Category Archives: Real Estate

Different Types of Real Estate Investments You Can Make

Real estate is one of the oldest and most popular asset classes.  Most new investors in real estate know that, but what they don’t know is how many different types of real estate investments exist.  It goes without saying that each type of real estate investment has its own potential benefits and pitfalls, including unique quirks in cash flow cycles, lending traditions, and standards of what is considered appropriate or normal, so you’ll want to study them well before you start adding them to your portfolio.

As you uncover these different types of real estate investments and learn more about them, it isn’t unusual to see someone build a fortune by learning to specialize in a particular niche.

If you decide this is an area in which you might want to devote significant time, effort, and resources to in your own quest for financial independence and passive income, I’d like to walk you through some of the different kinds of real estate investing so you can get a general lay of the land.

Before We Talk About Real Estate Investments

Before we dive into the different types of real estate investments that may be available to you, I need to take a moment to explain that you should almost never buy investment real estate directly in your own name. There is a myriad of reasons, some having to do with personal asset protection.  If something goes wrong and you find yourself facing something unthinkable like a lawsuit settlement that exceeds your insurance coverage, you and your advisors need the ability to put the entity that holds the real estate into bankruptcy, so you have a chance to walk away to fight another day.

 A major tool in structuring your affairs correctly involves the choice of legal entity.  Virtually all experienced real estate investors use a special legal structure known as a Limited Liability Company, or LLC for short, or a Limited Partnership, or LP for short.  You should seriously speak with your attorney and accountant about doing the same.

 It can save you unspeakable financial hardship down the road.  Hope for the best, plan for the worst.

These special legal structures can be set up for only a few hundred dollars, or if you use a reputable attorney in a decent sized city, a few thousand dollars. The paperwork filing requirements aren’t overwhelming, and you could use a different LLC for each real estate investment you owned. This technique is called “asset separation” because, again, it helps protect you and your holdings.  If one of your properties gets into trouble, you may be able to put it into bankruptcy without hurting the others (as long as you didn’t sign an agreement to the contrary, such as a promissory note that cross-collateralized your liabilities).

With that out of the way, let’s get into the heart of this article and focus on the different types of real estate.

From Apartment Buildings to Storage Units, You Can Find the Type of Real Estate Project That Appeals to Your Personality and Resources

If you’re intent on developing, acquiring, or owning, or flipping real estate, you can better come to an understanding of the peculiarities of what you’re facing by dividing real estate into several categories.

  • Residential real estate investments are properties such as houses, apartment buildings, townhouses, and vacation houses where a person or family pays you to live in the property. The length of their stay is based upon the rental agreement, or the agreement they sign with you, known as the lease agreement.  Most residential leases are on a twelve-month basis in the United States.
  • Commercial real estate investments consist mostly of things like office buildings and skyscrapers.  If you were to take some of your savings and construct a small building with individual offices, you could lease them out to companies and small business owners, who would pay you rent to use the property.  It isn’t unusual for commercial real estate to involve multi-year leases.  This can lead to greater stability in cash flow, and even protect the owner when rental rates decline, but if the market heats up and rental rates increase substantially over a short period of time, it may not be possible to participate as the office building is locked into the old agreements.
  • Industrial real estate investments can consist of everything from industrial warehouses leased to firms as distribution centers over long-term agreements to storage units, car washes and other special purposes real estate that generates sales from customers who temporarily use the facility. Industrial real estate investments often have significant fee and service revenue streams, such as adding coin-operated vacuum cleaners at a car wash, to increase the return on investment for the owner.
  • Retail real estate investments consist of shopping malls, strip malls, and other retail storefronts. In some cases, the landlord also receives a percentage of sales generated by the tenant store in addition to a base rent to incentivize them to keep the property in top-notch condition.
  • Mixed-use real estate investments are those that combine any of the above categories into a single project. I know of an investor in California who took several million dollars in savings and found a mid-size town in the Midwest. He approached a bank for financing and built a mixed-use three-story office building surrounded by retail shops. The bank, which lent him the money, took out a lease on the ground floor, generating significant rental income for the owner. The the other floors were leased to a health insurance company and other businesses. The surrounding shops were quickly leased by a Panera Bread, a membership gym, a quick service restaurant, an upscale retail shop, a virtual golf range, and a hair salon. Mixed-use real estate investments are popular for those with significant assets because they have a degree of built-in diversification, which is important for controlling risk.
  • Beyond this, there are other ways to invest in real estate if you don’t want actually to deal with the properties yourself.  Real estate investment trusts, or REITs, are particularly popular in the investment community.  When you invest through a REIT, you are buying shares of a corporation that owns real estate properties and distributes practically all of its income as dividends.  Of course, you have to deal with some tax complexity – your dividends aren’t eligible for the low tax rates you can get on common stocks – but, all in all, they can be a good addition to the right investor’s portfolio if purchased at the right valuation and with a sufficient margin of safety.  You can even find a REIT to match your particular desired industry; e.g., if you want to own hotels, you can invest in hotel REITs.
  • You can also get into more esoteric areas, such a tax lien certificates.  Technically, lending money for real estate is also considered real estate investing, but I think it is more appropriate to consider this as a fixed income investment, just like a bond, because you generating your investment return by lending money in exchange for interest income.  You have no underlying stake in the appreciation or profitability of a property beyond that interest income and the return of your principal.
  • Likewise, buying a piece of real estate or a building and then leasing it back to a tenant, such as a restaurant, is more akin to fixed income investing rather than a true real estate investment. You are essentially financing a property, although this somewhat straddles the fence of the two because you will eventually get the property back and presumably the appreciation belongs to you.

Post found on www.thebalance.com

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There’s No Better Time to Be a Real Estate Investor

Real estate investors may have never had it so good. A classic alternative investment in a volatile stock market, real estate also just got a boost from the Tax Cuts and Jobs Act, with landlords among the biggest winners.

The law’s new provisions especially favor rental properties. “Real estate investors have historically been given preferential treatment by the tax code,” says Nick Sher, founder of New York-based Sher & Associates. “All things being equal, 2018 tax reform only enhanced that preferential treatment.”

And there’s no shortage of tenants. “Real estate is a strong long-term investment because people will always need housing,” says Ryan Coon, CEO of Rentalutions, a Chicago-based company that provides online tools for landlords. “While the housing boom and bust of a decade ago hurt a lot of overleveraged buyers, we’re facing a housing shortage right now, and that scarcity could mean higher rents.”

Other tax changes that have created disincentives for home ownership could push more consumers into the rental market. New limits on deductions for mortgage interest and state and local property taxes mean there’s less of a tax advantage to owning a home, Coon says. The higher standard deduction may also have a chilling effect on a taxpayers’ ability to benefit from itemizing and deducting mortgage interest.

If you’re considering wading into the rental property investing waters, here’s what the changes mean from a tax perspective.

Pass-through entities get a tax break. One of the most significant provisions of the tax bill affecting real estate investors is the 199A pass-through deduction. This allows residential landlords who operate as pass-through entities to deduct 20 percent of net rental income right off the top. “The new deduction will allow many individuals at the highest tax brackets to effectively reduce their tax rate from 37 percent to 29.6 percent,” says Chris Pegg, senior director of wealth planning for Wells Fargo Private Bank in San Diego.

But there are some exceptions for who can claim this deduction. “New qualified business income rules do not permit the full deduction for high-income specified service businesses, which includes lawyers, accountants, doctors, consultants and financial advisors,” says George Clough, senior vice president for People’s United Wealth Management in Bridgeport, Connecticut.

Claiming the full deduction also depends on income. For pass-through entities to qualify, total annual income must be less than $157,500 for single filers and $315,000 for those who are married and file jointly.

Rental property investors should also keep in mind that the 20 percent deduction of rental income is capped by whichever is greater: 50 percent of wages or 25 percent of wages plus 2.5 percent of the unadjusted basis of qualified property held by the business, says Rob Crigler, managing partner at Mariner Wealth Advisors in Madison, New Jersey. Qualified property is any rental property you own that’s subject to depreciation, and the unadjusted basis is the property’s original cost, without depreciation.

For an idea of how much the pass-through deduction could be worth to a rental property investor, he says to assume you own a 10-unit apartment building through a limited liability company, with no employee wages. The building was constructed in 2012, with land costing $100,000 and the building costing $800,000. In 2018, your LLC has a taxable profit of $300,000. In that case, Crigler says, the potential 20 percent pass-through deduction is $60,000 or 20 percent of $300,000; however, it’s limited to 2.5 percent of the $800,000 building or $20,000.

Anthony Glomski, principal and founder of AG Asset Advisory in Los Angeles, says investors just entering the rental property arena should fully understand the tax implications of the deduction. “Each person’s situation is going to be different,” he says. “For example, fully depreciated property may not qualify for the deduction, but a simple fix may be exchanging into another property with a higher basis.” Your financial advisor or accountant can help with determining whether you qualify for the deduction.

New Section 179 rules yield additional tax savings. The tax bill preserves and expands some existing tax benefits for rental property owners, including the Section 179 deduction. It allows business owners to deduct the cost of qualifying equipment or software purchased or financed in that tax year.

Beginning in 2018, the deduction is extended to rental property business owners, allowing them to deduct the cost of personal property, such as appliances or furniture used in rental units. The deduction has also been expanded to include investments in certain improvements, such as a new roof, an upgraded heating and air system or new fire protections and security systems.

“By having a firm grasp of Section 179, investors can realize some meaningful reductions to taxable income,” says Scott Bennett, a financial advisor with Wells Fargo Real Estate Asset Management in New York. “It’s important to be familiar with what assets and improvements qualify for the depreciation allowance to take full advantage of the change.”

In addition to widening the scope of deductible expenses, the tax bill also raises the Section 179 deduction limit from $500,000 to $1 million, with a phaseout limit of $2.5 million. This represents the amount you can spend on rental property assets or improvements before the deduction begins to be reduced on a dollar-for-dollar basis.

Additionally, the new 100 percent bonus depreciation allowance lets landlords deduct the entire personal property for rental units, instead of the previous limitation of $2,500 or less, says Nina O’Neal, partner at Archer Investment Management in Raleigh, North Carolina. “That certainly makes upgrading or replacing kitchen appliances to attract new tenants more appealing.”

Don’t overlook the downsides. Tax breaks are a great reason to consider owning rental property, but that doesn’t make it right for every investor. “It all sounds great in theory – steady rental income, tax benefits and ideally a gain on the property when you sell,” says Matt Archer, founder of Archer Investment Management. But finding tenants, resolving tenant issues and handling property maintenance and repairs are time-consuming. You can hire a property management company to do the legwork, but “that will decrease your net monthly income.”

Keep in mind also that these tax breaks won’t last forever. The pass-through deduction ends Jan. 1, 2026, and the 100 percent bonus depreciation deduction only lasts through 2022. Before adding rental property to your portfolio, consider whether the investment can still meet your goals and objectives after these tax benefits expire.

Post found on http://www.money.usnews.com

Why You Need A Professional On Your Team When Buying A Home

Many people wonder whether they should hire a real estate professional to assist them in buying their dream homes or if they should first try to go through the buying process on their own. In today’s market: you need an experienced professional!

You Need an Expert Guide If You Are Traveling a Dangerous Path

The field of real estate is loaded with landmines; you need a true expert to guide you through the dangerous pitfalls that currently exist. Finding a home that is priced appropriately and is ready for you to move into can be tricky. An agent listens to your wants and needs, and can sift through the homes that do not fit within the parameters of your “dream home.”

A great agent will also have relationships with mortgage professionals and other experts that you will need in order to secure your dream home. 

You Need a Skilled Negotiator

In today’s market, hiring a talented negotiator could save you thousands, perhaps tens of thousands, of dollars. Each step of the way – from the original offer to the possible renegotiation of that offer after a home inspection, to the possible cancellation of the deal based on a troubled appraisal – you need someone who can keep the deal together until it closes.

Realize that when an agent is negotiating his or her commission with you, they are negotiating their own salary; the salary that keeps a roof over their family’s head; the salary that puts food on their family’s table. If they are quick to take less when negotiating for themselves and their families, what makes you think they will not act the same way when negotiating for you and your family?

If they were Clark Kent when negotiating with you, they will not turn into Superman when negotiating with the buyer or seller in your deal. 

Bottom Line

Famous sayings become famous because they are true. You get what you pay for. Just like a good accountant or a good attorney, a good agent will save you money…not cost you money.

Post courtesy of keepingcurrentmatters.com

 

2 Major Myths Holding Back Home Buyers

Urban Institute recently released a report entitled, “Barriers to Accessing Homeownership,” which revealed that eighty percent of consumers either are unaware of how much lenders require for a down payment or believe all lenders require a down payment above 5 percent.”

Myth #1: “I Need a 20% Down Payment”

Buyers often overestimate the down payment funds needed to qualify for a home loan. According to the same report:

Consumers are often unaware of the option to take out low-down-payment mortgages. Only 19% of consumers believe lenders would make loans with a down payment of 5% or less… While 15% believe lenders require a 20% down payment, and 30% believe lenders expect a 20% down payment.”

These numbers do not differ much between non-owners and homeowners; 39% of non-owners believe they need more than 20% for a down payment and 30% of homeowners believe they need more than 20% for a down payment.

While many believe that they need at least 20% down to buy their dream home, they do not realize that programs are available that allow them to put down as little as 3%. Many renters may actually be able to enter the housing market sooner than they ever imagined with programs that have emerged allowing less cash out of pocket.

Myth #2: “I Need a 780 FICO® Score or Higher to Buy”

Similar to the down payment, many either don’t know or are misinformed about what FICO® score is necessary to qualify.

Many Americans believe a ‘good’ credit score is 780 or higher.

To help debunk this myth, let’s take a look at Ellie Mae’s latest Origination Insight Report, which focuses on recently closed (approved) loans.

2 Major Myths Holding Back Home Buyers | Keeping Current Matters

As you can see in the chart above, 53.5% of approved mortgages had a credit score of 600-749.

Bottom Line

Whether buying your first home or moving up to your dream home, knowing your options will make the mortgage process easier. Your dream home may already be within your reach.

6 Amazing Tips on Turning Real Estate Into a Real Fortune

At least 30 U.S. billionaires made their money from real estate; some say that it’s the greatest way to create real wealth and financial freedom.

These six tycoons and members of The Oracles suggest how you can invest $100,000 or start with nothing.

1. Start small.

Although I’m a businessman first, I’ve always been a part-time real-estate investor. You can do both, too. Have a business or career that creates positive cash flow, which you can diversify into part-time real estate investing. I’ve done it for many years.

If you’ve never invested in real estate, start small and don’t use all your money. No one’s ever looked back and said, “My first deal was my best.” You’ve got to learn how to read the contracts, build your network of specialists—for example, lawyers and realtors—and develop a good eye for it. This only comes from experience.

The beauty of real estate is that you can learn the ropes while starting small: find some cheap properties, like single-family homes, renovate-and-flips, multi units, or commercial properties. Try to commit as little as possible while you get some notches under your belt. Joel Salatin, my mentor, always said, “Make your mistakes as small as possible without catastrophic consequences.”

If you have zero cash, maybe do wholesale deals. A business partner, Cole Hatter, and I created a real-estate program teaching you how to put a property under contract for very little money down, sometimes less than $1,000; you sell that contract to another buyer before the contract expires. Worst case: you just lose under a grand. Best case: you make $5,000-15,000 positive cash flow that can be reinvested in long-term holdings. Tai Lopez, investor and advisor to many multimillion-dollar businesses, who has built an eight-figure online empire; connect with Tai on Facebook or Snapchat.

2. Think big.

It’s easy to give up on the real-estate game because you don’t have any money, but it’s the deal that matters, not how much money you have. Chase the deal, not your budget.

I know a guy who saved $50,000 and started chasing $200,000 deals. First of all, you can’t buy more than four units with that budget. The problem with four units is that each can only produce maybe $1,000 or $2,000 per month. And that’s only after you’ve done thousands of dollars in work around the units to make them rentable in the first place. That math isn’t difficult—there’s just not enough money to make it worthwhile.

Smart Tips for Decorating Your Apartment on a Budget

Following simple guidelines can help you decide when to splurge and when to save when decorating your apartment.

Decorating a new apartment can quickly go from exciting to overwhelming, especially if you’re on a tight budget. As a renter moving into a new apartment, you want to make your place feel like your own home, but without spending a ton of money every time you move. Herein lies the eternal rental decorating dilemma: Which items should be higher quality, and where can you get away with more frugal options? If you follow this set of savvy furnishing guidelines, your temporary digs can look great without breaking the bank.

Here are some rules to decorate by.

decorating your apartment

Choose quality when it affects your quality of life.

While it’s tempting to buy items at the lowest prices possible, you also want your purchases to add value to your life. So it’s worthwhile to invest money into certain furnishings while being more thrifty with others.

Save on: Decor

All home decor has to do to make your life better is look good. It doesn’t have to cost an arm and a leg to do it. You can find just about any style of wall hanging, throw pillow, or faux plant at discount retailers like Target or Ikea. Or find something truly original at consignment and thrift stores. “Go to a second-hand shop, choose pieces you like, refinish them yourself, and update the hardware on it,” says Debra Duneier, New York City interior designer and owner of EcoChi. “It’s good for the earth and your budget.”

Splurge on: Your mattress set

Great sleep is vital for a healthy body and mind, and purchasing a great mattress makes that possible. Buy one that’s new and high-quality, and it will last at least a decade. Though mattresses can be pretty costly, you can still find ways to get a good one at a decent price.

“Find name-brand mattresses at outlet stores, and look for sales at certain times of the year,” Duneier suggests. You can also test drive a mattress in a store and then bargain shop online.

 

decorating your apartment

Accent pieces are optional, good furniture is not.

Since you’re not buying for the long-term as a renter, you don’t want to compromise your savings when putting together your temporary home. But there are some items you don’t want to buy cheap, because cheap usually means flimsy, and you’ll end up having to re-buy them every time they fall apart.

Save on: Curio cabinets, end tables, and window treatments

Furniture that doesn’t do heavy-lifting, like end tables or display cabinets, can be less high-end. This is especially true for items you know you won’t reuse in your next apartment, like curtains or blinds.

“Whatever you buy for your windows, you probably can’t take with you because windows are a different size everywhere you live,” cautions Duneier. “But, you can find knock-offs of the latest styles, which saves you money,” she adds.

Splurge on: High-use furniture

Sturdy furniture made with quality materials is imperative for anything you’re going to sit or lie on every day, such as the bed frame for your master bedroom. If they need to support your weight and abuse day in and day out, be willing to shop for quality materials and construction—and to pay for it.

 

decorating your apartment

Cater to your unique lifestyle.

Do you have kids or pets? Will you entertain a lot or spend most nights out on the town? Do you travel for work, or are you a work-from-home warrior? The answers can affect which items you should splurge on.

Kids? Splurge on: Fabric-covered furniture

With kids or pets, “make sure you buy darker, durable fabric that’s stain- and spill-proof,” Duneier states. To determine if something will stand the test of time, ask lots of questions in the store, read online reviews, or buy and test something that has a good return policy.

Work from home? Splurge on: Office furniture

If you work from home, spend money on your office chair, Duneier advises. You clock lots of time there, so you should make it comfortable. Ergonomic chairs and computer stands are critical to avoiding injuries.

Never entertain? Save on: A dining set

While an expensive dining set might be the best investment for a frequent entertainer, if you don’t do much hosting, your dining area might not get much use. If you typically eat out or in front of the TV, you can get away with a dining room table that will last you through your next apartment, rather than your next decade. After all, your next apartment might not even have a separate dining area.

 

Post found on trulia.com

Raising Rent Without Feeling Guilty

Year-over-year inflation means that raising rent is inevitable for most landlords. However, it can be hard to pass the financial burden along to tenants, especially if they’re long-term and have a good track record.

Here are three ways to increase rent without resentment:

  1. Add a clause in your initial rent agreement.

    Telling tenants ahead of time that rent will increase 2-3% each year is a good way to alleviate any shock that comes from raising the rent when their lease expires. If they ask, explain that a small increase each year helps cover taxes and minor repairs.

  2. Include details in a letter.

    Typically landlords send out a letter at the end of a lease to renew or go month-to-month. This is a good time to introduce the new rent price and explain your reasons. Did you install new countertops or upgrade the storage in your building? Make sure your tenants know that!Pointing out improvements can help take away the sting a price increase, and helps tenants feel confident that their money if going back into improving the living conditions.

  3. Keep rent raises to a minimum.

    In the case of owner-occupied buildings, many landlords choose to take a low maintenance and reliable tenant over a small increase in rent each month. If you’re in it for the long-haul, it might not be worth it to potentially drive good tenants out. However, if you make the yearly increases small there’s a very good chance they’ll stick around.

  4. Distribute the costs.

    If you feel uncomfortable about raising the rent with a monthly fee, you can always consider changing how you charge for utilities. For example, if you currently cover water and electricity, inform the tenants that they will now be in charge of paying the bill and include it in their new lease. This is an especially good option if part of the reason you need to increase rent is higher utility bills.

Post found on fourwalls.rentler.com