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- Herausgeber: John Wiley & Sons
- Kategorie: Ratgeber
- Sprache: Englisch
Build wealth through real estate
Real Estate Investing All-in-One For Dummies will show new and seasoned real estate investors how to make smart decisions. With seven books in one, this complete resource will teach you how to purchase real estate, flip houses, invest in commercial real estate and foreclosures, sell your house, buy real estate internationally, and more. We even explain the ins and outs of short-term rentals like Airbnb, so all your passive income options are covered. With this book, you can start investing in real estate quickly and easily, thanks to user-friendly information and expert tips that will help you avoid costly mistakes. It’s your one-stop resource for all things real estate.
- Learn how to buy and sell real estate, including how to find the best deals
- Determine whether flipping houses or short-term rental management is for you
- Maximize your earnings and minimize your tax bill in real estate investment
- Extend your reach outside the United States by investing in real estate globally
This is the perfect Dummies guide for amateur real estate investors who need a hand getting started, and for seasoned investors looking to up their game with commercial, international, and other investment strategies.
Das E-Book können Sie in Legimi-Apps oder einer beliebigen App lesen, die das folgende Format unterstützen:
Veröffentlichungsjahr: 2022
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Real Estate Investing All-in-One For Dummies®
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2023 by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Control Number: 2022948311
ISBN 978-1-394-15284-1 (pbk); ISBN 978-1-394-15289-6 (ebk); ISBN 978-1-394-15288-9 (ebk)
Real Estate Investing Al-in-One For Dummies®
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Table of Contents
Cover
Title Page
Copyright
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Book 1: Getting Started with Real Estate Investing
Chapter 1: Evaluating Real Estate as an Investment
Understanding Real Estate’s Income- and Wealth-Producing Potential
Recognizing the Caveats of Real Estate Investing
Comparing Real Estate to Other Investments
Determining Whether You Should Invest in Real Estate
Fitting Real Estate into Your Plans
Chapter 2: Covering Common Real Estate Investments
Identifying the Various Ways to Invest in Residential Income Property
Surveying the Types of Residential Properties You Can Buy
Considering Commercial Real Estate
Buying Undeveloped or Raw Land
Chapter 3: Building Your Team
Knowing When to Establish Your Team
Adding a Tax Advisor
Finding a Financial Advisor
Lining Up a Lender or Mortgage Broker
Working with Brokers and Agents
Considering an Appraiser
Finding an Attorney
Chapter 4: Financing Your Property Purchases
Taking a Look at Mortgage Options
Reviewing Other Common Fees
Making Some Mortgage Decisions
Borrowing Against Home Equity
Getting a Seller-Financed Loan
Mortgages That Should Make You Think Twice
Chapter 5: Grasping the Legal Fundamentals of Managing Residential Rentals
Running Your Operation as a Corporation or LLC
Taking Ownership of a Rental Property
Avoiding the Legal Pitfalls of Managing Residential Rental Properties
Book 2: Welcome Home: Buying a House
Chapter 1: Knowing Where and What to Buy
A Crash Course on Factors Affecting a Home’s Value
Location, Location, Value
Fundamental Principles for Selecting Your Home
Defining Home Sweet Home
Finding a Great Deal
Chapter 2: Determining a House’s Worth
Preparing to Tour an Endless Parade of Homes
The Three Elusive Components of Worth
Explaining Fair Market Value
Figuring Out Fair Market Value: Comparable Market Analysis
Getting a Second Opinion: Appraisals versus CMAs
Why Buyers and Sellers Often Start Far Apart
Chapter 3: Negotiating Your Best Deal
Understanding and Coping with Your Emotions
The Art of Negotiating
The Negotiating Process
The Finer Points of Negotiating
Book 3: Investing in a Foreclosure Property
Chapter 1: Getting Up to Speed on the Foreclosure Process
Identifying the Foreclosure Process in Your Area
Exploring the Missed-Payment Notice Stage
Getting Serious: The Notice of Default
Proceeding to the Foreclosure Sale
Halting the Foreclosure Process
Finalizing the Foreclosure: Ushering the Previous Owners out the Door
Chapter 2: Picking Your Point of Entry in the Foreclosure Process
Dipping In at the Pre-Auction Stage
Pursuing Foreclosure Notices
Bidding for a Property at a Foreclosure Auction
Acquiring Properties after the Auction
Waiting Out the Redemption Period — If Necessary
Chapter 3: Performing Your Due Diligence
Collecting Essential Information about the Property
Doing Your Fieldwork: Inspecting the Property
Assembling Your Property Dossier: A Checklist
Recognizing the Most Common and Serious Red Flags and Big Mistakes
Chapter 4: Cashing Out on Your Foreclosure Property
Selling Through a Qualified Real Estate Agent
Staging Your House for a Successful Showing
Generating Interest Through Savvy Marketing
Negotiating Offers and Counteroffers
Closing the Deal
Checking Out Other Cash-Out Strategies
Book 4: Flipping a House
Chapter 1: Devising an Effective Flipping Strategy
Deciding on the Role You Want to Play
Surveying Different Strategies
Drawing Up a Detailed Plan in Advance
Plan B: Surviving a Flip That Flops
Chapter 2: Inspecting the Property and Estimating Rehab Costs
Packing for Your Inspection Mission
Finding the Perfect Candidate for a Quick Makeover
Assessing Potential Curbside Appeal
Taking a Big Whiff, Inside and Out
Inspecting the House for Big-Ticket Items
Discovering Some Promising Features
Arriving at a Ballpark Figure for Repair and Renovation Costs
Chapter 3: Calculating Your Profit and Best Offer
Doing the Math to Ensure a Profitable Flip
Estimating a Realistic Resale Value
Accounting for Expenses
Chapter 4: Prioritizing and Planning Your Renovations
Developing an Eye for Home Improvements
Prioritizing Your Projects
Delegating Duties
Drawing Up a Tentative Budget
Coming Up with a Game Plan
Chapter 5: Negotiating the Sale to Maximize Your Profit
Comparing Seemingly Similar Offers
Mastering the Art of Counteroffers
Shuffling Papers and Other Legal Stuff at Closing
Book 5: Using Your House as an Airbnb
Chapter 1: Hosting on Airbnb: What It Really Means
Having a Hospitality Mindset: What It Takes to Be a Host
Before You Become an Airbnb Host: What to Consider
Chapter 2: Determining Your Profit Potential
Decoding How Much You Can Really Make on Airbnb
Researching Your Airbnb Market: Earning Statistics
Determining the Size of Your Pie
Comparing the Big City versus Rural Markets
Determining the Legality of Hosting in Your Market
Chapter 3: Preparing Your Property
Creating Profit Potential with Your Property
Determining the Amenities Guests Want in Your Market
Deciding Which Amenities, Furniture, and Appliances to Include
Figuring Out What Space Is Accessible to Guests in Your Listing
Managing Neighbors’ Relations
Managing Landlord Relations
Getting Proper Insurance Protection
Being a Guest First to Better Understand Hosting: Walk in Your Guests’ Shoes
Chapter 4: Setting Your Listing Pricing
Focusing on Baseline Pricing
Ramping Up to Baseline Pricing
Understanding and Adjusting for Seasonality
Factoring in Temporality and Special Events: Going from High to Low
Using Dynamic Pricing: Yes or No?
Setting Other Types of Fees
Book 6: It’s All Over: Selling Your House
Chapter 1: Deciding to Sell
Figuring Out Whether You Really Need to Sell
Knowing the Health of Your Housing Market
Chapter 2: Timing Is Everything
Timing the Sale of Your House
The Seller’s Quandary: Timing the Purchase of Your Home
Consolidating Your Sale and Purchase
Chapter 3: Price It Right and Buyers Will Come
Getting a Grasp on Pricing Methods
Identifying Incentives and Gimmicks
Overpricing Your House
Chapter 4: Marketing Your House
Advertising That Works
Arranging Open Houses
Showing Your Property
Book 7: Gone Global: Investing in International Real Estate
Chapter 1: Introducing International Investment Strategies
Taking Your Real Estate Investments to the Next Level
Focusing on Investment Strategies That You Can Use Internationally
Running Your Property Portfolio as a Business
Getting Your Financial Ducks in a Row
Blending Real Estate Strategies to Create a More Robust Portfolio
So Which Strategies Are Right for You?
Chapter 2: Investing at Home or Abroad: Which Is Right for You?
Deciding Whether to Invest Abroad: It’s Not All about the Numbers
Considering Your Budget
Assessing Your Risk Profile
Figuring Out How You’ll Manage Your Property
Drilling Down to the Right Market for You
Focusing Your Attention on One or Two Key Markets
Book 8: The Next Level: Investing in Commercial Real Estate
Chapter 1: A Crash Course in Commercial Real Estate Investing
Comparing Commercial Real Estate and Residential Real Estate
Deciding to Invest in Commercial Real Estate
Exploring the Available Types of Investments
Getting Started
Recognizing Myths and Questions about Investing in Commercial Real Estate
Timing the Commercial Real Estate Market
Chapter 2: Evaluating Commercial Real Estate
Talking the Talk: Terms You Need to Know
The Commercial Property Evaluator
Diving Deeper into Property Valuation
Running the Numbers on Some Properties
Valuing Properties like a Professional
Understanding What Creates Value
Differentiating a Good Deal from a Bad Deal
Chapter 3: Property Management: Who’s Minding Your Ship?
Being the Boss: Manage Your Commercial Property Yourself
Letting Go: Using Professional Property Management Companies
Knowing How to Be an Effective Absentee Owner
Index
About the Authors
Connect with Dummies
End User License Agreement
List of Tables
Chapter 1
TABLE 1-1 How a Rental Property’s Income and Wealth Build over Time
Chapter 7
TABLE 2-1 Sample CMA — “Recent Sales” Section
TABLE 2-2 Sample CMA — “Currently for Sale” Section
Chapter 29
TABLE 2-1 Cap Rates
TABLE 2-2 Courtside Apartments Example
TABLE 2-3 Square Footage and Yearly Rent for Kimo’s Landing
Chapter 30
TABLE 3-1 Typical Monthly Reports
List of Illustrations
Book 2 Chapter 7
FIGURE 2-1: How buyers and sellers approach fair market value.
Book 3 Chapter 11
FIGURE 3-1: Collect important details about the foreclosure property from the N...
FIGURE 3-2: Record information from the foreclosure notice and public records o...
FIGURE 3-3: Personally inspect the neighborhood and the exterior of the propert...
FIGURE 3-4: Inspect the home’s interior if possible.
Book 4 Chapter 14
FIGURE 2-1: A home inspection checklist is an essential inspection tool.
FIGURE 2-2: This house is a potentially perfect candidate for a quick makeover....
Book 4 Chapter 16
FIGURE 4-1: A renovation planner is a handy tool for estimating costs.
Book 5 Chapter 19
FIGURE 2-1: How much Airbnb hosts earn.
FIGURE 2-2: Two blocks away, a world of difference.
FIGURE 2-3: Average monthly rental revenue.
FIGURE 2-4: Seeing market seasonality.
FIGURE 2-5: Estimated time commitment required per week for hosting.
FIGURE 2-6: Comparing an urban versus a remote listing.
Book 5 Chapter 21
FIGURE 4-1: Baseline pricing exercise.
FIGURE 4-2: Different kinds of seasonality.
FIGURE 4-3: Example of how a third-party pricing tool could benefit a listing.
FIGURE 4-4: The fees can add up.
Book 6 Chapter 22
FIGURE 1-1: Trading homes can cost you big bucks.
Book 6 Chapter 23
FIGURE 2-1: A real estate marketing calendar usually has predictable peaks and ...
Book 6 Chapter 25
FIGURE 4-1: Here’s what a good listing statement looks like.
Book 8 Chapter 28
FIGURE 1-1: The real estate cycle.
Book 8 Chapter 29
FIGURE 2-1: The Commercial Property Evaluator is a tool that helps you evaluate...
FIGURE 2-2: The breakeven point in this example is 55 percent.
Book 8 Chapter 30
FIGURE 3-1: A weekly property report.
Guide
Cover
Title Page
Copyright
Table of Contents
Begin Reading
Index
About the Authors
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Introduction
Successful real estate investing requires smart decisions. Real Estate Investing All-in-One For Dummies presents basic real estate investing topics — such as buying and selling houses, investing in foreclosures, and flipping properties — but also introduces advanced subjects, like international and commercial real estate investing, that can help you build even more wealth. You even get the ins and outs of short-term rentals like Airbnb, so all your passive income options are covered.
This book can help you start investing in real estate quickly and easily, thanks to expert tips and information that will help you avoid costly mistakes. It’s your one-stop resource for all things real estate. Explore the pages of this book and find the topics that most interest you within the world of real estate investing.
About This Book
You don’t need a fancy degree to invest in real estate. What you do need is a desire to read, absorb, and practice the simple yet effective strategies in this book. Real Estate Investing All-in-One For Dummies is designed to give you a realistic approach to investing in real estate. It provides sound, practical lessons and insights. You’re not expected to read it from cover to cover. Instead, this book is designed as a reference tool. Feel free to read the chapters in whatever order you choose. You can flip to the sections and chapters that interest you or those that include topics that you need to know more about.
A quick note: Sidebars (shaded boxes of text) dig into the details of a given topic, but they aren’t crucial to understanding it. Feel free to read them or skip them. You can pass over the text accompanied by the Technical Stuff icon, too. The text marked with this icon gives some interesting but nonessential information about the subject of real estate investing.
One last thing: Within this book, you may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending as though the line break doesn’t exist. If you’re reading this as an e-book, you’ve got it easy — just click the web address to be taken directly to the web page.
Foolish Assumptions
No matter your skill or experience level with real estate investing, you can get something out of this book. Here are some assumptions we made about you as we wrote this book:
You’re new to investing in real estate and don’t know what properties and strategies will work for you.
Your real estate experience is limited to renting an apartment or owning your own home, and you’re interested in finding out more about foreclosures, flipping, and other investment options.
You may already be a seasoned real estate investor, but you’re ready to go to the next level with commercial and international properties.
You want to diversify your investment portfolio.
Icons Used in This Book
Throughout this book, icons help guide you through suggestions, solutions, and cautions. Here’s what they mean.
The name says it all! This icon indicates something really important to take away from this book.
Information marked with this icon is interesting but not crucial to understanding real estate investing. Skip it or read it; the choice is yours.
This icon highlights helpful strategies that can enable you to build your real estate portfolio (and your wealth) faster.
This icon indicates treacherous territory in real estate investing. Skip this information at your own peril.
Beyond the Book
In addition to the material in the print or e-book you’re reading right now, this product comes with a free access-anywhere Cheat Sheet that can put you on the road to successful real estate investing. To get this Cheat Sheet, simply go to www.dummies.com and search for “Real Estate Investing All-in-One For Dummies Cheat Sheet” in the Search box.
Where to Go from Here
If you’re a new real estate investor, you may want to consider starting from the beginning; head to Book 1 on getting started. That way, you’ll be ready for some of the more advanced topics introduced later. But you don’t have to read this book from cover to cover. Real Estate Investing All-in-One For Dummies makes it easy to find answers to specific questions. Just turn to the table of contents or index to locate the information you need. You can get in and get out, just like that. Good luck!
Book 1
Getting Started with Real Estate Investing
Contents at a Glance
Chapter 1: Evaluating Real Estate as an Investment
Understanding Real Estate’s Income- and Wealth-Producing Potential
Recognizing the Caveats of Real Estate Investing
Comparing Real Estate to Other Investments
Determining Whether You Should Invest in Real Estate
Fitting Real Estate into Your Plans
Chapter 2: Covering Common Real Estate Investments
Identifying the Various Ways to Invest in Residential Income Property
Surveying the Types of Residential Properties You Can Buy
Considering Commercial Real Estate
Buying Undeveloped or Raw Land
Chapter 3: Building Your Team
Knowing When to Establish Your Team
Adding a Tax Advisor
Finding a Financial Advisor
Lining Up a Lender or Mortgage Broker
Working with Brokers and Agents
Considering an Appraiser
Finding an Attorney
Chapter 4: Financing Your Property Purchases
Taking a Look at Mortgage Options
Reviewing Other Common Fees
Making Some Mortgage Decisions
Borrowing Against Home Equity
Getting a Seller-Financed Loan
Mortgages That Should Make You Think Twice
Chapter 5: Grasping the Legal Fundamentals of Managing Residential Rentals
Running Your Operation as a Corporation or LLC
Taking Ownership of a Rental Property
Avoiding the Legal Pitfalls of Managing Residential Rental Properties
Chapter 1
Evaluating Real Estate as an Investment
IN THIS CHAPTER
Focusing on the potential (and downsides) of real estate investing
Contrasting real estate with other investing options
Deciding whether real estate is really for you
Arranging your overall investment and financial plans to include real estate
It’s never too early or too late to formulate your own plan for a comprehensive wealth-building strategy. For many, such a strategy can help with the goals of funding future education for children and ensuring a comfortable retirement.
The challenge involved with real estate is that it takes some real planning to get started. Contacting an investment company and purchasing some shares of your favorite mutual fund or stock is a lot easier than acquiring your first rental property. Buying property need not be too difficult, though. With a financial and real estate investment plan, a lot of patience, and the willingness to do some hard work, you can be on your way to building your own real estate empire!
This chapter gives you information that can help you decide whether you have what it takes to make money and be comfortable with investing in real estate. You compare real estate investments to other investments. You find some questions you should ask yourself before making any decisions. And finally, you get guidance on how real estate investments can fit into your overall personal financial plans. Along the way, you find insights and thoughts on a long-term strategy for building wealth through real estate that virtually everyone can understand and actually achieve.
Understanding Real Estate’s Income- and Wealth-Producing Potential
Compared with most other investments, good real estate can excel at producing periodic or monthly cash flow for property owners. So in addition to the longer-term appreciation potential, you can also earn investment income year in and year out. Real estate is a true growth and income investment.
The vast majority of people who don’t make money in real estate make easily avoidable mistakes, which this book helps you avoid.
The following list highlights the major benefits of investing in real estate:
Tax-deferred compounding of value:
In real estate investing, the appreciation of your properties compounds
tax-deferred
during your years of ownership. You don’t pay tax on this profit until you sell your property — and even then, you can roll over your gain into another investment property and avoid paying taxes. (See the later section “
Being aware of the tax advantages
.”)
Regular cash flow: If you have property that you rent out, you have money coming in every month in the form of rents. Some properties, particularly larger multi-unit complexes, may have some additional cash flow sources, such as from parking, storage, or washers and dryers.
When you own investment real estate, you should also expect to incur expenses that include your mortgage payment, property taxes, insurance, and maintenance. The interaction of the revenues coming in and the expenses going out tells you whether you realize a positive operating profit each month.
Reduced income tax bills:
For income tax purposes, you also get to claim an expense that isn’t really an out-of-pocket cost — depreciation. Depreciation enables you to reduce your current income tax bill and hence increase your cash flow from a property. (Find out about this tax advantage and others in the later section “
Being aware of the tax advantages
.”)
Rate of increase of rental income versus overall expenses:
Over time, your operating profit, which is subject to ordinary income tax, should rise as you increase your rental prices faster than the rate of increase for your property’s overall expenses. The following simple example shows why even modest rental increases are magnified into larger operating profits and healthy returns on investment over time.
Suppose that you’re in the market to purchase a single-family home that you want to rent out and that such properties are selling for about $200,000 in the area you’ve deemed to be a good investment. (Note: Housing prices vary widely across different areas, but the following example should give you a relative sense of how a rental property’s expenses and revenues change over time.) You expect to make a 20 percent down payment and take out a 30-year fixed rate mortgage at 6 percent for the remainder of the purchase price — $160,000. Here are the details:
Monthly mortgage payment
$960
Monthly property tax
$200
Other monthly expenses (maintenance, insurance)
$200
Monthly rent
$1,400
Table 1-1 shows you what happens with your investment over time. Assume that your rent and expenses (except for your mortgage payment, which is fixed) increase 3 percent annually and that your property appreciates a conservative 4 percent per year. (For simplification purposes, depreciation is ignored in this example. If the benefit of depreciation had been included, it would further enhance the calculated investment returns.)
TABLE 1-1 How a Rental Property’s Income and Wealth Build over Time
Year
Monthly Rent
Monthly Expenses
Property Value
Mortgage Balance
0
$1,400
$1,360
$200,000
$160,000
5
$1,623
$1,424
$243,330
$148,960
10
$1,881
$1,498
$296,050
$133,920
20
$2,529
$1,682
$438,225
$86,400
30
$3,398
$1,931
$648,680
$0
31
$3,500
$1,000
$674,625
$0
Now, notice what happens over time. When you first buy the property, the monthly rent and the monthly expenses are about equal. By year five, the monthly income exceeds the expenses by about $200 per month. Consider why this happens — your largest monthly expense, the mortgage payment, doesn’t increase. So, even though you can assume that the rent increases just 3 percent per year, which is the same rate of increase assumed for your nonmortgage expenses, the compounding of rental inflation begins to produce larger and larger cash flows to you, the property owner. Cash flow of $200 per month may not sound like much, but consider that this $2,400 annual income is from an original $40,000 investment. Thus, by year five, your rental property is producing a 6 percent return on your down payment investment. (And remember, if you factor in the tax deduction for depreciation, your cash flow and return are even higher.)
In addition to the monthly cash flow from the amount that the rent exceeds the property’s expenses, also look at the last two columns in Table 1-1 to see what has happened by year five to your equity (the difference between market value and mortgage balance owed) in the property. With just a 4 percent annual increase in market value, your $40,000 in equity (the down payment) has more than doubled to $94,370 ($243,330 – $148,960).
By years 10 and 20, you can see the further increases in your monthly cash flow and significant expansion in your property’s equity. By year 30, the property is producing more than $1,400 per month cash flow and you’re now the proud owner of a mortgage-free property worth more than triple what you paid for it!
After you get the mortgage paid off in year 30, take a look at what happens in year 31 and beyond to your monthly expenses (big drop as your monthly mortgage payment disappears!) and therefore your cash flow (big increase).
Recognizing the Caveats of Real Estate Investing
Despite all its potential, real estate investing isn’t lucrative at all times and for all people — here’s a quick outline of the biggest caveats that accompany investing in real estate:
Few home runs:
Your likely returns from real estate won’t approach the biggest home runs that the most accomplished entrepreneurs achieve in the business world. That said, by doing your homework, improving properties, and practicing good management (and sometimes enjoying a bit of luck), you can do extremely well!
Upfront operating profit challenges:
Unless you make a large down payment, your monthly operating profit may be small, nonexistent, or negative in the early years of rental property ownership. During soft periods in the local economy, rents may rise more slowly than your expenses or they may even fall. That’s why you must ensure that you can weather financially tough times. In the worst cases, rental property owners lose both their investment property and their homes. See the later section “
Fitting Real Estate into Your Plans
.”
Ups and downs:
You’re not going to earn an 8 to 10 percent return every year. Although you have the potential for significant profits, owning real estate isn’t like owning a printing press at the U.S. Treasury. Like stocks and other types of ownership investments, real estate goes through down periods as well as up periods. Most people who make money investing in real estate do so because they invest and hold property over many years.
Relatively high transaction costs:
If you buy a property and then want out a year or two later, you may find that even though it has appreciated in value, much (if not all) of your profit has been wiped away by the high transaction costs. Typically, the costs of buying and selling — which include real estate agent commissions, loan fees, title insurance, and other closing costs — amount to about 8 to 12 percent of the purchase price of a property. So, although you may be elated if, in the short term, your property appreciates 10 percent in value, you must consider the overall financial picture. You may not be so thrilled when you realize that selling the property may not have any greater return than stashing your money in a lowly bank account.
Tax implications:
Last, but not least, when you make a positive net return or profit on your real estate investment, the federal and state governments are waiting with open hands for their shares. Throughout this book, you discover ways to improve your after-tax returns. Keep in mind that the profit you have left after government entities take their bites (not your pretax income) is what really matters.
These drawbacks shouldn’t keep you from exploring real estate investing as an option; rather, they simply reinforce the need to really know what you’re getting into with this type of investing and whether it’s a good match for you. The rest of this chapter takes you deeper into an assessment of real estate as an investment as well as introspection about your goals, interests, and abilities.
Comparing Real Estate to Other Investments
Surely, you’ve considered or heard about many different investments over the years. To help you grasp and understand the unique characteristics of real estate, the following sections compare and contrast real estate’s attributes with those of other wealth-building investments like stocks and small business.
Returns
Clearly, a major reason that many people invest in real estate is for the healthy total returns (which include ongoing cash flow and the appreciation of the property). Real estate often generates robust long-term returns because, like stocks and small business, it’s an ownership investment. This means that real estate is an asset that has the ability to produce periodic income and gains or profits upon refinancing or sale.
Research and experience suggest that total real estate investment returns are comparable to those from stocks — about 8 to 9 percent on average, annually. Over recent decades, the average annual return on real estate investment trusts (REITs), publicly traded companies that invest in income-producing real estate such as apartment buildings, office complexes, and shopping centers, has appreciated at about this pace as well.
And you can earn long-term returns that average much better than 10 percent per year if you select excellent properties in the best areas, hold them for several years, and manage them well.
Risk
Real estate doesn’t always rise in value — witness the decline occurring in most parts of the U.S. during the late 2000s and early 2010s. That said, market values for real estate generally don’t suffer from as much volatility as stock prices do. You may recall how the excitement surrounding the rapid sustained increase of technology and internet stock prices in the late 1990s turned into the dismay and agony of those same sectors’ stock prices crashing in the early 2000s. Many stocks in this industry, including those of leaders in their niches, saw their stock prices plummet by 80 percent, 90 percent, or more. Generally, you don’t see those kinds of dramatic roller-coaster shifts in values over the short run with the residential income property real estate market.
However, keep in mind (especially if you tend to be concerned about shorter-term risks) that real estate can suffer from declines of 10 percent, 20 percent, or more. If you make a down payment of, say, 20 percent and want to sell your property after a 10 to 15 percent price decline, you may find that all (as in 100 percent) of your invested dollars (down payment) are wiped out after you factor in transaction costs. So you can lose everything.
You can greatly reduce and minimize your risk investing in real estate through buying and holding property for many years (seven to ten or more). Note that many of these fantastic success stories about amazing profits on “flipping” single-family homes and small rental properties are just like gamblers who only tell you about their biggest winnings or forget to tell you that they turned around and lost much of what they won. While there is a lot of hype on cable television and the internet about “flipping properties” for short-term profits (get the scoop in Book 4), think of real estate as a long-term investment.
Liquidity
Liquidity — the ease and cost with which you can sell and get your money out of an investment — is one of real estate’s shortcomings. Real estate is relatively illiquid: You can’t sell a piece of property with the same speed with which you can whip out your ATM card and withdraw money from your bank account or sell a stock or an exchange-traded fund with a click of your computer’s mouse or by tapping on your cellphone.
You can actually view real estate’s relative illiquidity as a strength, certainly compared with stocks that people often trade in and out of because doing so is so easy and seemingly cheap. As a result, some stock market investors tend to lose sight of the long term and miss out on the bigger gains that accrue to patient, buy-and-stick-with-it investors. Because you can’t track the value of investment real estate daily on your computer and because real estate takes considerable time, energy, and money to sell, you’re far more likely to buy and hold onto your properties for the longer term.
Although real estate investments are generally less liquid than stocks, they’re generally more liquid than investments made in your own or someone else’s small business. People need a place to live and businesses need a place to operate, so there’s always demand for real estate (although the supply of such available properties can greatly exceed the demand in some areas during certain time periods).
Capital requirements
Although you can easily get started with traditional investments such as stocks and mutual funds with a few hundred or thousand dollars, the vast majority of quality real estate investments require far greater investments — usually on the order of tens of thousands of dollars.
If you’re one of the many people who don’t have that kind of money, don’t despair. Among the simplest low-cost real estate investment options are real estate investment trusts (REITs). You can buy these as exchange-traded stocks or invest in a portfolio of REITs through a REIT mutual fund.
Diversification value
An advantage of holding investment real estate is that its value doesn’t necessarily move in tandem with other investments, such as stocks or small-business investments that you hold. You may recall, for example, the massive stock market decline in the early 2000s. In most communities around the United States, real estate values were either steady or actually rising during this horrendous period for stock prices.
However, real estate prices and stock prices, for example, can move down together in value (witness the severe recession and stock market drop that took hold in 2008). Sluggish business conditions and lower corporate profits can depress stock and real estate prices.
Opportunities to add value
Although you may not know much about investing in the stock market, you may have some good ideas about how to improve a property and make it more valuable. You can fix up a property or develop it further and raise the rental income accordingly. Perhaps through legwork, persistence, and good negotiating skills, you can purchase a property below its fair market value.
Relative to investing in the stock market, tenacious and savvy real estate investors can more easily buy property in the private real estate market at below fair market value because the real estate market is somewhat less efficient and some owners don’t realize the value of their income property or they need to sell quickly. Theoretically, you can do the same in the stock market, but the scores of professional, full-time money managers who analyze the public market for stocks make finding bargains more difficult.
Being aware of the tax advantages
Real estate investment offers numerous tax advantages. The following sections compare and contrast investment property tax issues with those of other investments.
Deductible expenses (including depreciation)
Owning a property has much in common with owning your own small business. Every year, you account for your income and expenses on a tax return. Be sure to keep good records of your expenses in purchasing and operating rental real estate. One expense that you get to deduct for rental real estate on your tax return — depreciation — doesn’t actually involve spending or outlaying money. Depreciation is an allowable tax deduction for buildings because structures wear out over time. Under current tax laws, residential real estate is depreciated over 27½ years (commercial buildings are less favored in the tax code and can be depreciated over 39 years). Residential real estate is depreciated over shorter time periods because it has traditionally been a favored investment in U.S. tax laws.
Tax-free rollovers of rental property profits
When you sell a stock, mutual fund, or exchange-traded investment that you hold outside a retirement account, you must pay tax on your profits. By contrast, you can avoid paying tax on your profit when you sell a rental property if you roll over your gain into another like-kind investment real estate property.
The rules for properly making one of these 1031 exchanges are complex and involve third parties. Make sure that you find an attorney and/or tax advisor who is an expert at these transactions to ensure that you meet the technical and strict timing requirements so everything goes smoothly (and legally).
If you don’t roll over your gain, you may owe significant taxes because of how the IRS defines your gain. For example, if you buy a property for $200,000 and sell it for $550,000, you not only owe tax on the gain from the increased property value, but you also owe tax on an additional amount, the property’s depreciation you used during your ownership. The amount of depreciation that you deduct on your tax returns reduces the original $200,000 purchase price, making the taxable difference that much larger. For example, if you deducted $125,000 for depreciation over the years that you owned the property, you owe tax on the difference between the sale price of $550,000 and $75,000 ($200,000 purchase price – $125,000 depreciation).
Deferred taxes with installment sales
Installment sales are a complex method that can be used to defer your tax bill when you sell an investment property at a profit and you don’t buy another rental property. With such a sale, you play the role of banker and provide financing to the buyer. In addition to often collecting a competitive interest rate from the buyer, you only have to pay capital gains tax as you receive proceeds over time from the sale that are applied toward the principal or price the buyer agreed to pay for the property. Because of the complexity of this method, consider consulting with a tax attorney.
Special tax credits for low-income housing and old buildings
If you invest in and upgrade low-income housing or certified historic buildings, you can gain special tax credits. The credits represent a direct reduction in your tax bill from expenditures to rehabilitate and improve such properties. These tax credits exist to encourage investors to invest in and fix up old or run-down buildings that likely would continue to deteriorate otherwise. The IRS has strict rules governing what types of properties qualify. See IRS Form 3468 to discover more about these credits.
The 2017 Tax Cuts and Jobs Act bill created “qualified opportunity zones” to provide tax incentives to invest in “low-income communities,” which are defined by each state’s governor and may comprise up to 25 percent of designated “low-income communities” in each state. (States can also designate census tracts contiguous with “low-income communities” so long as the median family income in those tracts doesn’t exceed 125 percent of the qualifying contiguous “low-income community.”)
The new qualified opportunity zone tax incentive allows real estate investors the following potential benefits:
The capital gains tax due upon a sale of the property is deferred if the capital gain from the sale is reinvested within 180 days in a qualified opportunity fund.
For investments in the qualified opportunity fund of at least five years, investors will receive a step-up in tax basis of 10 percent of the original gain.
For investments in the qualified opportunity fund of at least seven years, investors will receive an additional 5 percent step-up in tax basis.
For investments of ten or more years or earlier than December 31, 2026, investors can exclude all capital gains of the investment.
20% Qualified Business Income (QBI) deduction for “pass-through entities”
The 2017 Tax Cuts and Jobs Act includes lower across-the-board federal income tax rates, which benefit all wage earners and investors, including real estate investors. If you spend at least 250 hours per year on certain activities (defined in a moment) related to your real estate investments, you may also be able to utilize an additional tax break targeted to certain small business entities.
In redesigning the tax code, Congress realized that the many small businesses that operate as so-called pass-through entities would be subjected to higher federal income tax rates compared with the 21 percent corporate income tax rate (reduced from 35 percent). Pass-through entities are small businesses such as sole proprietorships, LLCs, partnerships, and S corporations and are so named because the profits of the business pass through to the owners and their personal income tax returns.
To address the concern that individual business owners who operated their business as a pass-through entity could end up paying a higher tax rate than the 21 percent rate levied on C corporations, Congress provided a 20 percent Qualified Business Income (QBI) deduction for those businesses. So, for example, if your sole proprietorship netted you $60,000 in 2019 as a single taxpayer, that would push you into the 22 percent federal income tax bracket. But you get to deduct 20 percent of that $60,000 of income (or $12,000) so you would only owe federal income tax on the remaining $48,000 ($60,000 – $12,000).
Another way to look at this is that the business would only pay taxes on 80 percent of its profits and would be in the 22 percent federal income tax bracket. This deduction effectively reduces the 22 percent tax bracket to 17.6 percent.
For tax year 2022, this 20 percent pass-through QBI deduction gets phased out for service business owners (for example, lawyers, doctors, real estate agents, consultants, and so on) at single taxpayer incomes above $170,050 (up to $220,050) and for married couples filing jointly incomes over $340,100 (up to $440,100). For other types of businesses above these income thresholds, this deduction may be limited, so consult with your tax advisor.
The Internal Revenue Service has clarified that certain rental real estate investor entities are eligible for the QBI 20 percent pass-through deduction in a given tax year if the following conditions are met:
Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
For tax years 2022 and earlier, 250 or more hours of rental services are performed (as described in this revenue procedure) per year with respect to the rental enterprise. For tax 2023 and beyond, in any three of the five consecutive taxable years that end with the taxable year (or in each year for an enterprise held for less than five years), 250 or more hours of rental services are performed (as described in this revenue procedure) per year with respect to the rental real estate enterprise.
The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following:
Hours of all services performed
Description of all services performed
Dates on which such services were performed
Who performed the services
Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement will not apply to taxable years prior to 2019.
Per the Internal Revenue Service, rental services include the following:
Advertising to rent or lease the real estate
Negotiating and executing leases
Verifying information contained in prospective tenant applications; collection of rent
Daily operation, maintenance, and repair of the property
Management of the real estate
Purchase of materials
Supervision of employees and independent contractors
Rental services may be performed by owners or by employees, agents, and/or independent contractors of the owners. The term rental services does not include financial or investment management activities, such as arranging financing; procuring property; studying and reviewing financial statements or reports on operations; planning, managing, or constructing long-term capital improvements; or time spent traveling to and from the real estate.
Real estate used by the taxpayer (including an owner or beneficiary of a relevant pass-through entity) as a residence for any part of the year is not eligible for this tax break. Real estate rented or leased under a triple-net lease is also not eligible for the QBI deduction.
Tax advisor Vern Hoven suggests that you can easily avoid the triple-net lease exclusion by changing the terms of the lease to a “net lease” in which the landlord makes the payments for both the real estate property taxes and insurance. So that the financial terms of the original lease remain the same, the landlord then increases the amount of the rent paid by the tenant to offset that full amount of taxes and insurance now paid by the landlord. Thus, your “triple-net lease” becomes a “net lease” with the same net effective financial terms but qualifies for the 20 percent QBI deduction.
Determining Whether You Should Invest in Real Estate
Most people can succeed at investing in real estate if they’re willing to do their homework, which includes selecting top real estate professionals. The following sections ask several important questions to help you decide whether you have what it takes to succeed and be happy with real estate investments that involve managing property. Income-producing real estate isn’t a passive investment.
Do you have sufficient time?
Purchasing and owning investment real estate and being a landlord are time consuming. The same way an uninformed owner can sell property for less than what it’s worth, if you fail to do your homework before purchasing property, you can end up overpaying or buying real estate with a slew of problems. Finding competent and ethical real estate professionals takes time. (Chapter 3 in Book 1 guides you through the process.) Investigating communities, neighborhoods, and zoning also soaks up plenty of hours as does examining tenant issues with potential properties.
As for managing a property, you can hire a property manager to interview tenants, collect the rent, and solve problems such as leaky faucets and broken appliances, but doing so costs money and still requires some of your time. Of course, if you hire a competent and experienced property manager, you will be rewarded with less time required for oversight.
If you’re stretched too thin due to work and family responsibilities, real estate investing may not be for you. So, unless you want to locate, interview, hire, and pay for a qualified property manager, then you may want to look into less time-intensive real estate investments such as real estate investment trusts.
Can you deal with problems?
Challenges and problems inevitably occur when you try to buy a property. Purchase negotiations can be stressful and frustrating. You can also count on some problems coming up when you own and manage investment real estate. Most tenants won’t care for a property the way property owners do.
If every little problem (especially those that you think may have been caused by your tenants — think “bed bugs”!) causes you distress, at a minimum, you should only own rental property with the assistance of a property manager. You should also question whether you’re really going to be satisfied owning investment property. The financial rewards come well down the road, but you live the day-to-day ownership headaches (including the risk of litigation) immediately.
Does real estate interest you?
Some of the best real estate investors have a curiosity and interest in real estate. If you don’t already possess it, such an interest and curiosity can be cultivated — and this book may just do the trick.
On the other hand, some people simply aren’t comfortable investing in rental property. For example, if you’ve had experience and success with stock market investing, you may be uncomfortable venturing into real estate investments. Some people are on a mission to start their own business and may prefer to channel the time and money into that outlet.
Can you handle market downturns?
Real estate investing isn’t for the faint of heart. Buying and holding real estate is a whole lot of fun when prices and rents are rising. But market downturns happen, and they test you emotionally as well as financially.
HOW LEVERAGE AFFECTS YOUR REAL ESTATE RETURNS
Real estate is different from most other investments in that you can typically borrow (finance) up to 70 to 80 percent or more of the value of the property. Thus, you can use your small down payment of 20 to 30 percent of the purchase price to buy, own, and control a much larger investment. (During market downturns, lenders tighten requirements and may require larger down payments than they do during good times.) So when your real estate increases in value (which is what you hope and expect), you make money on your investment as well as on the money that you borrowed. That’s what we mean when we say that the investment returns from real estate are enhanced due to leverage.
Take a look at this simple example. Suppose you purchase a property for $150,000 and make a $30,000 down payment. Over the next three years, imagine that the property appreciates 10 percent to $165,000. Thus, you have a profit (on paper) of $15,000 ($165,000 – $150,000) on an investment of just $30,000. In other words, you’ve made a 50 percent return on your investment. (Note: This example ignores cash flow — whether your rental income that you collect from the property exceeds the expenses that you pay or vice versa, and the tax benefits associated with rental real estate.)
Keep in mind that leverage magnifies all of your returns, and those returns aren’t always positive! If your $150,000 property decreases in value to $135,000, even though it has only dropped 10 percent in value, you actually lose (on paper) 50 percent of your original $30,000 investment. (In case you care, and it’s okay if you don’t, some wonks apply the terms positive leverage and negative leverage.) See the earlier section “Understanding Real Estate’s Income- and Wealth-Producing Potential” for a more detailed example of investment property profit and return.
Consider the real estate market price declines that happened in most communities and types of property surrounding the 2008 financial crisis. In many parts of the United States, the impact was still a reality several years later. Such drops can present attractive buying opportunities for those with courage, a good credit score, and cash for the down payment.
No one has a crystal ball, though, so don’t expect to be able to buy at the precise bottom of prices and sell at an exact peak of your local market. Even if you make a smart buy now, you’ll inevitably end up holding some of your investment property during a difficult market (recessions where you have trouble finding and retaining quality tenants or when rents and property values may fall rather than rise). Do you have the financial (and emotional) wherewithal to handle such a downturn? How have you handled other investments when their values have fallen?
Fitting Real Estate into Your Plans
For most non-wealthy people, purchasing investment real estate has a major impact on their overall personal financial situation. So, before you go out to buy property, you should inventory your money life and be sure your fiscal house is in order. This section explains how you can do just that.
Ensuring your best personal financial health
If you’re trying to improve your physical fitness by exercising, you may find that not eating healthfully and smoking are barriers to your goal. Likewise, investing in real estate or other growth investments such as stocks while you’re carrying high-cost consumer debt (credit cards, auto loans, and so on) and spending more than you earn impedes your financial goals.
