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Why invest in real estate
Before you begin investing in real estate, you have to outline your Why? Why do you want to invest in real estate. Here are some common reasons why people invest in real estate:
Passive Income
If you bought a $200,000 rental property with a 20% down payment and a 5.5% interest rates. Your estimated monthly payments based on Taxes, insurance, property management and placing month aside for Repairs and capital expenditures would be around $1700. With the 1% rule in place, if you can rent the place for 1% of the purchase price, so $2,000 a month, then you can cash flow $300 a month in passive income on that property. (The income is passive because you have a property manager in place to manage the rental, and you are just getting regular updates from the property management.
Create Income to fuel your Retirement
If you know that you need $7,000 a month to retire, then simply divide $7000 / $300 monthly cash flow and that will give you the number of units you need to have enough properties to fuel your retirement. In this case, I need 23.3 so 24 units to retire. Therefore, my goal would be to buy at least 1 new rental year for the next 24 years to get to this goal.
Or I can buy 2 cash-flowing rentals a year for 12 years to meet this goal.
Or I can buy 4 rentals a year for the next 6 years to meet this goal.
Or I can buy 6 rentals a year for the next 4 years to meet this goal.
Build up Additional Streams of Income
There are a number of ways to make money with investment property. You can rent out a property to long term renters. Rent out to short term rentals. Or sale the property for a profit.
Supplement their income
Maybe you aren't read to retire. Maybe you love the job you have and you just want additional income to save, travel, or increase your lifestyle. If I knew that I only needed an additional $2500 per month in addition to my day job (W-2 job), I could create a rental investing plan that takes this into account. Assuming the same $300 in net cash flow, I would need $2500/300 = 8.3 (so 9 units) to give me the supplemental income that I want in order to cover my additional savings, travel, or other lifestyle expenses.
Build Generational Wealth
W-2 Income won't make you rich. Most wealthy people become wealthy through investing.
Over the last 200 years, about 90% of the world's millionaires have been created by investing in real estate. Therefore, for many people, real estate offers the best way to develop significant wealth.
Pass real estate down to your heirs in a trust is a good way to avoid some capital gains tax.
Imagine if you had a child. When they turned 3 years old, you bought a rental property and put it on a 15 year fixed mortgage. After 15 years, when the child turns 18, they will have a completely paid off property. They can choose to live in it, house hack it, or rent it out for continued passive income. In addition to the house being paid off, chances are that the value of the house increased over the past 15 years. Imagine if they did the same for their child. Or if the house that's already paid off gets passed down to the next generation. There are endless opportunities to ensure wealth for the future generations.
Build a legal tax shelter
The government rewards real estate investing through tax breaks.
If you make just over $50,000 from your W-2 job, you are taxed around 22%. If you make $50,000 in long term capital gains from real estate, you are taxed around 15%. Long term capital gains is when you hold an asset for at least a year, before selling it. You are rewarded with a lower tax rate for holding it longer.
You can deduct expenses which helps to lower the amount of income that you pay taxes on. If you pay property taxes and property insurance on your primary residence, there is no tax write off for that. However, if you pay property taxes and property insurance on your investment property, you can write that off on your taxes. If you fix your broken dishwasher in your primary residence, there is not tax write off for that. But if you fix the dishwasher, you can write off the cost to repair the dishwasher.
You can depreciate the value of the building you own and deduct a portion of its value over 27.5 years. This reduces how much you pay in taxes. You don't have to pay this back until you sell the home.
With the Pass-through deduction, the IRS allows you to deduct 20% of your qualified business income on your personal taxes.
The money you earn from rental income is not considered "earned income" therefore, you may not have to pay 15.3% FICA taxes
Protect money from inflation.
The average inflation over the last 60 years was 3.8%. When appreciation happens, real estate is impacted and appreciates as well. While the dollar (ex. cash saved in the bank) loses value with appreciation, real estate tends to gain value with appreciation. If you saved $15,000 last year, and inflation was 3.8%, then you only have $14,430 in buying power for next year. However, if you invested that $15,000 into the down payment of a $300,000. If inflation was 3.8%, then that house would be work $311,400 next year.
You want a bigger house.
With the income you receive from your rental property, you can qualify to buy a larger house.
Also if you buy a house, and live in it for at least 2 of the previous 5 years, you can sell it for a profit. You will not need to pay taxes on that profit up to $250,000. So if you buy a house for $250,000 and live in it for 2 years. If that property appreciates to $350,000, then after 2 years, if you decide to sell that house, you can keep the $100,000 profit. Then you can use that profit to buyer a bigger house. Now you have a $100,000 down payment. $100,000 is a 5% down payment on a $2 million house. Just imagine the possibilities.
After you have determined your why, it's time to start investing.
First Determine your Investing Criteria
Do you know what type of property you want? The very first thing that I ask my clients and customers is, what do you want to buy? That's because I want to start sending you properties that meet your criteria. Here are some things that go into your Property criteria:
Price Range
First give me your preliminary price range. When you sign on to be my official client, I will connect you with a lender so that you can get a Pre-qualified to purchase. Your lender will tell you how much you can afford based on the financial documents that they collect from you. This will help us to narrow down your price range.
Investment Property Type
Are you looking for a multifamily or a single family property. There are a number of different ways to invest in real estate. Some people choose to House Hack their way into investment properties. House Hacking means living in 1 unit and renting out the other units to help cover the mortgage. Investors often choose to house hack because it allows them to purchase an investment property with only 3.5% - 5% as a down payment, versus the 20% that's typically required. After a year, you can move out, and possibly house hack your next property, while renting out the first property in full. You can house hack a number of ways:
Buy a Condo/Coop and rent out your spare bedroom.
Buy a Single Family house with a basement. Live in the upstairs and rent out the basement.
Buy a duplex. Live in 1 unit and rent the other unit out.
Buy a triplex. Live in 1 unit and rent the other 2 units out.
Buy a 4-plex. Live in 1 unit and rent the other 2 units out.
If you don't want to live with your tenants, you can also choose to put 20%-25% down and purchase a rental property like that. How do you get that 20% - 25% down?
Save up
Monetary gift from friend or family member
Do a Cash-out Refinance or HELOC on a current property that you own and use that to pay the down payment on the next property.
The third option is to GO BIG! With a 25% - 30% down-payment, you can purchase a commercial property. There are different types of commercial properties:
5-19 unit Apartment = Small-cap multifamily properties
20 - 49 unit Apartment = Medium-cap multifamily properties
50+ unit Apartment = Large-cap multifamily properties
Retail (ex. buy a store)
Location
What location do you want to be in?
You can search multiple locations.
Your location search can be as general as the state of Maryland, DC, and Virginia.
Or it can be as specific as: within 10 miles of this Metro Station.
Location search ideas: City, State, Zip Code, within X miles of this address, etc.
How many bedrooms and bathrooms?
This is my favorite hack for Prince George's County and DC. Both PG and DC list the fair market rents according to the number of bedrooms either by Zip Code (PG) or by neighborhood (DC). Based on these rent prices, I know how many bedrooms (minimum) I am looking for in my price range.
If your budget is $250,000, do you want to spend that on a 1 bedroom condo downtown, a spacious 5 bedroom farmhouse out in the boonies, or a 3 bedroom townhouse in the suburbs right outside of the city. The choice is up to you.
Functional obsolescence is the reduction of a properties desirability because of an outdated design feature that cannot be easily changed or updated (e.g. layout of a house, # of bathrooms, etc.). I listed a 4 bedroom 2 bathroom townhouse for rent and received 6 applications that same week. Meanwhile, the 4 bedroom 1 bathroom townhouse sat on the market before receiving some applications. This is because only having 1 bathroom makes properties with a larger number of bedrooms less desirable. A 2 bedroom 1 bathroom is fine; but a 5 bedroom 1 bathroom may suffer from some function obsolescence.
Condition of the Property
Keep in mind that people's opinion of the condition of the property varies greatly. Someone could say their property is in good condition, but when you see it, you think it's below average. The main thing you need to figure out is if you want a home that is move-in ready or needs some repairs. You can typically get a better price for houses that need more repairs. However, if you are purchasing a rental, buying a home that is move-in ready, means you might be able to put it on the market immediately. Keep in mind that there still may be some smaller repairs you have to make to take a property from being move-in ready for you to rent-ready according to county guidelines.
Here is a list of the condition of properties. The repair estimates are just guidelines for your search. In actuality, they can vary from property to property:
Excellent -
$0 - $1,000 in repairs (this is for small things that may have been missed, or stylistic changes that you can do your self; ex. paint office blue.)
new construction, move-in ready
Good condition
$1,000 - $3,000
Not a new property, still move-in ready
Cosmetic Fixer-upper
$3,000 - $7,000
needs work to update i (ex. paint kitchen cabinets, or change out old carpet, new floors, etc.)
Fixer Upper
$7,000 - $20,000
needs a good amount of work to get it move-in ready or rent-ready
Gut Job
$20,000 - $50,000
Property is not livable. Need to gut the house to the bones and start over.
Now That you have your criteria, complete this form below so that I can send you a list of properties in the DMV that meet your criteria. After you start receiving properties, you will want to analyze multiple properties a day. This is your next step.