Real Estate Strategies
The one “must” property in your real estate portfolio should be your own home. If you own a home, you know the great feeling and sense of accomplishment that comes with that investment. If you rent, owning your own home should be your first step. If you already know the peace of mind that comes with home ownership, investment properties may very well be your best starting point.
As you might expect, not everyone who invests in real estate makes money. The major cause for failure in most “deals gone wrong” is failure to project and calculate R.O.I. or Return on Investment and Net Cash Flow. Unbelievably, many misinformed investors actually purchase real estate just for the tax breaks, even if it means acquiring a net-loss investment! Never find yourself in that league of player by following some of our favorite time-tested strategies.
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Location, Location, Location
The surrounding properties should be as aesthetically pleasing as the eye can handle. You never want to buy the biggest house in the neighborhood because there’s usually no room for growth. Well established mid-town areas are always safe bets, but take special note of surrounding details. Can you smell odors from a nearby dump? Excessive dog barking? Is the house located under an airport flight path? Any of these nuisances can add up to a loss of property value.
Visit your potential property during rush hour – and at night – to develop a sense of the traffic and noises. And a drive through the neighborhood during and after school hours will give you a good take on kid flow and potential problems.
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Live Free by Buying Instead of Renting
There are only three valid reasons for renting:
- You live with your parents or friends rent-free
- You live in a rent-controlled apartment in a city like N.Y.C. where you pay a set fee every month, which is typically much less than you would ever pay normally
- You are living in an area for less than two years
Remember, you are always paying someone’s mortgage-either yours or your landlord’s.
If you buy and live in a home for at least five years, you live practically free–all of your monthly payments, closing costs, insurance and property taxes are returned to you through tax savings and your profit when you sell.
For example, let’s say that you have the option of either buying or renting a $200,000 home (match the dollar figures that best fit your circumstances). If you buy, say your down payment is $10,000 and the interest rate on the mortgage is an 8% average (again, match to the market). Property taxes are $3,000 per year and you are in the 33% tax bracket when your federal and state tax brackets are added together. Here is what happens if the home appreciates just 5% per year.
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Get a Bigger Mortgage to Create a Better Investment
Your home is more than a place to live, it is one of the best investments you will ever make.
There are four positive uses of a mortgage:
- To increase the return on a real estate investment through the power of leverage.
- To buy a home without paying cash.
- To free up real estate equity for higher return investments.
- To pay off non-deductible consumer loans with tax-deductible equity loans.
Leverage is the use of other people’s money (OPM) and a home mortgage is an easy method of putting OPM to work. Earning $10,000 in a savings account would require an investment of $50,000 for two years at 10%. Thirty percent of your interest would be lost to taxes. Buy a $100,000 home with a $10,000 down payment and if the home appreciates 5% per year, you have earned the same $10,000 in two years with no taxes. Your investment return is 50% per year instead of 10%.
When selecting a mortgage, what should you do about those bewildering financing options, including determining down payment amounts, financing terms, interest rates, periods, bi-weekly payments, points and early payoff methods?
Your overall strategy should be to use as much as possible of other people’s money (OPM) at the least expensive usage rate. This means that you should make the smallest down payment possible.
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When Interest Rates are Below 9%, Finance Your Home for 30 Years and Invest the Difference
If Jane makes her regular monthly payments and invests $199 a month at 12% for 15 years, she can expect to have $99,916 available to pay off the mortgage (about $22,800 more than she needs) and the liquidity to use her investment during the 15 years, if necessary.
Even if the average rate of return is 9.25%, which is less than the average return for the past decade, Jane’s investment will be adequate to pay off the mortgage in 15 years.
With mortgage rates as low as they are, there is no incentive for her to pay off that low interest money fast, but to use her discretionary money in some way which has expected potential to grow at a rate greater than her mortgage interest rate.
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Do Not Make Extra Principal Payments on Rental Property Mortgages
Your goal with investment real estate is to buy it with none of your own money and receive monthly positive cash flow. Never use your money to pay down the mortgage debt. Use it to invest in more real estate, mutual funds or to enhance your lifestyle. Also, equity in rental property often is considered “dead equity,” because lenders will not give equity loans on many rental properties. Typically, the only way to get to the equity is to sell.
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Seek Out Online Appraisals First
Want to know what your home is worth, but not ready to make the $400 to $600 plunge for an appraisal? You can check two websites for a quick value. It’s not a substitute for a licensed appraiser, but it can give you some idea. Enter information about your home, including square footage and number of bedrooms and bathrooms. Click into: www.homeagain.com and www.housevalues.com.
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Buy a Home with Your Children or Grandchildren
Buying a home with and for your children or grandchildren can be a financially and personally rewarding experience. The children or grandchildren agree to live in and maintain the property, as well as make the mortgage payments. Both parents and children get the tax and appreciation benefits of a sound real estate investment.
The co-owner who lives in the property enjoys these benefits:
- You qualify for a mortgage you might not be able to get on your own.
- Your down payment is reduced or eliminated altogether.
- You can stop renting and start building equity for the future.
- When you sell, you may use the tax deferral rules to avoid taxes.
- You may deduct your share of the mortgage interest and property taxes.
The parent or grandparent who co-owns but does not live in the property enjoys these financial and tax benefits:
- You can help someone you care about own a home.
- You have a resident property manager.
- There is no vacancy problem.
- You may deduct your share of depreciation, interest, property tax and maintenance expenses.
The resident owner is not allowed to take depreciation, but the non-resident owner, as of today, can. This strategy can also be used by parties who are not related. Profits on the eventual sale of the property are divided based on the ownership percentage of each party.
Please be sure to read our disclaimer prior to acting on any information you find on this website There is never any substitute for personalized professional advice.
