First Time Real Estate Investors how to Choose the right Area first Property

Why invest in Real Estate?

When you look at investing in Stocks there is always the same mantra: Work Hard – Save Money – Get out of Debt – Invest for the Long Term – Diversify. However, to invest in Real Estate, it is the opposite: DO NOT DIVERSIFY – FOCUS = Follow One Course Until Successful! By finding a particular niche you can succeed in, develop a system that works and implement that same system over and over. What are you looking for in real estate investing:

Cash Flow: Goal is to have a monthly positive cash flow from each individual property. This is then used to invest in other Real Estate investments. Also you build up a cushion for when times are bad. Income = Cash Flow! Earn a Profit. Cash on Cash return on your investment. Make your money when you BUY!

Appreciation: You are not taxed on the annual appreciation (increase) in value of your property until you sell. (This is similar to the tax treatment of other capital investments, such as mutual funds and bonds.) Passive appreciation neighborhood appreciates causing your property to go up in value. Active appreciation Paint, rezone, update the property, add more rooms, clean up the landscaping. You can refinance taking cash out at the higher value and there is no tax on this money.

Leverage: In order to purchase additional rentals, you can borrow against the equity in other rentals you own and use it as leverage to obtain your down payment, making the interest expense tax deductible. Wealth building strategies of Real Estate: Leverage of Money, Leverage of Time, Velocity = how fast are you going towards your goals, Cash Flow, and Risk Reduction. Difference between a Saver and an Investor is Leverage. You can preserve your capital and increase your available funds by using leverage!

Relief from taxation: You can choose to “exchange” your investment property for another like-kind property, tax-deferred. (Since tax laws are so complex, consult with your tax adviser) If you should decide to move back into one of your rental properties and occupy it as your primary residence for at least two out of five years prior to selling it, you may completely avoid paying capital gains tax on the sale. You only need to pay tax on the previous depreciation deductions claimed; you are allowed to keep the rest.

Depreciation: This allows you to claim an extra deduction each year based on the cost of your rental property (minus the land value) over a period of time, currently 27.5 years. Carpet, furniture and appliances can be depreciated over a period of five years. Outdoor fencing, driveways and planted trees may be depreciated over a period of 15 years. Depreciation expense can greatly increase your overall tax liability. You will need to note that when the rental property is sold, all previous depreciation claimed must be recaptured and will be subject to taxation. Depreciation can also be called “Phantom Cash Flow” or “Paper Losses”.

Creativity: Change the use of the property: Rezone for a higher & better use. Divide into more units, etc.

Expandability: Buy more units for more cash flow.

Inflation Hedge: Protect yourself from inflation losses.

Predictability: After 1 year the property stabilizes then cash flow is predictable from month to month.

Principal Reduction: As mortgage principal goes down Equity builds.

Special tax loss allowance: Owners of rental properties qualify for a deduction of up to $25,000 ($12,500 for married couples filing separately) against ordinary, non-passive income sources, such as wages and investment income. You only need to prove that you are an active participant (you own at least 10 percent of the rental property) and that you are actively involved in managing your rental properties. A limited partner does not qualify under the active participation test.

Tax Benefits: Tax deductions, depreciation, Tax credits like Americans with Disabilities Act (ADA) retrofits or historic building rehabilitation. Pre-1936 construction rehabilitation costs. Mortgage Interest. Rent Losses. Capital Gains = reduced tax rate. 1031 Tax-Deferred Exchange.

These help answer the question of why invest in Real Estate, but how do you get started? Tune in next time for more on this topic.