Real estate is great option when it comes to non-retirement investing.
If you think the stock market isn’t for you, and you’d like to have more tangible assets, then real estate might be for you. Depending on the direction you go in real estate, you can gain appreciation in the value of the property, and you can collect rent from tenants.
Real estate is much more hands-on though. If you go the renting route, even if you hire a property manager, there are decisions you’ll need to make.
Lots of situations arise, such as a tenant isn’t paying their rent on-time, or they cause damage or they get hurt on the property. These will need proper attention.
If you go the flipping route, this is also hands-on. Yes, you can hire a general contractor, but you’ll need to be onsite frequently to confirm the work is being done per your specifications and on-time.
I personally love real estate. I love flipping properties and actually love doing some of the work myself, but it is time-consuming. You’ve got to be committed to your properties.
You also need to know your area. You need to know what a ‘good deal’ is.
A good deal in one area might not be a good deal in your area.
Every city and every block are different. There are nuances you will never understand until you spend time there.
Get a great real estate agent, but don’t leave all of the work up to them. Do research on your own. This is your investment. I didn’t really understand what it meant to do this research when I first bought that duplex. I overpaid for it and tried to rent in an area that didn’t attract the best tenants. These were mistakes I made.
Luckily, it didn’t cost me too much in the end.
I learned a ton about real estate through this duplex experience though. I realized how important the location is and how important doing research is. This made all four of my flipping experiences favorable.
You can make a lot of money in real estate, but you can also lose a lot too.
If you decide flipping real estate is for you, build a skill at finding the deals. You can use foreclosure auctions, contacts at your local bank, wholesale contacts, or real estate contacts to find deals. Build relationships with all of these people. They are closer to the supply and can point you in a good direction.
Depending on how long you own the flip property, there may not be much organic appreciation in the value of the property, but your renovations should add a significant amount of appreciation to its value.
After you’ve renovated the property, you have two options. You can sell it immediately or you can rent it out.
If you sell it immediately, you’ve just given yourself a windfall of cash on the sale, especially if you paid all cash for the property originally. Having cash frees you up to do another flip or allows you to enjoy a well-deserved break. These are the pros of selling it immediately.
The con is that depending on how you set up your flipping business, you’ll likely need to pay your ordinary income tax rate on this profit.
The alternative is renting your flip after you’ve done the renovation. The pros to this are monthly passive income for as long as you rent the property and no immediate tax hit. If your primary business is renting, and you hold onto the property for at least one year, then you would be able to take advantage of the capital gains rate, which is lower than your ordinary income rate.
The cons to renting are you don’t get your initial cash investment or profit from the value appreciation back immediately. You’ll earn additional rents, but the big cash windfall won’t be received until you sell the property. The other con is that tenants may tear up all of the work you’ve put into this property. They likely won’t treat it as well as someone who owns it.
Flipping creates many opportunities. You just need to have interest, be willing to invest your time, and come up with the strategy that works best for you.
If you want to skip the renovations completely, you can buy rental properties that are ready to be rented.
Find properties in a decent area and stick to single family homes instead of duplexes and triplexes. You’ll be able to sell the single-family homes quicker and at a higher premium than the other types of homes. Nicer areas draw better tenants. Remember this when looking for a rental property. If you purchase something in a rough neighborhood, you’re going to get rough tenants.
Another strategy for real estate is making the flip property your primary residence. You may not have considered this as a path to wealth, but I know many people who have used this strategy successfully.
There is an awesome tax loophole that allows the profit you make off the sale of your primary residence to be tax-free. That’s right, if you sell your home for $100,000 more than you purchased for, you don’t have to pay income taxes on that $100,000.
The conditions are that you must have lived in that home for two out of the last five years, and up to $250,000 per person is not taxable. This means, if you profited $270,000 on your property and your filing status is single, then you would only pay taxes on the $20,000 gain. Now, if you’re married filing jointly, you can actually gain up to $500,000 without a tax consequence.
My dad worked with a guy who owned a construction company. He moved his family about every three years to take advantage of this. His wife may not have been as excited as he was about this, but they became very wealthy through these moves.
I know another woman who took jobs in different parts of the US at various times. Her and her husband purchased a new property in the new location of the job every time. And, every time they sold the last property, they earned a great deal of profit that wasn’t taxable.
This is the best strategy if you do not want to flip properties every single year and you also don’t want to be a landlord.
How bothered would you be to move every three-to-five years? This is an easy way to make money in real estate and also avoid income taxes.
If you want to learn more about this loophole, go to the IRS website (irs.gov), and you will find a very interesting document, Publication 523.