Best Tips for Investing in Real Estate
Real Estate is a popular asset class in which people invest their hard earned money. Some people have made billions by investing in real estate. Popular investor names that one may think of are Sam Zell and Bruce Flatt.
While analytical ability and access to capital are important factors for investors to be as successful as Sam and Bruce, there are plenty of other things that you need to think about in order to create wealth from real estate.
After all, investing cannot be done from just a spreadsheet alone.
The following are some important real estate investing tips which can guide you to be a successful investor and create the right kind of mindset for sustainable long-term success in real estate investing.
Tax Benefit of Investing in Real Estate
Money saved is money gained. Every dollar that an investor can save in outflows, including tax bills, is an extra dollar that the investor can put to work to grow his/her wealth. Saving on your taxes is one of the three main pillars of building sustainable long-term wealth.
There are many ways in which an investor can plan tax outflows so as to maximize his/her income. Tax liabilities can be brought down through depreciation, deductions like mortgage interest, write-offs like tax maintenance, and by taking advantage of provisions like unlimited passive loss when operating as an agent.
Investing through HSA and ESA accounts or through IRA accounts can also have significant tax advantages for an investor.
Tax laws have undergone quite a lot of change in the Trump administration. Hence, it would be a good idea to do some financial planning with your accountant or financial planner so that you do not have to face any nasty surprises later on.
Philosophically speaking, most of the tax breaks have their source from actions which tend to provide housing, create new jobs, or help charities.
If you find a way to do either of those, then chances are that you will find some provision in the tax laws where you can save some money. You will have to work out whatever strategy fits your business model.
Work on yourself
Many of us work much harder at our jobs than we do on ourselves and our own life situations. You get a salary for doing work at your job. But, investing some energy on yourself can be the best investment and provide the best returns long term.
Work on your soft skills. Things like time management, negotiations, public speaking, etc. are soft skills that one needs to develop in order to be a successful investor. Investing isn’t just about numbers and spreadsheets. It is also about the human skills that can close deals.
Another well-known skill for any investor is reading. The more you read, the more informed you get. And the best part is that the effort which you put into building your knowledge is cumulative. It stays with you for the rest of your life. So, there can be no waste in such a scenario.
Here is a complete real estate investing course that has lots of educational content, PDF’s, etc. to read and learn from to grow and self develop your mind into a tool that can bring great return to your life financially and socially.
It is important to set goals for yourself. Whether it is making investments or being in a certain position by a certain age, it is important to have some sort of a goal.
The author of the book “The Strangest Secret”, Earl Nightingale, was once asked the question about where he would see himself when he reached the age of 65.
Earl was also a famous insurance broker, so his answer to the question touched upon actuarial statistics for men who were aged 65 at the time. The trend was that only 5% of all men who were 65 were wealthy or well-off.
The remaining 95% were either dependent on someone else or had died. Earl claimed that the 5% who were well-off had one thing in common, goal-setting. Even he recognized the importance of goal setting for long-term well-being.
We cover goal setting inside our real estate investing mastery course here.
Before you make any investment, you need to plan out what you want to do with that investment and how you will make an exit from that investment.
Many investors don’t think about the exit and the time period for which they will hold the investment. Only thinking about the property or its purchase price is not enough planning.
If you are going to purchase a home which you want to rent out, then your plan may be to hold it for as long as possible and generate passive income.
Or, your goal could be to flip the property through some smart renovations, in which case the holding period will be short and the exit strategy will be known.
You will also have to think about taxes regardless of whether you plan to hold or sell the property. Planning years, or even decades, ahead is important.
Leverage can be powerful
Leverage (loans and outside capital) can be a very important tool in a real estate investor’s kit. Leverage is not always the bad destructive thing that it is sometimes made out to be.
If used prudently and conservatively, leverage can significantly boost your returns and make investments, which are seemingly out of your reach, doable.
If you are purchasing a property that already has debts on its balance sheet, then make sure that it is good debt and not bad debt. The goal is to accumulate assets with good debt and keep it that way. If there is any bad debt, then it is best to get rid of it as soon as possible.
Use other people’s money
Real estate investing is capital intensive. You may not always have all the necessary capital in your bank account. Often times, you will have to raise capital to do bigger deals.
You can either go to the bank and get a loan, or you can raise capital from family and friends. You can also rope in investors to give you some capital in return for a share in the profits.
Your investor or “money people” list is always going to be a lot more valuable than a customer list or a contractor list. Capital is all important in real estate investing.
Other ways to raise capital could be by conducting seminars about real estate investments, teaching people how to raise capital, or working with charities. Raising money from other people and making real estate investments can reap you rich rewards if done properly.
Increase cash flow by paying off debt
There are a few ways in which you can pay off the principal amount on your mortgage and reduce your monthly outflow. If you are approaching retirement or have stopped accumulating assets/properties, then it may be a good idea to starting paying down the debts which you took to purchase real estate.
You can either send in next month’s principal amount with the current month’s mortgage installment, you can opt for a bi-weekly mortgage, or you can use sweep accounts which can redirect excess cash towards paying off your real estate debt. There are plenty of ways in which you can gradually work towards bringing your debt down to zero.
Another tactic you can use is to pay off the debt on a rental home and move it into a trust. Then, you can wait for the cycle to rise and the real estate prices to rise. At an opportune moment, you can sell the house to another real estate investor and sweeten the deal by offering owner financing.
You can then place that “financing” or seller loan into servicing for collections. That way, you have your cash flow minus the troubles of ownership. It will be someone else’s headache to make sure the payments come in.
Use passive real estate income to pay for your lifestyle
Whether your dream is to buy a vacation home or to gift your wife her dream car, you can pay for those luxuries by using the cash flows from your real estate investments.
You can literally buy something which costs twice the amount that your real estate investment cost you and still pay for it using the cash flows from the real estate.
Managing cash flows and creating streams of passive income is what you need to fund various liabilities which may arise throughout your lifetime.
Equity-linked loans for asset protection and liquidity
Asset protection is important in real estate. Lawsuits on properties are quite common. Hence, you can protect your real estate investment by taking out a HELOC against the equity in the real estate and placing that money in an annuity. Many states in the US shelter annuities from legal judgments.
Besides protecting the equity in your real estate investment, debt instruments like HELOC can also provide you with additional liquidity. Equity loans, which are loans against the equity component in a property, are also making a comeback lately with rising employment and an upturn in the real estate market.
We hope that you find these tips useful in your journey towards becoming a successful real estate investor. This is by no means an exhaustive list of best practices and tips.
There are plenty of other things that an investor can do to become better at real estate investing. The tips mentioned above are some of the most useful in our opinion.
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