Real Estate

land renting

  • hunting

  • horses

  • farming

Preparing a home or property for renting

  • need to line up financing in advanced

  • hire accountants, building inspectors, licensed repair personnel

    • want to make

  • 3-6 month of expenses saved

    • used to make rent when you don’t have renters, and to protect yourself from lawsuits or late stuff

    • e.g. getting sued for carbon monoxide poisoning

  • Set up a limited liability corporation to own your own real estate

    • without this, someone who sues can take your own home, the renter’s property, your cars, and anything else that you own

    • this separates renters property from personal property

Making Money in Real Estate

Current income vs. capital gains

  • current income is rent

    • current income results from positive cash flow

    • rent yield is rate of return based on rent

      • rent for more than you bought it for

  • capital gains is profit from selling

  •     know the price-to-rent ratio

  • price appreciation leads to capital gains

    • bought it at 280K, sold for 310K

    • enables capital gain

      • anything you add that it didn’t have before is called a capital improvement (is also tax deductible)

      • repairs are tax-deductible annually

        • repair or replacement to something that already existed, such as fixing a fence vs. adding a fence when there was never ever a record of one at the house

  • Depreciation

    • also tax deductible each year

    • can only be done on rental, not on primary residence

    • goes down by amt of years that you have it or something like that

      • need to see what this is again

  • leverage

    • increases investor’s return

      • loan-to-value ratio

      • need to study what this is again

  • exchange of properties

    • when you want to sell the property

    • can be tax-free (1031 exchange)

      • can be a way to postpone capital gains tax

      • you immediately buy another investment that is more expensive, using all the money from the previous property in order to

Financing a real estate investment

  • mortgage rates are typically higher than one u will live in

    • avoid this by living in it first for 3 years

      • was originally your own property, meaning you have an original mortgage

        • original is: 6-7%

        • renters’ mortgage is 10-12%

  • Sweat equity property is where you make repairs and improvements in order to raise the value of the property

disadvantages of real estate

  • risk in running a business

  • is not super liquid

    • need to find someone to rent it out

  • interest rate risks

    • if it is low, less people will rent, more if it is high

  • foreclosures on homes around it will decrease its value

  • high transaction and legal costs

    • closing costs (10-12k)

  • large initial investment an low current income

    • down payment of 10%

  • dealing with tenants and unpredictable costs

    • if they are bad and make a lot of damage

  • property management

    • can pay someone to manage it for you, and pay them a fee

    • cost typically 8-12% of monthly rent collected

  • complex and time-consuming to manage

you actually want slightly more expenses than what you take in

  • 24k comes in vs. 24,1000 expenses

    • bc expenses get written off

      • can move the 100 extra to be written off on the next year

Collectible