Saturday, October 29, 2011

Your Personal Home is NOT An Investment Property

David Crook wrote an incredible book called the "Wall Street Journal Complete Real-Estate Investing  Guidebook".  If there is any real estate investment book everyone should read this is it.  I'll be writing a few pieces inspired by his book.

A first really good point that he makes is that most people think of their personal home as an investment property but it actually isn't.  This is because as Crook says, "[y]ou are more likely to spend far more money living in your home than you will make when you sell it."  Investing is using your money to make more money.  Anything else is spending.

To be an investment property it must cover all of its costs and produce a return on the money you invested (or cash flow).  Quite often homes end up costing more than they produce even in appreciation.

Take Crook's example of someone who bought a home for $200,000 in 1990 and sold it in 2006 for $650,000.  In this scenario they spent about $234,000 of after tax money on interest or half their gain.  A kitchen remodel, which was supposed to increase the value of the property so much was actually a money loser especially since it was paid for with borrowed money.  So don't repeat the mistakes of the last decade and think that you are "making" a lot of money on your personal home.  With 5% interest rates and 5% annual appreciation you are breaking even at best.

Monday, October 24, 2011

Planning for Success Step One: Market Analysis

To invest successfully in rental properties you’ll need clearly defined long-term goals and a well thought out plan or strategy to achieve your goals. This plan will keep you focused and enable you to weather the ups and downs of a cyclical market.
How to begin? Strategies will differ depending on the location you choose and its demographics. So after you’ve set your goals, step one of your business plan is to analyze your market. That will include researching: property values; employment status; prospective tenant pool; and the rental market.
Here’s a sample of a market analysis we did for Northern Virginia in the spring of 2011. 
Property values: Due to the many distressed sales in Northern Virginia, properties are available well below intrinsic market value.
Employment status: The employment climate in Northern Virginia is one of the strongest in the nation and is projected to continue to grow for the foreseeable future. Employers, including government agencies and high-tech firms, provide well-paying jobs for highly educated professionals.
Prospective tenant pool: A large number of highly educated workers with specialized skills are drawn to the area to fill these jobs.  Many come for short-term consulting projects. Due to the transient nature and mobility of the work force, many professionals are seeking high-end rentals.
Rental market: The current economic environment has created a high demand for rental properties. At the same time there is limited housing stock for rental properties due to lack of available land for development. The results are high occupancy rates, above average rents and above average increases in rent.
Once you understand the market, you’re ready for step two of your strategy.  Next time we’ll look at how to choose the types of communities you will target, the asset class that works best for you, and how to establish your competitive edge. In other words, what you will offer tenants that sets you apart from the competition. And we’ll examine our cardinal rule for determining the right price for a property: The rent you are able to charge should cover your costs: principal, interest, taxes, insurance, condo fees, vacancy costs, and repair costs. 

Tuesday, October 11, 2011

Is it a good time for you to buy investment rental properties?

According to some experts there’s money to be made- today’s undervalued properties offer bargains of a lifetime.  Others insist there’s money to be lost -today’s real estate market is poised for a bigger drop. Throughout history fortunes have been made in real estate over the long term - whatever the short-term market does. Conversely, during the exact same time periods fortunes have been lost. So, is it the best of times? Or is it the worst of times to invest in rental properties? How’s an investor to know?
Not surprisingly to answer that question you need to think of real estate investment as a business venture and take a long-range perspective. Because your investment goals, your time frame, and your game plan to achieve your goals will determine whether or not it’s a good time to invest. 
            The steps are simple: First - Define your goal: what exactly are you trying to achieve? Second - Delineate your time frame: Where do you want to be in five years – in ten? Third - Develop your game plan: What steps will you take to achieve your goal?
            And to be successful your long-term strategy should include:
·      Making informed and focused investment choices
·      Choosing optimum locations
·      Targeting your customers
·      Establishing your niche and competitive edge
·      Planning for cyclical changes
That means watch the market. If you buy when there’s a need for more rentals, and then the cycle changes and there are more buyers and fewer renters, then it may be a good time to sell into the rising market.
It’s key to have a well-defined plan and stick to it. If you do, then whether the market is on the rise or on the downturn you’ll prove the naysayers wrong.
 Next time we’ll be looking at key strategies in buying rental properties.  We’d love to hear what’s worked for you!

Tuesday, October 4, 2011

Downsides to Real Estate Investing Through A Self-Directed Roth IRA

Some of the benefits of investing through a self-directed Roth IRA can also have a downside.  Since you don't pay taxes on the rental income or capital gains in your Roth IRA you can't take advantage of the tax benefits of real estate investing.  This means that you cannot benefit from depreciating your property, which can be extremely lucrative.  In many cases, property owners make more money on the tax savings from depreciation than they do on the rental income.

Offsetting your rental income with expenses from mileage and other costs really don't have any benefit either.

Lastly, the ability to avoid capital gains taxes through a 1031(b) exchange does not help an investor in a Roth IRA.

In addition, there are strict rules for real estate investing through a Roth IRA.  If you don't follow these properly you can lose the protected status of the money and have to pay an early withdrawal penalty.

Consider the positives and negatives carefully when deciding whether to buy real estate in a self-directed Roth IRA.

Sunday, October 2, 2011

Never Pay Taxes on Your Investment Property Income Again – The Self-Directed Roth IRA

A very savvy real estate investor and friend, Ramesh Chandra (,  
shared with me a little-known way to avoid paying any tax on your real estate investment income. 

The tax laws allow you to purchase real estate investment property in a self-directed Roth IRA.  This is a little known fact because most brokerage firms offering Roth IRAs limit  what you can invest in to equities, bonds, mutual funds, etfs and other traditional financial instruments. 

You can find brokerage firms, though, that will permit you to buy the other assets that the tax laws allow.  (One of the most well known is Equity Trust -  These include real estate investment property, notes, partnership interests, some collectibles, etc. 

There are several benefits.  Since you have put in post-tax money to your Roth IRA, any additional income you make off your investment property will never be taxed again.  The rental income will never be taxed and the appreciation will never be taxed.  You can’t take the money out for personal use of course before retirement age but quite often you want to hold investment property until retirement age anyway. 

Then you don’t have to worry about doing a 1031 exchange when you sell the investment property because there are no capital gains taxes. 

This is a complicated area so we’ll do our next post on the downsides of investing this way and some of the rules you have to be wary of when you make this move.