rental property investing

Real Estate Investing FAQ (Most Frequently Asked Questions)

Here is a brief outline of the random real estate questions we’ve added to our FAQ post. More will be added over time so please check back for updates by bookmarking this page!

  • How Much House Can I Afford?
  • How Do Mortgage Payments Impact Return on Investment?
  • What Does Freddie Mac & Fannie Mae Do?
  • Why Do Rich People Invest in Real Estate?
  • Stocks vs Real Estate Capital Gains
  • Best Tools & Resources to Learn Investing in Real Estate
  • What Are Home Sales Comps?
  • How to Value Apartment Buildings
  • How to Buy Your First Real Estate Investment Property

How Much House Can I Actually Afford?

For many first time home buyers, your first question that comes to mind is “How much house can I actually afford to buy”

Finding out your max purchase price is kind of fun. It’s a curious question we all have about our financial situation.

It’ going to vary of course for every individual person.

You have to consider your current debt vs income totals as well as credit score and a few other factors banks look at.

In this video I share a tip for figuring out a rough estimate of how much house you can afford but to get a more accurate number you’ll need to talk with a lender.

How Does a Mortgage Impact Your Real Estate Investment Returns?

One of the easier ways to get started with real estate investing is by using bank financing to make the purchase and putting little money down at closing with the seller.

It’s a popular route to go because most of us do not have the cash to buy a property outright with no debt.

The limited cash we have on hand has to go towards the renovations as well as utilities, mortgage payments, and other costs associated with owning investment real estate property.

This leaves you to question “how does a mortgage impact your real estate investment returns?”

Check out my video lessons sharing the impact a mortgage has on your rental cash flow and investment returns.

What Do Freddie Mac & Fannie Mae Do?

If you thought Freddie Mac and Fannie Mae were physical people, you’re not alone. Haha.

“Who are those people?” … is a common question I get and I have to explain that they are government programs not actual human beings!

Both served an important role in stimulating the housing market after the recent financial crisis in 2007-2011. We’re starting to see them get phased out as the recovery has been in full swing.

Here is a quick video explaining who they are and then below you’ll find some follow up paragraphs giving you additional information.

What Does Freddie Mac Do?

In 1970, Congress chartered Freddie Mac to keep money flowing to mortgage lenders to support home ownership and rental housing. Their job is to provide liquidity, affordability, and stability to the U.S. housing market. The Federal Housing Finance Agency regulates Freddie Mac.

Freddie Mac does not actually make loans. Instead, they purchase loans from lenders to replenish the lenders funds to that the lender can make more mortgage loans to other borrowers.

You can discover if Freddie Mac has one of your loans by using their self service loan look up tool.

What Does Fannie Mae Do?

Pretty much the same thing as Freddie Mac. Fannie Mae was founded in 1938 by Congress to stimulate the housing market which was coming out of the Great Depression. They made mortgages more available to low income earners.

This is the primary role of Fannie Mae today as well, to provide liquidity. Since 2009, they have reportedly provided over $4 trillion in liquidity to the mortgage market by buying loans off of banks so banks can reissue money in the form of loans to new borrowers.

Fannie Mae has strict criteria these banks must adhere to when qualifying people for loans. For banks to be approved to work with Fannie Mae, they must agree not to practice unethical subprime lending practices that we all saw occur in the 2009 crisis in the U.S.

Fannie Mae packages these loans they buy off of banks into Mortgage Backed Securities (MBS) which are sold to financial institutions and investors, like Wall Street.

More Information:

Why Do Rich People Invest in Real Estate?

The wealthy are people who have large sums of money they’ve accumulated over the course of their life.

Since the bank only insures up to $250,000 and typically falls behind inflation, many elect to invest their money instead.

Having large amounts of money to put to work, the wealthy folk need assets that can handle high volumes of money.

More importantly though, the wealthy look at how they can generate the greatest return on their investment.

What destroys your return on investment if you aren’t financially educated?

Answer: Taxes

The wealthy are generally very financially literate individuals who understand how to retain more of their hard earned money than the middle class by following legal tax strategies.

Real Estate offers a great tax saving strategy called the 1031 deferral/exchange.

In simple terms, when an investor sells a property they can roll that money into a new property of equal or greater value tax free.

This is a legal tax method for avoiding capital gains taxes that the IRS set up in 1979 allowing investors’ money to compound greater.

Stocks vs Real Estate Capital Gains Taxes

Check out this example comparing stocks and real estate when it comes to capital gains tax and trying to compound your wealth by shielding your tax burden legally with the IRS.

**Disclaimer (The numbers are loose calculations and used for easy to understand examples. They should not be taken serious or considered real.)

Stock Investor:

Investor A puts $5 million into $5 million dollars worth of stocks and after 8 months he has made 10% on his investment or $500,000.

He decides he wants to sell and buy different stocks so he places all 5.5 million into new stock. When tax season comes he is forced to sell some shares to pay his capital gains taxes.

Let’s say now he has just 5.3 million in stock after selling some for taxes and makes 10% or $530,000. That’s less than the $550,000 he could have made if he still had all $5.5 million to invest.

His gains are compounding but not as greatly due to capital gains taxes. Over time his money will continue to compound and grow but the gap will widen between what he has and what he could have if it grew tax deferred.

Real Estate Investor:

Investor B invests $5 million into a $40 million dollar apartment complex with a cap rate (Net Operating Income, NOI compared to purchase price) of 10%.

He finances the remaining $35 million with a loan from the bank.

After a year of owning the apartment complex it has produced a net operating income of $4 million before debt (40 million x 10% NOI).

Investor B made an 80% ($4 million profit/$5 million investment) cash on cash return while Investor A made just 10% ($500,000/$5 million).

Investor B would like to sell this apartment complex and move his money to a better apartment complex he found.

Under the 1031 exchange, he gets to invest all of his money upon sale into the next apartment complex without paying any capital gains taxes.

This allows him to keep more money in his pockets to put towards an even larger next property than he could if he was taxed.

For example, if his lender wants a 10% down payment and he has 9 million to invest now then he can go after a 90 million dollar property.

If he would have had to pay capital gains taxes then he most likely would have had closer to 7 million to invest which limits him to a $70 million dollar property. That’s a $20 million dollar difference!

Overall, it’s important to see the leverage that real estate allows compared to stocks as well as the shield from capital gains taxes which ultimately allows the investor to achieve more leverage and greater compounding.

One final note: You can deduct mortgage interest and property taxes from your income taxes to help lower your taxable income. This gives real estate another win when it comes to tax savings.

Read: Why Real Estate Investing Beats Stock Market Investing

Best Real Estate Investing Education Resources & Tools

Need to grow your knowledge of real estate investing?

In the video below I share several educational tools and resources real estate investors can use to learn more about buying rental properties, flipping houses, wholesaling, and any other real estate strategy you’re curious about.

Don’t forget to subscribe to my YouTube Channel talking all things real estate

What are Comparable Prices or “Comps” in Real Estate?

Briefly, I want to fill you in on what comparable prices are if you’re new to real estate investing, flipping houses, or just don’t know very much terminology related to real estate.

Read: Real Estate Terminology 101

Comparable prices are what investors and real estate agents look up when deciding how much the current property they are dealing with is worth.

Let’s say for example a property may have 3 bedrooms, 2 bathrooms and is 1,600 square feet.

You would want to look up recent sales in your area (neighborhood or nearby streets) that had houses with similar to identical features and see what prices those houses sold for.

This will give you a good idea of what the property you are looking to buy or sell could be worth.

Of course there’s other factors to consider such as what kind of shape the property was in when it sold or how safe the neighborhood is but you get the general idea now.

So what resources can you use to find these sales comps?

6 Resources for Doing Your Homework On Potential Properties

1. www.Realtor.com
2. www.Zillow.com
3. www.Eppraisal.com
4. Trulia.com
5. www.propertyshark.com
6. Public Records

Obviously the first 5 are websites you can go to and check out but resource #6, Public Records, is a little more complicated. It entails a little more grunt work but can provide great information.

Real estate public records are often held with one of the following but it may differ in our city:

  • County recorder
  • County courthouse
  • City hall

What Do Public Property Records Show?

  • Name of Owner
  • Tax Parcel Number/ID Number
  • Amount of present taxes and whether they’ve been paid
  • Lot/Land Description
  • Year house was built
  • Other Information

Homework Assignment:

Head over to google and search for your city’s public records for property.

Once you’ve determined who holds these records, go to that website and search your current address you are living at to see what kind of information the city has on your property.

Or an alternative is to search the property address that you are interested in buying/investing in. Go!

How to Value Apartment Buildings

We covered this question in depth in a recent blog article you can read here. It outlines the cap rate and gross rent multiple that are often used for determining purchase value of an apartment building.

Check out this quick YouTube video I put together for you as well.

 

How to Buy Your First Deal in 7 Simple Steps

Want a simple 7 step outline to make buying your first real estate deal low stress?

Check out my video lesson that gives you an easy to follow process roadmap. It’s the same steps I took to buy my first rental property at age 20 which turned into a $75,000 profit upon flipping it a few years later.

Thanks for reading our new but growing FAQ page that we will add more content to as time progresses.

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