage a bigger property, small changes make a huge difference. 

If you have a single-family home and are able to raise rent by $50 per month, you can make an extra $600 per year.  If you have a 100-unit apartment building you raise rents $50/month that’s $5k/month or $60k/year income. Furthermore, because the value of a 5+ unit is based off of net operating income, these increases will significantly increase the value of the property.

Lastly, when you have a larger place you have economies of scale that make it more cost effective to pay for professional property management.  This means that you can have more tenants, but do less work (no fixing toilets for you!).

5. Principle Pay Down

As you pay down your mortgage (which is OPM) with interest, with each payment you pay back some principle and come closer and closer to owning the property free and clear. This is allowing you to build equity and wealth. 

The doubly nice part about that is when you have a cash-flowing income property, your tenants are paying this down for you and helping your build your wealth and equity at the same time.

6. Re-finance

A re-finance is when you put in a new mortgage on a property.  If your property has equity (from appreciation plus principal paid own), you can do a cash-out refinance (pull out some of the equity gained).

The best thing about a cash-out refinance is that it is not a taxable event.  You have pulled out this income tax free. 

A savvy investing goddess will use this cash-out refinance to buy more income properties, and grow her wealth in that way.

This is what one of our Real Estate Investor Goddesses, Sarah May did.  She and her husband saved up some money and put a down payment on a duplex.  They rented it out and started cash flowing on that. 

They were able to save up some more for another duplex.  From there they did a cash-out refinance and bought another duplex.  Then she just “rinsed and repeated.” 

When I interviewed her for this book, she had just closed on her 10th income property, a fourplex, in the Denver Area where she lives.  She and her husband did this in under 10 years. 

And as of last year, they had created enough passive income from their real estate that she was able to “retire” from her 6-figure job as an engineer to be with their toddler full-time and to work on acquiring more real estate.    

7. Real Estate is a “Feel-Good” Business

Having a business that simply “feels good” is particularly important to women.  In a recent interview I did with Barbara Stanny, women and money expert, she said:

Once a woman has enough to have food on the table, a roof over her head, and a mani-pedi every once in a while, she no longer is motivated by money.  What motivates her is how to help others.  It’s a very different game.  ‘How can I help others and be richly rewarded?’

If you invest according to the mission of the Real Estate Investor Goddesses, you can help others and be richly rewarded.

Our mission at Real Estate Investor Goddesses is to invest in properties that enable us to:

-make a property and a community better than we found it

-only engage in win-win transactions

-ensure that everyone touched by our deals is uplifted and benefits from their involvement 

If you make a property and community better than you find it, than you are benefiting the tenants and neighbors.

If you are engaging in win-win transactions, it benefits all involved.  Sellers are happy and you’re happy.

Everyone touched by your deal can be uplifted and benefited. Your income property is like a ripple of prosperity that spreads throughout the community. In every transaction the sellers, brokers, agents, property managers, other investors, and other service providers (lenders, accountants, contractors) are enriched.

And personally it feels good because while you are doing all this good you are making more money passively (i.e., even while you sleep, go on vacation, etc., your properties are making you money).  This gives you financial and TIME freedom.  Don’t you feel good already?

Monick Halm is the author of The Real Estate Investor Goddess Handbook:Everything You Need To Know To Start Investing in Real Estate Like a Goddess.  She is the co-founder of Real Estate Investor Goddesses, and is herself a real estate investor, syndicator, and developer with over 12 years of investing experience in single family, multi-family, and RV/mobile home parks. She and her husband own over 1000 rental doors in 6 states.  She is also a certified interior designer, Feng Shui expert, Intuitive Abundance coach, and attorney.  Monick is passionate about real estate, design, and helping women to thrive.  You can connect with her at www.realestateinvestorgoddesses.com or on twitter as @monickpaulhalm.

30 Jan 2017

The #1 Tax Mistake Most Real Estate Investors Make

Amanda Han, Managing Director of Keystone CPA, Inc.

Last week we interviewed Amanda Han of Keystone CPA, Inc. on our Real Estate Investor Goddesses podcast.  She’s a real estate investor herself as well as a CPA with years of experience in real estate and taxes.

Her interview was chock-full of great advice about how to save more money and what to look out for in the near future tax wise.

There were tons of nuggets of wisdom that she laid down during the interview.  One of the best nuggets was when she shared the #1 mistake she sees most real estate investors make.  This is a mistake that leaves money on the table or in the government’s hands if you will.

If you like paying more in taxes, read no further.

If you’d like to be able to get legitimate tax deductions through what she calls “grateful expenses”, then keep on reading.

What Amanda calls “grateful expenses” are expenses that people are grateful to be able deduct because they’re expenses that you’d have anyway, but because they are expenses that are “reasonable and ordinary” for real estate investment, they can be moved from the personal non-deductible bucket to the deductible bucket.

Examples of these “grateful expenses” are:

  • cell phone
  • computer
  • home office
  • travel costs
  • car
  • dinner with potential investors
  • books on real estate investment or personal development

 

How do you know if an otherwise personal expense should be classified as a legitimate business expense?

 

Amanda says you should ask yourself:

“Would an ordinary real estate investor have this expense?”

If the answer is yes, than you can deduct it.

Most people don’t realize this is possible, so they miss all these deductions.  They don’t claim the hundreds and sometimes thousands of dollars in deductions they could legally claim.

And the nice thing is these business deductions are not just for LLCs and Corporations.  Even if you’re a W2 employee doing real estate on the side, you can take advantage of these business deductions.

Pretty cool, right?

Amanda gave tons of other great advice during our 3o minute interview.  Check out her interview on Blog Talk Radio or on iTunes, and make sure you subscribe so you don’t miss the other great  content and interviews we have every week.

Monick Halm is the co-founder of Real Estate Investor Goddesses.  She is a real estate investor with over 11 years of investing experience in single family, multi-family, mobile home parks, flipping, and syndication. She is also a certified interior designer, Feng Shui expert, author, speaker, certified NLP and money coach, and attorney.  Monick is passionate about real estate, design, and helping women to thrive.