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There are five ways to make money investing in Real Estate!

Buy Low, Sell High

There are more investors looking for foreclosures and distressed property than properties available!  That doesn't mean you can't find a great deal from time to time.  The important thing to remember is to work with a Real Estate Broker who is knowledgeable in this field.  Let everyone you know what you are doing.  Someone may just run into the perfect transaction for you. Don't be discouraged if you have to bid on several properties before finally making a purchase.  Avoid "pie in the sky" promises, one good book on investing is all you need.  Tapes and "magic" contracts won't work.  You need to use Texas Real Estate Commission approved contracts so the Sellers will feel that they are not being duped!  You can't buy for 40 cents on the dollar but you can make a fair profit, buying low, fixing the home's problems and reselling for a profit.

     Tax Benefits

You can write off depreciation on a residential property faster than a commercial property.  The current schedule is 27 1/2 years.  This is basically free money.  The tax savings is part of your cash-on-cash return.  Remember you can't write-off the value of the land, just the building whether it is a single family residence, a duplex, fourplex or small apartment building.  Office buildings and shopping centers are on a 38 1/2 year depreciation schedule.  In addition, you can deduct taxes, insurance, repairs and other expenses.  1031 tax exchanges can defer your tax liability when buying and selling.  Preserve your equity to invest in additional properties. Be sure to check with a knowledgeable tax accountant to get the latest figures approved by the IRS.

Cash Flow

This means that you are getting more income for your property than the expense that is involved.  For example, you purchase a single family home and rent is for $1500 per month.  Your PITI (principle, interest, tax and insurance runs you $1100 per month.  You reserve $150 a month toward repairs, vacancy and leasing expenses.  Your positive cash flow on this property would be $250 per month.

Principle Reduction

Part of your mortgage payment every month includes a partial payment of the mortgage amount that you owe.  You cannot deduct this on your tax return.  The payment is usually small in the early years of your mortgage but accumulates over the years.  It is essentially free money since your tenant is paying this for you.  Your profits will be realized when you sell the building or increase your cash flow when the mortgage is paid off.

     Appreciation

It is impossible to know exactly what appreciation will be in the short term but in the long run Real Estate has proven itself to appreciate in value and has kept up with inflation.  Over the years as you pay off your mortgage and your property increases in value you may see a major increase in your total wealth.

 BASIC PROPERTY TYPES

Single family residences: come in many forms, but first-time investors are usually advised to buy a single family detached property.  They are easy to buy and easy to rent out and have an appeal to the greatest number of buyers at resale.  Single family homes are also the easiest to finance.

Apartment properties: these properties require a long-term commitment, substantial down payments and  mortgages.  Most investors hire professional management so an investment in an apartment building does not require as much personal time.  Mortgages are generally repaid with income generated by rents.

Condominiums: provide a bit of extra risk, appreciate more slowly than detached single family residences. Rental fees need to be high enough to cover mortgage, property tax and maintenance fees.

Vacant land: highly speculative and probably the least liquid of all real estate investments. Consider this a long term investment.  Easy to manage however, takes longer to appreciate and longer to sell.

Commercial property: some investors form or join a limited liability company to reduce personal liability and offset the greater expense of these properties.  These investor agreements can be high risk and you should have a real estate attorney prepare and review all agreements.  

HOW TO AVOID COMMON MISTAKES

Keep properties in top shape, clean paint and fresh odors will command a higher rent.

Establish a schedule to inspect your units regularly.

Use high quality materials, i.e. carpets, vinyl flooring.

Build a relationship with maintenance people and vendors. They will make you top priority in an emergency.

Select considerate tenants and build good tenant relations.  Be flexible when tenants have personal problems.  It is usually easier to keep current tenants than to have a high turn-over.

 

 To work with any of our professional agents e-mail sandy@sondra.info