September 29, 2022

Vegas odds would suggest that if you’ve invested in real estate, it was likely to make money. Knowing when the right time to sell can be challenging. If you are unsure if now is the best time to sell and make a decent profit, the below advice may help you determine if now is the right time to sell.  You could have hundreds of reasons to sell a rental property, but here are the most common reasons people sell:

You’re Done With Real Estate Investment

Whether you’ve been investing in real estate for a few months or years, there often comes a time when you’re just over it. Maybe it wasn’t what you expected, it takes too much time and energy, or things have just naturally run its course.  There’s nothing wrong with throwing in the towel and calling it quits, as long as you do things strategically.

The Appreciation Grew Significantly

If properties in the area are selling for much more than you bought for, you may consider if you should sell. Appreciation naturally occurs, but you can expedite it by making enhancements to the home and stay on top of needed repairs.  Deciding when it’s the right time to sell when the property appreciates depends on your goals. Are you needing to save for retirement or for a shorter-term return? If you invested for retirement, you might want to hold onto the home longer so you’re certain the capital gains will be worthwhile.  It all boils down to timing the sale right, which we will discuss below. If you sell during a year you have a high income, you may increase your tax liability significantly and walk away with less money in your pocket than you thought.

Tenant Retention Challenges

You have to keep the home occupied with tenants if you own a rental property. It’s not always a simple task, and some areas that were once great markets may die out over time.  If you’re having a hard time keeping the home occupied, you may want to cut your losses and try selling for a profit so you can invest your money elsewhere.

You Found A More Lucrative Investment

If another investment appears more lucrative, you may want to pull money from your real estate investment and invest in something with potentially higher returns. If all goes well, you may want to sell your property to use the money to enhance your new investment.  If you invest the funds in more real estate investments, you may get away with a Like-Kind Exchange, which means you don’t get hit for taxes on the property since you use the money to invest in another home. However, if you’ve invested in anything else, you’ll likely pay the taxes on your capital gains, which requires proper timing.

Too Much Upkeep

Let’s face it, handling a rental property can be hard work. You are the landlord, aka the person responsible for every little thing that goes wrong with the home. You’re also must handle payments, defaults, and lease contracts.  The work load can add up quickly. You can hire a property management company, but unfortunately that will eat up a lot of your profits. If you can’t keep up with all that’s involved, you may decide to sell and invest your proceeds elsewhere. Whenever you decide to sell, you have a few considerations to make.

Tax Obligations

When you sell your rental property, you’ll owe taxes on the capital gains. Unlike primary residences, you won’t likely receive the capital gains exclusions for living in the property. You’ll most likely pay taxes on every dollar you gain.  You should try your best to time the sale to minimize your tax liability. Unless you are just over real estate investment, you may want to consider a Like-Kind Exchange or at least see if you’re eligible instead. It’s worth the money to consult with a licensed tax professional or accountant to determine your eligibility.  If you are done with real estate investing, its critical to understand the tax implications ahead of time. If you’ve owned the home for less than one year, you’ll probably pay a short-term capital gains tax. This means you’ll need to pay taxes at the current rate. If the capital gains bump you up to the next tax bracket, you’ll end up paying even more.  If you owned the home for a year or more, you’ll likely pay a long-term capital gains tax, with the average investor paying 10% of their capital gains in taxes.

Tenants

If you have tenants in your rental property when you decide to sell, you’ll need to choose how you’ll sell. Here are a few options to consider.

Wait for the lease to expire – If you have a current tenant lease, you can wait until it expires, fix up the home and list it. If you choose this option, you can market the home to any buyer, not just investors. The downside is you have to wait to sell until the lease expires. If you have a lot of time remaining on the lease, you may not make as large of a profit as you hoped if the market changes.

Pay the tenant to vacate – If you want to sell now, you may be able to convince your tenant by paying them to vacate early. How much you should offer depends on the circumstances. You may go back and forth with the tenant a few times before you can reach an agreement. You’ll likely need to pay to help them move, cover the difference between the new rent and your rent for the remainder of the lease, or come up with another compromise.

Sell with a current lease – A final option is to sell with an active lease on the property. Also known as a turnkey property, you sell the home to another investor who takes over the landlord duties and earns cash flow from day one.

Answering the above questions, will be a critical first step in deciding whether or not now is the best time to sell your rental property or if you should wait until the cards are stacked more in your favor.

September 22. 2022

Most new investors do not have a bunch of excess capital lying around to purchase a loan without some type of mortgage loan.  While there are many valid mortgage terms out there to meet the unique needs of the borrowing community, there are some loan types that should be avoided at all cost. Below we will discuss some of the worst home loan types you should avoid as well as provide you with a few reasons why these are not as good as they sometimes sound.

Balloon Mortgages

Balloon mortgages may be structured in slightly different ways, but at their core they are all basically the same. After a small period of time passes, a large lump sum payment comes do.  With a balloon mortgage, you’ll normally make payments for around a 5-7 year term. After that you’ll owe the entire remaining balance of your mortgage loan, which can often mean a payment of several hundred thousand dollars.  Some balloon mortgages don’t charge monthly payments. Other times, the monthly payment is based on what you’d owe if you were paying your loan off over a longer period of time. Regardless, whatever terms these balloon mortgage offers, there will always be a large lump-sum payment.

A lot of borrowers sometimes will take out balloon mortgages because they offer lower interest rates or reduced monthly payments.  Generally, they hope to refinance their loan before the lump-sum payment is due.  Refinancing isn’t always possible, however, and if you can’t pay off your entire loan, the property could go into foreclosure and you could lose the property. This risk with these loans far outweigh the pro’s and this is why you should avoid balloon mortgages at all costs.

Interest-only mortgages

Interest-only mortgages are structured so that you only pay for the interest on the loan and no principal. This means a lower monthly payment, however, the problem with these loans is that you don’t make any progress with paying off the property. You send interest payments every month without gaining any equity in your home.  Eventually, you’ll be required to start paying off your loan, or you’d be in debt forever. Here are a few ways this could happen:

Interest only loans are often structured as balloon loans. As discussed above, this means you pay interest only for several years and then owe a huge lump sum. Some terms may have a short interest-only period, afterwards, you’ll start to pay both principal and interest. These payments will be much higher than if you’d simply been paying principal and interest from the start. These loans carry a lot of risk. You could struggle to afford the higher monthly payments or balloon payments down the road. Since you aren’t building any equity in the property, you could be in trouble if property values decline. You could even end up owing more on the loan than the overall value of the home.

A 40-year fixed-rate loan

40-year fixed-rate loans are very similar to 20- or 30-year fixed loans. The difference, obviously, is that the loan repayment timeline is 10 years longer.  While these terms will lower your monthly payments, they also add a lot to your total interest owed. An extra decade is a very long time when someone is trying to be debt free. There’s a high probability you will carry your loan into your retirement years. This would also mean you will need to save additional funds for later. These loans may also reduce your ability to accomplish other financial goals because your interest costs would be much higher and you’d have to make that mortgage payment for an extra decade.

Instead of going with any of the above risky loan types, it’s best practice to stay with a traditional 15-year, 20-year, or 30-year fixed-rate loan. These loans have stood the test of time and remain the right options for most borrowers.  The above loan types often sound like good opportunities to potentially save on your mortgage. Chances are; however, interest rates won’t stay put for much longer and avoiding the above mortgage loan types will help keep you financial fit long term.

September 16, 2022

The pandemic changed the ways people interact with homes in a variety of ways.  Now that the worse of the pandemic is hopefully behind us, real estate investors should shift their objectives from reactive to proactive solutions that will keep unoccupied units down and profits up. One of the best places to focus your attention is on adding green features to your property that will hopefully provide significant cost savings while appealing to younger renters with a newer interest on climate issues.

Adding smart devices to your property is a smart solution to instantly make your rental properties more environmentally friendly. What’s more, there is strong indications that millennials are willing to pay more for rental properties equipped with smart technology.  By upgrading certain systems, real estate investors can make some positive impacts on the environment while attracting more renters. Additionally, they can likely boost their ROI by investing in properties with the following energy and money saving features:

Keyless Resident Locks

Keys are expensive and replacing them can cost a few hundred dollars and result in more time, energy, and physical waste.  They’re also not as secure as most people would like to believe. You may initially give your tenants two keys, but there’s really no way of telling how many copies renters will end up making on their own.  When a new tenant moves in, it’s a good idea to rekey the locks, but that expense is easily avoided with keyless smart locks which allow you to give renters unique codes to gain access. Keyless entry also allows prospective tenants to look at your properties on their own, saving valuable time when you are seeking new tenants.

Smart Thermostats

HVAC units are one of the largest consumers of electricity in a typical home. Smart thermostats have shown themselves to be an effective way to lower the overall electrical pull, providing energy savings upwards of over 30% monthly.  Additionally, adding sensors that shut off the HVAC when a door or window is left open, can further increase the potential energy savings.  Smart thermostats are valuable for your property when it is left unoccupied because they make it easier to manage HVAC costs and humidity levels in vacant properties. They also reduce vacancies by making properties more attractive to potential renters who are interested in lower heating and cooling bills.

Water Leak Sensors

The typical household will leak as much as 10,000 gallons of water each year, amounting to almost 1 trillion gallons wasted nationwide. Water leak detectors, flow valves, and shut-off valves reduce this waste, but they also help protect major property investments. Water damage emergencies can cost tens of thousands of dollars, and they impact thousands of Americans every day. A few inexpensive smart devices are money well-spent when it comes to protecting both your properties and the environment.

Solar Power

The IRS currently offers a 26 percent residential solar tax credit that applies to both the purchase and installation costs of solar power solutions, and some utilities will buy back unused electricity generated by solar power. As consumers prioritize measures designed to protect the environment, solar panels are an attractive proposition.  They’ll likely become even more important as electric vehicles grow in popularity and increase household energy consumption.

It should come as no surprise that waste hurts wallets in addition to the environment but that makes an even stronger case for real estate investors to go green. The categories above highlight smart rental property investments, both because they’ll save money and energy and because they attract a growing group of environmentally conscious renters.

September 8, 2022

Investment properties are properties in which the owner plans to make a return on investment through either rental, resale, or both. With the right planning and management, they can be a nice way to earn additional income. But sometimes, they can be a slippery slope into financial distress. If you’re planning to invest in real estate, here are a few hard truths about what could potentially await you.

Initial Costs Can Be Steep

Buying property is a costly affair in general, let alone when you’re venturing down the investment avenue. Financing the purchase of your investment property could well be your first hurdle, especially if you already have a mortgage. One way you can do this is through a cash-out refinance, however you will need to have sufficient equity in your home, as well as pass your lender’s assessments. Investment property mortgages are another option, but they can be very costly, and you can expect down payments of at least 25%, as well as stricter credit score requirements and higher interest rates.

Upkeep Can Be Costly

Once you bought an investment property, there’s a very good chance you will need to perform some maintenance on it. Depending on the building’s age and condition, this can be anything from a fresh coat of paint, to plumbing repairs or installing new flooring.

Upkeep, however, is something you will need to keep on top of for as long as the property is in your possession. Rental properties in particular can be very high maintenance, and could require costly upkeep, depending on the tenants who have lived there previously.

At the same time, it’s important to check on and maintain properties that you intend to sell, especially if nobody lives there. For example, a vacant property that’s been on the market for several months can suffer unexpected damage, such as a pipe freezing in winter, and causing water damage when it bursts. Not only will you have to contend with the financial losses that come with a property that isn’t selling, but now you also have an expensive repair on your hands.

Finding the Right Tenant Can Be Tricky

If you’re buying an investment property that you intend to rent out, it’s important that you find the right tenants to live there. Ideally, you should draw up a contract that clearly stipulates rules such as no smoking or no pets, as well as ask for a security deposit. Yet even so, you should prepare for cases in which rent is paid late, tenants are disruptive, your property is damaged, items get stolen, or tenants simply abandon the property without any notice.

In the best-case scenario, the security deposit will cover any damages and items that need replacing. But even so, you run the risk of taking your property off the market for a few weeks, while repairs are being performed, which can set you back financially.

It’s worth noting that evicting a troublesome tenant takes time, and needs to be done in accordance with the law and the local renter’s rights. Also, as a landlord, you will need to wait a standard 30 days before you can use the security deposit, assuming that your tenant doesn’t qualify for a return.

The Property Value Could Decrease

Depending on market fluctuations, the value of your property can either rise or fall. This can cause issues if you’re buying investment properties with the intention of selling them later on. The most common scenario is neighborhood decline, which will result in a depreciation of your property’s value. Regardless of whether you’re dealing in commercial or residential investment properties, pay close attention to the signs of a declining neighborhood prior to buying, such as an increased lack of stores or public transport.

Selling an Investment Property Can Take Time

Unlike other types of investments, properties are not a liquid asset. If you’re flipping properties or just planning a resale later on, prepare for any financial drawbacks that could arise while the property is on the market. And as any investor knows, the older the listing is, the bigger the risk of not closing on a sale.

Lots of Hidden Costs to Watch

On top of the initial cost, upkeep and maintenance, investment properties pack hidden expenses that might not be obvious at first sight. The best example is long periods of vacancy for rental properties, especially when there’s little demand. Not only that, but if you’re a landlord dealing with several rentals, you will find yourself in need of hiring a property manager, which adds to your monthly costs. Don’t forget to take property insurance into account, and also keep an eye out for an increase in local taxes.

September 1, 2022

If you are a real estate investor, there are a lot more financial numbers to keep track of besides just the rental income you generate. If you only keep track of income, you’d be responsible for a larger tax bill at the end of each year than you anticipated. Tracking expenses helps ensure that the investment is profitable overall. It also allows you to deduct as many of your costs as possible, which decreases tax liability and increases the bottom line. If you are curious of the best ways to track rental property expenses, use the below guide to help you keep track of everything.

What To Track?

Writing your rental property expenses down and proving them are two different things. It’s important to keep a careful log, but let’s first look at what you need to prove your expenses, especially if you’re planning on writing them off.

Leases – Keep all current and past leases for several years. You don’t want to be blindsided by surprise when something pops up unexpectedly from a prior years’ tax returns.

Proof Of Rent Collected – Make sure to keep proof of all the rent you’ve collected. If you collect rent digitally, track it. If you collect checks, make a copy of the check.

Copies Of Bills – Keep copies of all bills you pay connected with running the property, including tax bills, utility bills, and insurance bills.

Mortgage Papers – Keep all mortgage statements and proof of payments if you have a mortgage out on the property.

Legal Fees – Keep a receipt and make copies of any legal fees you incur in connection with the property.

Sale Papers – You must report the profits on your tax return if you sell any investment property. Understanding capital gains and how you can offset them is critical, and purchase contracts are an essential part of this equation. You should also make sure any expenses you pay in connection with the property are reasonable for the area. You should never attempt to increase what you pay and should always have keep good records for proof.

Best Ways To Track Expenses?

Similar to personal finances, these is not one right or wrong way to track rental property expenses. There are many ways to accomplish the same end goal so it’s ok to do whatever works best for your specific needs. The best approach is one that allows you to keep track of things in real time. It’s important to keep on top of expenses to ensure you file your taxes properly and get all the deductions you are entitled to.  Below we will look at some best ways to track rental property expenses.

Accounting Software

Luckily, in 2021 there are many accounting software programs to help you track your rental income. Programs like QuickBooks and TurboTax all provide solid options for real estate investors.  Do your research and figure out which one you understand the most and will use consistently as they all have costs associated with them. Many options have a free trial, so you can try before you buy. Take advantage of these free trials so you don’t pay for a program that doesn’t work for your needs.  The right program for you will vary based on the number of properties you have, your total expenses, and the complexity of all your other business needs.

Property Management Software

Property management software is a specific product meant just for real estate investors. They can help you track rental income, automatically track income and expenses, and keep track of all your real estate investment properties in one place. Most of these programs also offer a free trial so you can see how they work and determine if they’re a good fit for your business needs. Next we will look at some common expenses to be aware of.

Common Expenses

Tracking your real estate investment expenses is critical. Here are the most common rental expenses most investors pay: Mortgage costs, closing costs, inspection fees, appraisal fees, real estate commissions, marketing and screening costs, maintenance costs, repair costs, materials, as well as any legal costs. Most real estate investors have fixed and variable rental property expenses.

Fixed expenses include:

Mortgage payments, utility fees, trash fees, property taxes, home insurance, property management fees, as well as any required HOA fees. Other fees you may have include the costs to find a new tenant, maintenance and repairs, vacancy costs and major improvements.

What’s Considered Rental Income?

Rental income includes all of the following in addition to the rent you receive:

Security Deposits – You are required to claim any security deposits earned if it’s not returnable at the end of the lease. If your lease includes a clause to return the security deposit, it’s not income, but the difference is taxable if you do not return the entire sum. If you collect the first and last month’s rent when you accept a lease, that’s also income that needs to be tracked.

Other Tips To Track Expenses

As you can see above, there is a ton that goes into preparing taxes when you own rental property. Everything you spend or collect matters and makes a huge difference in the amount of taxes you owe at tax time.  To make sure you accurately track your rental property expenses, consider the following:

Keep your business bank account separate. It’s challenging to differentiate between personal and business income and expenses when you keep them all together. It’s wise to open a separate bank account and conduct all business from that account. Keep track of all receipts. Its smart to scan copies of them and store them on our computer or phone to always have a record on file.  Regardless of what system you decide is best for you, figure out a system and subscribe to the software that suits your needs the most. Take the help above to maximize your tax write-offs by staying organized as a real estate investor.

August 25, 2022

All investment opportunities come with common facts and falsehoods, which is why it is so important to do your research ahead of time to distinguish what the truth is for your situation.  If you desire to be independent financially, then investing in real estate can be a great place to start. This market can at times be a bit challenging for new investors which is why a good real estate agent can help you start off right in a big way.  Below we will explore some of the most common real estate facts and falsehoods to help you decipher the differences.

You Need A Lot Of Capital

Most new investors believe that you need a lot of money to start investing in real estate, but that is far from accurate. Investing is not the same as owning a property; when you invest, you should expect to get a return from the money you’ve invested, which will make it possible for you to pay back your mortgage over time.  If you want to invest in real estate, you can look for partners or private money lenders. All in all, every investment is a risk, so you should always have a plan B in place ahead of time.

Buying Beats Renting

A common falsehood in real estate investing is that you must have your own home first before investing in other real estate. This is simply not the case.  Many new investors are investing in real estate while still renting the place they currently live in. This is very common with people who rather wait to save up for their dream home by investing until they have enough capital in reserves to buy or build what they desire long term.  Many new investors own vacation rentals or condos first and see a great return while they build equity for their future projects and goals.

Fix And Flipping Equals Quick Cash

This is perhaps one of the most common falsehoods circulating in the real estate industry, where investors buy rundown houses, fix them up and sell them for a profit. Cable network programming often highlights this tactic of real estate investing.  While it’s possible to profit from flipping houses, they are far from a get-rich-quick fix as it requires a careful and calculated plan. To be successful, you must survey the property, calculate the total repair and labor costs, at end a 10-20% buffer for unexpected expense contingencies, and ensure that the amount you pay for the property is not more than 70% cost of repairs. If everything goes to plan, you stand to make about 30% profit after all your hard work is done.  You must keep in mind though that if the real estate market crashes or takes a significant hit, you don’t have to sell the property at a loss; you can hold on to it until the market recovers.  At the end of the day, you can see many examples of how real estate is not the best way to get rich quick without a lot of time and headaches.

Good Land is Rare

Most real estate agents will try to encourage new investors to buy a particular piece of land by convincing you that you’ll never come across such a plot again as land is scarce across the country and the population is increasing.  By these metrics, they argue that the price of land will continue to rise.

While it’s true land is limited throughout the country, advancements in building technology are making it much easier to maximize the use of available land out there and even if the population does increase, there will still be enough land with current death and birth rates, so there should not ever come a time when the amount of good land available will not be adequate for future needs.

Being A Landlord Is Too Difficult

It is true that owning an investment property can be a lot of work, especially if you have difficult or demanding renters. On top of that, you will have to ensure that your rental property is maintained properly, accounting is current and rent is collected in a timely manner.  Luckily, you don’t have to do all of these things alone; many new investors utilize a property management company to manage their investment property for them. Just understand that you will have to pay them a certain amount which will need to be accounted for in your bottom line but it can be well worth the cost if they take all or even most of the headaches off your plate.

To start investing in real estate, a wise new investor will make sure to research ahead of time and figure out the differences between common facts and falsehoods within real estate investing.  By taking this approach, this will help you avoid being led astray to purchase a property that is not worth the return on your investment and also help you develop your sixth sense when it comes to real estate opportunities. If you find a good real estate agent you trust, they can be a great resource especially when you are first starting out, to help you discern what is the best opportunity for you to get started when investing in real estate.

August 18, 2022

If you are the type of investor who wishes to buy a property and turn a profit on it long term, then hopefully this post will help guide you in the process.  Property investment can be beneficial to the investor in several ways including the ability to utilize the property as your main source of income or simply reduce the monthly cost of rent, maintenance, interest, etc. That said, it is not always so easy to invest in real estate.  As the property investment market gets more competitive, it is important to have a clear investment strategy. Below, we will look at some basic steps to take to help you start investing in real estate and be successful long-term.

Learn What Work for You

When you invest in a property, you should decide to either invest a certain amount of money into real estate or invest it through asset-based lending but it can be a challenge to know if you’re investing in a good deal to start. It is important to know in advance what investment strategy is right for you ahead of time before getting in over your head on a deal that may not be so easy to walk away from once you have funds or assets tied up.

Asset Based Lending

Asset-based lending is a loan or line of credit issued to someone that is secured by some form of collateral.  When you invest in a property through this method, there is still a possibility that you could lose money on the deal but it’s generally safer because you’re putting down your money to earn it back through future rent. This way, you’re not putting your money at as much risk of losing the entire lump sum you’ve invested. Overall investing in a property through asset-based lending comes with a lower risk of losing significant money long term.

Tax Advantages

Investing in an investment property can provide certain tax benefits that you can deduct including property taxes, interest, property management fees, insurance, maintenance, repairs and more. Best of all If you sell your property for more than you bought it for, the profit will not be taxed as income. Rather, it will be taxed as capital gains which are generally subject to lower tax rates than traditional income. If you invest using asset-based lending, the profit you acquire from the property is considered a capital gain which could help you save some money on taxes long term.

Decide on the Type of Investing

Understanding all of the nuanced differences between passive vs. active investing is an important part of learning how to invest in a property. Active property investments may include hands-on real estate purchases, property management as well as market knowledge that requires a great deal of financial and real estate knowledge.  If you’re not ready to purchase a property, you can still benefit from the additional income and asset value through passive investing with a lower financial barrier to entry.

How to Know if You’re Getting a Good Deal

Before you invest, you should first decide how you are going to invest, whether you decide to purchase a rental property, flip a house, contribute funds through an investment group/REIT, or simply use an online real estate investment platform. When choosing a property investment, consider as many factors that can affect your decision as you can research or think of, including calculating all potential risk and upfront costs. One important area that you’ll want to look for when you’re investing in a property is how much of a return you are getting vs. how much you initially invested in it. One simple way of achieving this is to look at the gross income to the overall cost of the property.  There is no specific amount of money required to start investing in real estate, but obviously more substantial investment amounts can lead to higher returns down the road. It is worth mentioning that different types of investment strategies have different costs, so some investments, such as flipping a property, may require you to make a large lump-sum payment upfront to secure the investment long term for the most future profit potential available.

August 12, 2022

As stocks take a dip and inflation rises, you might wonder if buying rental property is a good place to invest your money.  Seemingly, it’s easy: buy a property, rent it out at a high enough price to cover the payments and put a little extra cash in your pocket.  The goal being that while you do this, property values will increase as rental amounts continue to rise nationwide. While this may still be a great opportunity to the right investor, there are many factors to consider before moving forward with a rental property investment, from rising mortgage interest rates to finding reliable tenants. There can also often be unexpected expenses that pop up out of nowhere. Below is a list of some common questions about purchasing a rental property.

Are Rental Properties A Good Investment In Todays Market?

If you have your finances in order, especially as interest rates climb, rental properties can still be a good long-term investment.  A rental property should generate income monthly, even if it’s only a few dollars to begin with. You should do the math to make sure the property you’re considering is right for your current situation. Consulting a financial adviser or local real estate expert ahead of time is a smart decision that can save you a lot of money and headaches in the long run.

One of the most important aspects to consider is to simply ask, does the deal make financial sense? At a minimum, there should be no net carrying cost to the property. Managing a rental property can be a lot of work.  A lot can go into setting things up correctly, including purchasing insurance, HOA fees, utilities, advertising, cleaning, repairs over time, rising mortgage payments and taxes are some critical factors, to name just a few.  Some rental property owners hire management firms to take care of the property, with fees typically between 7-12% of the monthly rent collected.

As an investment, a rental property can be a slower but still more reliable source of income than flipping a home at the height of a thriving real estate market. Though home values soared in the past few years, that pace is beginning to slow.

How Much Return Should You Get?

Once you’ve crunched the numbers, and if you intend to hold the property for a number of years, even a small profit can be a valuable source of income over time.  For example, a $100 per month net profit (after everything is paid) can add up. If rents continue to rise at 3-5 percent per year, profit should continue to rise, also.  Overtime, that can add up to a pretty significant rental return which doesn’t include appreciation on top of monthly revenue.

What Kind Of Loan Should You Get?

Rental property owners can apply for mortgages like homeowners but with some noteworthy differences. First, the down payment for rental properties is usually significantly larger.  Most lenders require putting a quarter of the total down for a rental property mortgage compared to the average 6-7 percent required for homeowners in recent years.  Lenders view a rental property mortgage as riskier than a regular mortgage because in hard times a primary home will take precedence over all other investment properties.

What Are The Best Financing Options?

Ideally, if you are able to secure a property with all cash and still have funds leftover for a rainy day that is the perfect situation to be in financially. If you are going to take out even a small mortgage, most lenders will require documentation that you have more than enough reserves set aside to cover unexpected expenses.  Before you begin the application process, make sure you have a clear understanding of your budget, that you have researched how to get and maintain having happy tenants and also have a clear idea of all of the rental property management costs.

How Much Can You Borrow?

As interest rates rise in 2022, the strategy of purchasing a run-down property, fixing it up, raising the rent then borrowing against that property to buy another is getting more challenging. Lenders want guarantees the mortgage will be repaid even during difficult times and will comb over the property closely before agreeing to issue you a second loan.

Rental property investors must be even more careful about their budget and assumptions about what future interest rates will look like because they’re not going to be able to refinance to take out equity while maintaining a positive cash flow if rates are twice as high as they were just a year or two ago.

August 5, 2022

Real estate investing is one of the top strategic methods investors utilize to be successful. That said, once you begin investing, you quickly realize that reality does not quite align smoothly with all of the success stories you read about online.  Everyone faces unique obstacles that will hold them back in achieving their financial goals. In an effort to assist you in preparation of these common setbacks, below we have identified a few common barriers experienced by first-time investors which prevent them from being successful with real estate.

Knowledge Gap

Investing in real estate requires some studying an obtaining knowledge ahead of time. You should understand the various rules that govern the real estate industry, taxes, analytics, financing options, etc. Luckily, there is a ton of information on all these subject matters you can find online. The quickest way to become literate within the real estate industry is to take some sort of formal education classes. Learning from other seasoned real estate investors is also an option but be careful not to rely on others to educate you on all of the ins and outs of the industry for free.

Not Recognizing Differences On Paper Vs. Real Life

New investors often think it will be a breeze for them to earn money with real estate, given all they have learned in school. That said, the further they get into their first investment project, the more they quickly realize that thing on paper often look very different in real life. This truth can cause new investors to begin doubting their abilities and to lose confidence. As a new investor, you need to prepare yourself mentally for the fact that the road ahead will be full of obstacles. It is likely you will make some rookie mistakes that could cause you to lose a deal. This is ok. The important thing is to learn from your mistakes. With time, you will learn to distinguish a good deal from a bad one. You will also become a better negotiator. All these things will be learned and perfected with practice and time.

No Clear Vision

As with any industry, using only your instincts is not sufficient to be successful with real estate investment. If you want to make money in real estate, you need to have a clear vision and stick to it. As you are learning, you may be confronted with various proposals that seem lucrative, but may not align with your financial objectives. It’s important to identify when investing in a particular deal may make you unable to continue investing in other opportunities.

Being Guided By Feelings

This is a common error often made by beginners and can really impact your ability to be successful with real estate investment. Feeling should have no place in the decision process of a real estate investing. You need to be able to control your feelings, so that they do not interfere with making calculated decisions. You need to base your decision on data not emotions. It is common for sellers to take advantage of a new buyer’s emotions when selling a property. If you simply look at the superficial elements, you may miss the major repairs that a property may need. So, you need to stay vigilant and hire a licensed home inspector to inspect the property before you close any deal.

Being Impatient

Patience and dedication are the two most important areas which will make you successful in real estate investing. Finding the right deal for you can take months of searching and doing research. Without patience and dedication, you may give up before you have a chance to find the right deal for your financial situation. Generally speaking, real estate investments are considered long term investments with the return on investment measured in years not weeks or months. Patience is key throughout your investment strategy. Now that you understand some of the most common obstacles new investors face when beginning to invest money in real estate, hopefully, you will be able to recognize these obstacles ahead of time and troubleshoot them before it is too late. No matter what may come your way, the best advice anyone can give you is to meet all of the challenges head on and not shy away at the first sign of adversity.

July 30, 2022

For those attempting to grow their wealth long term, save for retirement, or achieve a greater level of financial freedom, real estate, whether residential or commercial, offers strong potential to get ahead financially.  Real estate is a great way to diversify your financial portfolio and can offer solid tax benefits, but when it comes to investing in residential versus commercial properties, knowing which strategies are right for your goals can be a real challenge.  If you’re committed to long-term growth with potentially higher returns, the benefits of commercial real estate may be a great fit for you.

Like any investment, real estate comes with its own set of rewards and risks, and commercial real estate differs significantly from residential in its strategies and financing methods.  Understanding the below pros and cons of commercial real estate will hopefully help guide you to decide if it’s a potential good fit for your investment strategy.

What is Commercial Real Estate?

Commercial real estate is a property with five or more units used specifically for business or to generate income. This may include multifamily housing, hotels, offices, retail space, restaurants, industrial warehouses, healthcare facilities, or multi-use spaces.  While in a residential property, it is families or individuals which are the typical tenants; in commercial properties, it is businesses and corporations. It is worth noting that depending on their location, commercial properties may be subject to more complex zoning ordinances than residential units.

Commercial Real Estate Pros

Commercial real estate offers investors a specific set of benefits and opportunities that differ from residential properties. Does that make commercial real estate a better investment? It depends on what you’re looking to achieve, but consider the following advantages to commercial real estate:

Tax Benefits

Commercial real estate is entitled to certain tax breaks that can drastically reduce the tax burden for commercial properties. These tax breaks may include deductions for mortgage interest, depreciation, and non-mortgage-related expenses such as maintenance, renovations, or applicable association fees.  Additionally, you may be able to avoid capital gains tax when you sell your commercial property if you reinvest those profits into another building or asset. It is worth consulting with a tax professional to assist you in navigating the finer points of using an exchange strategy.

Desirable Tenants

Owners of residential properties often invest a considerable amount of time and effort in vetting high quality tenants who can be trusted to care for the property.  Commercial tenants are businesses or corporations who have a vested interest in maintaining a professional public image and are thus more likely to take the care and maintenance of the property seriously to protect their business and their brand overall. The relationship between a business leasing commercial space and the property owner tends to be a more professional type of relationship.

Commercial Real Estate Cons

Professional Services Required

Managing one or more commercial properties each with multiple tenants is similar to running a small business. There’s more to manage, more maintenance, and more public safety concerns. A professional management company is likely needed in order to stay on top of issues and keep things running smoothly.

Zoning

Commercial zoning has multiple categories, and regulations tend to be more complex than residential zoning requirements. A solid understanding of local zoning ordinances is needed in order to remain compliant with local laws.

Bigger Upfront Investment

More upfront capital is required to purchase a commercial property, and with it comes bigger maintenance and upkeep costs. Replacing the roof or the HVAC system of commercial property for example is far more costly than the same repairs on a residential property. Having a capital reserve and contingency fund is a must when you own a commercial property.

Getting Started With Commercial Real Estate

Investors who have done their homework and are ready to try the commercial real estate waters should first make sure they find a knowledgeable real estate agent who is experienced in commercial real estate.  While the upfront cash investment can be out of reach for some investors, there are some more passive options to investing in commercial real estate without purchasing an entire property.  Peer-to-peer real estate allows you to pool your money with other investors and affords the ability to open a portfolio with a much smaller initial investment.  Similarly, “Real Estate Investment Trusts” describe a company that invests in a portfolio of real estate projects and distributes earnings to its shareholders. There are several types of REITs: publicly traded, publicly non-traded, and private, each with its own set of requirements. While REITs are a hands-off way to invest in commercial properties, investors usually have less control over the types of properties they are invested in or when they can access their money.

While the high-risk/high-reward nature of commercial real estate might not be right for all investors, remaining open to considering new property types expands your options and could help you reach your long term financial goals.