Date: Sat, 25 May 2013 21:14:19 +0200
Reading notes from The Wall Street Journal Complete Real-Estate Investing Guidebook
- Four basic rules for success with real estate investments:
- Buy a property for less than you can sell it.
- Use other people’s money as much as possible.
- Make sure the property pays for itself.
- Take maximum advantage of the tax laws.
- When looking at appreciation rates, homeowners rarely consider total cost of ownership – replacing roof, furnaces, appliances.
- When you consider the total interest payments and home improvement costs, very few homeowners with a 30-year mortgage actually come out ahead.
- Who loans the money:
- Family and friends
- Hard money lenders
- A real-estate license won’t hurt – one needs a network of contacts to acquire properties before they hit the Web listings or newspapers.
- Three questions to ask about each property:
- Is buying this property the best use of the money?
- Will it pay for itself?
- Can you add value to the property?
- Two ways to raise profits for the property – increase the rent or decrease expenses.
- Buy locally – you’re unlikely to be able to add value to the property being on the other side of the country or world, partnerships with remote partners tend not to be hands-on.
- By having several properties nearby, you save on your time, and contractor’s or handyman’s time when you plan a major repair job.
- Cap rates are lower in desirable neighborhoods and higher in high-risk neighborhoods.
- Gross Rent Multiplier – ballpark figure, total price divided by annual gross income produced by the property.
- Debt-service ratio – used by lenders, net operating income divided by annual debt payment, should be in the range of 1-1.5.
- Return on investment – cap rate inclusive of loan payments.
- Before striking a deal, write a note to the tenants introducing yourself, and ask for what could be improved. You can get a good overview of current problems.
- The biggest reason people invest in real estate is to use depreciation – fantom losses on the properties count against one’s income. Government has a way, however, to recapture that at the time of sale, when it turns out the property has not depreciated as much as expected.
- You have to materially participate in the investment to get the investment income treatment – that means maintenance and being involved with tenants.
- 1031 exchange allows an investor to sell an existing property and buy a more expensive property without paying taxes on the sale.
- If you bought a house (for yourself) at the peak of the market and are in the hole now, rent it out for a couple of years before selling, and then capture the losses as investment losses.
- Each property should be a separate entity, easier to operate and sell.
- Home office deduction raises a flag with IRS, usually it’s hardly ever worth bothering.
- Types of starter investment properties:
- In-law units
- Vacation homes
- Single family homes
- Duplexes and multi-family homes
- With in-law units, it’s hard to qualify for material participation rule, therefore the hope is to have the expenses and depreciation be deductible and as a result have the rental income arrive to you tax-free.
- Vacation homes are tougher to qualify as investment properties, as you cannot use them for longer than 10% of their total rental availability. However, two weeks of rental income on such properties is tax-free.
- Once you pass 4-family units, residential loans no longer apply, for commercial loans it’s typically expected that you cover at least 25% of down payment.