More Good Ideas in Real Estate
The last time, I focused on some general ideas in real estate that I find to be important for home owners to know about to appreciate their home ownership goals fully. Today, I want to focus more on the residential investment side of things in all things real estate. There are many good ideas in this area as well and many of them end up making the investors some money! Again, please let me remind you that none of this is legal, tax or investment advice.
Real Estate Good Idea #1: Investment Real Estate
Yes, why not? Investment real estate in itself is one of the best ideas in real estate. Think about it: you buy a home, you get tenants to live in the home, they pay you rent, which in turn you pay the mortgage and other expenses with. You’re responsible for repairs, property taxes and insurance and eventually you hold the house until it appreciates or until you want to hand it over to your heirs. Not a bad idea overall.
Landlording is a serious business because you’re responsible for the condition of the home your tenants live in, but with a little care in screening tenants and taking care of the house, it can be hugely profitable, especially if you buy the property at the right time when home prices are low. That way, you can even manage to get enough of a rent payment to cover the mortgage and other expenses, something that is pretty tough to do in a state like California, where historically home prices are higher than rents.
Real Estate Good Idea #2: Cashflow
Most investors will tell you that is the only way to invest. If the rental home doesn’t bring you any money month after month that goes straight to your pocket (or bank account) after paying all expenses like the mortgage, the property tax, the home insurance, the utilities (city and county) and repairs, it’s not worth it. Buying a rental that you pay into month after month is called feeding the alligator (or crocodile, I can’t remember which!) because eventually they say it will eat you!
While this is a good idea and a pretty good gauge (not to mention an interesting picture!) I don’t know how realistic this might be in a place like California. There are states where cashflow is better from what I hear, but traditionally, appreciation is the reason investors buy homes in California. However, it is still a good measure of a rental home to ensure that you are not paying too much out of pocket to hold on to the property. The idea is to have most expenses taken care of with the rent payment so that you’re not eaten by the alligator. Or crocodile.
Real Estate Good Idea #3: Appreciation
This is a reiteration of the earlier point, but I had to mention it separately to draw attention to it. If I had a dollar for each time someone has walked into an Open House and said, We used to live in this neighborhood. If only we had kept our home as a rental. The prices right now are just crazy! We could have got so much more for it! Coulda, woulda, shoulda. Well, the real estate investors turn this around. They hold on to a home for as long as they can and then sell high.
If you buy low, hold the home as a rental, have the tenants pay the mortgage (even if you pay some smaller costs associated with the property like utilities) and then sell high, preferably after the mortgage is paid off, you reap some of the benefits of appreciating property values and in some instances these can be substantial.
Real Estate Good Idea #4: Depreciation
While you are looking forward to the investment property appreciating, you can also look forward to the property depreciating! Depreciation is a tax advantage landlords have. According to the IRS, different kinds of property held for investment purposes depreciates over a certain amount of years until it it worth nothing and so “depreciation” is a deduction you can claim on your income tax return for investment property that is owned by you. This also can be a substantial advantage financially and sometimes the only reason certain investors choose to buy real estate.
Real Estate Good Idea #5: 1031 Exchange
The problem, of course, arises when you have made a huge profit in real estate. Now the IRS wants you to pay taxes on it! It’s called capital gains. What can you do? For one, you could just pay the taxes and keep the rest of the money liquid for when you want it. Or you can do a 1031 exchange. 1031 - or Section 1031 - is simply the tax code which refers to this kind of an investment property exchange. Basically, a 1031 exchange involves selling your investment propert and buying a “like-kind” property of equal or higher value. If you do that, you can defer taxes on any profit you may have made.
There are many companies, usually sisters of title companies, that specialize in 1031 exchanges which you should contact before you sell or buy if you wish to do a 1031. There are very specific rules you must follow regarding dates and real estate values for a successful 1031 exchange. However, it is a great tool and many real estate investors use it to their advantage.
Here are then the basic good ideas about investing in real estate. As I write these, a few more come to mind and, no doubt, I will have another post soon about some more good ideas in real estate! Until then, feel free to let us know your own.
