Reading notes from The Wall Street Journal Complete Real-Estate Investing Guidebook
Four basic rules for success with real estate investments:
Buy a property for less than you can sell it.
Use other people’s money as much as possible.
Make sure the property pays for itself.
Take maximum advantage of the tax laws.
When looking at appreciation rates, homeowners rarely consider total cost of ownership – replacing roof, furnaces, appliances.
When you consider the total interest payments and home improvement costs, very few homeowners with a 30-year mortgage actually come out ahead.
Who loans the money:
Family and friends
Hard money lenders
A real-estate license won’t hurt – one needs a network of contacts to acquire properties before they hit the Web listings or newspapers.
Three questions to ask about each property:
Is buying this property the best use of the money?
Will it pay for itself?
Can you add value to the property?
Two ways to raise profits for the property – increase the rent or decrease expenses.
Buy locally – you’re unlikely to be able to add value to the property being on the other side of the country or world, partnerships with remote partners tend not to be hands-on.
By having several properties nearby, you save on your time, and contractor’s or handyman’s time when you plan a major repair job.
Cap rates are lower in desirable neighborhoods and higher in high-risk neighborhoods.
Gross Rent Multiplier – ballpark figure, total price divided by annual gross income produced by the property.
Debt-service ratio – used by lenders, net operating income divided by annual debt payment, should be in the range of 1-1.5.
Return on investment – cap rate inclusive of loan payments.
Before striking a deal, write a note to the tenants introducing yourself, and ask for what could be improved. You can get a good overview of current problems.
The biggest reason people invest in real estate is to use depreciation – fantom losses on the properties count against one’s income. Government has a way, however, to recapture that at the time of sale, when it turns out the property has not depreciated as much as expected.
You have to materially participate in the investment to get the investment income treatment – that means maintenance and being involved with tenants.
1031 exchange allows an investor to sell an existing property and buy a more expensive property without paying taxes on the sale.
If you bought a house (for yourself) at the peak of the market and are in the hole now, rent it out for a couple of years before selling, and then capture the losses as investment losses.
Each property should be a separate entity, easier to operate and sell.
Home office deduction raises a flag with IRS, usually it’s hardly ever worth bothering.
Types of starter investment properties:
Single family homes
Duplexes and multi-family homes
With in-law units, it’s hard to qualify for material participation rule, therefore the hope is to have the expenses and depreciation be deductible and as a result have the rental income arrive to you tax-free.
Vacation homes are tougher to qualify as investment properties, as you cannot use them for longer than 10% of their total rental availability. However, two weeks of rental income on such properties is tax-free.
Once you pass 4-family units, residential loans no longer apply, for commercial loans it’s typically expected that you cover at least 25% of down payment.