Real Estate

The topic of real estate can bring about numerous emotions. Some love it and some swear they will NEVER invest in real estate again. Others have heard about investing in real estate and even gotten emotionally hooked into the thought of “easy money” when seeing house flipping shows on HGTV.

Now flipping housings CAN make you a lot of money. You can also lose EVERYTHING if you are not careful and know what you are doing; these instances are typically not highlighted on HGTV.

However before flipping houses became a craze in the late 90’s and onward, there is a better and more stable way to make money in real estate, in my opinion. This is buying rental real estate, or simply called “buy and hold.”

This isn’t a get rich quick way nor is it near as sexy as seeing a dilapidated house being remodeled into an A class beauty that gets appraised for 3 times the original purchase price.

However, many describe real estate as the I.D.E.A.L investment, which is what makes it shine over other investments. Here is what the I.D.E.A.L. stands for:

(I)ncome – coming at top is why anyone typically invests in real estate, income or sometimes called cashflow. This is what you NET after ALL expenses of the property. After you deduct your mortgage payments, insurance, property taxes, property management fees, utilities, vacancy and maintenance you SHOULD have some money left over that goes in your pocket. EVERY month, for as long as you hold the property

(D)epreciation – without getting too technical, this is a specific part in the tax code that allows you to write off part of your investment every year to OFFSET your income. The IRS understands that property tends to wear out over time and allows a deduction to help offset those costs AND to encourage taxpayers to invest in real estate. Keeping this simple, let’s say you buy a $100,000 property. Now, about 20% or $20,000 of the property will be the land that you cannot depreciate so that leaves $80,000. Currently you can depreciate a residential real estate property over 27.5 years. Taking $80,000 divided by 27.5 years divided by 12 months in a year comes to about $242 a month available in depreciation. Why is this important? Well as we discussed on The Problem (link) at a typical W2 job, much of your income in taken out in the form of taxes. Well, let’s say that back to the I in IDEAL for income, you net $240 a month. You have to pay taxes on that, right? WRONG! Thanks to the depreciation schedule allowed via the IRS, your $242 a month of depreciation offsets your $240 of income so that the entire amount your receive is TAX FREE!!! Using proper tax planning, not one penny of your net income through real estate will be subject to taxes (note: please consult a qualified tax professional for advice as everyone’s tax situation in different and different properties have different depreciation schedules).

(E)quity buildup – Ok, so we have income and thanks to depreciation, it is TAX FREE. Sounds good, right! Well we are not done yet! Now if the property has a loan on it, there is a mortgage payment that has to be made. Each payment, has a portion going to principle pay down and a portion going to interest. As the mortgage balance goes DOWN, your equity or your wealth goes UP, every month! Now, who is paying for that mortgage payment? That’s right, your tenants! A portion of their rent every month goes to building up your equity in the property and thus increases your wealth.

(A)ppreciation – This should never be thought of as a given, as we found out in the 2008 Housing Crisis, but typically over the last several decades, real estate has appreciated on a national level about 6% annually. However, even if we took this in HALF, a modest 3% appreciation annually will grow your $100,000 property to $103,000 to $106,090 and so on.

(L)everage – This can be the most important part of your investment if structured properly. Typically, you can qualify for an investment property with only 20% down, which would be $20,000 on our previous example and the other $80,000 can come from a bank. Now if your $100,000 property appreciates to $103,000 you just gained 3%, right? WRONG! Remember, you only put 20% or $20,000 down, the rest came from the BANK. A $3,000 increase on a $20,000 investment gives you a 15% GAIN on your investment with your initial $20,000!

Hopefully I have piqued your interest and shown you just how powerful real estate investing can be. So your next question may be, ‘Where can I find a good investment property?’ Well, you could start looking in your own backyard. Or, for the new investor, you could start with a Turnkey Property.

What is a Turnkey Property?

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