- I know a few people that have investment properties and they are very happy they have them. Is that usually the case?
There are surveys that show that 95% of people that own 2 or more properties want to buy more?
- I’ve heard that there are tax advantages when you invest in real estate. Is that true?
Taxes are the largest expense for most people over their lifetime. You will get much further getting your money working for you (like your employees) in real estate investments with tax advantages than depending on your job income (highest taxed).
- So what are some of the tax advantages?
If you do have some positive cash flow (income is more than expenses), from real estate, it can be tax-free. You can be making money but actually show a tax loss due to depreciation, mortgage, and other expenses.
Plus, that real estate investment can actually reduce income taxes from your job or other income.
- Someone told me I can have an investment property and after some time go live in it as my residence and it could help me with taxes.
You can own a residential investment property for years and then move into it for 2 years and wipe out all of the capital gains taxes that you would have incurred by just selling it. There is no limit to the number of times you can do this – essentially if you own many properties, you could do it every 2 years, sell the properties and never pay capital gains taxes.
Learn to love the US Tax Code. The government wants you to own properties.
- If I own an investment property for a while, can I take money out of it if I want to? What’s the penalty?
You can refinance an investment property and take out cash tax-free?!!!
Invest in more properties, pay for college, pay off medical bills, retirement – no penalty.
- So I guess if I own a property for quite a while and it goes up a lot in value then I will pay a lot of taxes when I sell it. Right?
You can actually defer paying any capital gain taxes by just reinvesting in more or higher value real estate. This is how many investors continue to accumulate more and larger properties ove the years.
- What about when I pass on. Won’t my children have to pay all of the capital gain taxes?
Your heirs can inherit your investment property and pay essentially no taxes on the capital gains accumulated over the years that you owned the property?
- So what could I expect if I invest in San Diego?
Did you know that very nice quality investment properties in nice areas of San Diego should return 10 to 14% annual rate of return if we just have the historical average appreciation.
- Someone told me that I should just try to find properties with good cash flow. Is that true?
Cash flow is a very small part of your return on investment houses or condos. Appreciation provides by far the largest part of your return with this type of property. The combination of appreciation and leverage (having loans on properties), is what really produces great wealth over time.
- Should I try to find properties that I can repair and “flip” to make a quick profit?
My advice is No! That takes so much time and it is very difficult to find ones that makes sense. Plus, you pay so much more in taxes doing that. You will make so much more over time just buying and holding quality properties. Be an “investor” (long term investments) not a “trader” (in and out of the market). Invest like Warren Buffet.
- So shouldn’t I want to make a large down payment on a property so I get some cash flow?
My advice again is No! The initial rate of return on an investment property is about double by having a mortgage and breakeven point monthly as opposed to paying cash for a property. This difference continues to get larger as time goes on because of annual compounding. As I said, you create long-term wealth by putting just enough down to break even monthly (rent equals loan and expenses). Today that usually takes about a 25% down payment on a property.
- So shouldn’t I want to pay off my mortgage on an investment property?
You should never pay off a mortgage. Use leverage (mortgages) to buy and control more properties and your net worth will grow many many times more than owning properties with no mortgages. It’s not how much equity you have, but how much property you control that really builds long-term wealth. You put 25% down and the bank will supply the other 75% – but you get all the appreciation and other benefits. Using “good debt” wisely is what secures your future.
- Don’t I want to have a lot of equity?
Did you know that you should be looking at the return on equity for a property you have owned for a few years instead of the return on your original investment? – return on equity % goes down – as equity builds, you should take some out and invest in other properties to keep getting the optimum return on your investment dollars.
- What is “positive leverage”?
It means that you can make a higher return than it is costing to borrow. The cost (interest rate) of mortgages for investment properties now is around 4.625%. As I said before, I can show you very nice quality properties that with average appreciation are going to get 10-14% return.
Cost = 4.625% Return = 10-14% – that’s pretty much a no brainer isn’t it?
So NOW is the time to make moves to acquire properties. Take advantage of today’s interest rates.
- I am frustrated with my IRA and 401k. The returns haven’t been great and I have no control over it.
Did you know that you can usually use your retirement accounts to invest in real estate. Stock brokers and a lot of financial planners don’t want you to know that. For one thing, you can usually borrow from your retirement accounts to buy real estate. But in many cases you can at some point convert the accounts to self-directed QRP’s (Qualified Retirement Plans). Then you can invest in pretty much whatever you want.
- I want to invest in real estate but don’t know if I have enough to get started.
Did you know you probably have hidden assets that can be used to invest in real estate. You could have retirement accounts that you may access. If you have owned a house or condo for a while, you probably have equity that you could use to get your long-term real estate investment strategy started. That’s kind of “dead equity” that could be working for you.
- I don’t have any assets.
Just save enough to buy a house or condo to live in – 3.5% FHA loan, 0% VA loan. Then just live there for a few years and you will build enough equity that the rent you could get would cover your expenses. Save enough to buy another residence to live in and convert the first property into an investment rental property. Now you’ve started and you can begin a long-term strategy to secure your future.
These points are just a few of the things I can demonstrate to you. To me, it is so much better to drive by where my money and future are instead of depending on stock investment companies that I have no control over.
With the right long-term strategy, you may pay little or no taxes on real estate investments. You are going to pay a lot of income taxes with stocks, regardless if you are buying and selling now or even on your 401k when you take it out.
Contact me to discuss changing your financial future.
Don Wehner, Diversified Property Investments
760.809.3507 | firstname.lastname@example.org |www.ownrealestatebuildwealth.com