I understand there are tax benefits to actually owning a property but is all the work that you put into a deal worth the returns? Because for me, if I would buy to rent, I would not want to deal with tenant so I would have to hire a property manager and then pay the manager/ manage the manager. What I’m asking is would it be better for a passive investor to simply buy shares of a Real Estate Investment Trust and profit from the dividends?
I understand there are tax benefits to actually owning a property but is all the work that you put into a deal worth the returns?
- After 1986, many of the greatest tax benefits of real estate investing went away, such as the ability for everyone to offset earned income with passive income losses. But there are some tax advantages - but the primary reason to invest in real estate is to get good returns. I get anywhere from a 20% to a 50% return on ALL of my properties, and I have “$0” leverage on them and that is after all expenses. You can make even greater returns than I do, with leverage. However the key thing is to read books on the subject and learn what niche market works best for you.
Because for me, if I would buy to rent, I would not want to deal with tenant so I would have to hire a property manager and then pay the manager/ manage the manager.
- That is one option. But the more expenses that you have, such as a property manager, the less profit you make. Why not learn how to be a property manager yourself, and save the money as well, when you first start out? However even if you do it on your own eventually if you become successful enough you’ll need to hire a property manager or an assistant to help you.
What I’m asking is would it be better for a passive investor to simply buy shares of a Real Estate Investment Trust and profit from the dividends?
- No way no how would I invest in a REIT. The yields are too small. However some people are happy with 1-5% yields per year. LOL! But not me!
What about the advantages of depreciation and the write-offs involved with being a business?
I think around 13% off of REIT’s isn’t too unreasonable if you know what you’re doing.
But I see how you’re saying that you get high returns and it’s not worth it for you. I don’t have much experience in real estate but my family is in the construction/remodeling business and I’m thinking how I could incorporate that into my investing. I think I can do well fixing up properties/flipping but it’s a little intimidating when you first start out. Also I think I read that when you flip properties you are in a different tax category and can’t depreciate, is this true? There’s also the thing with the capital gains taxes each time a house is sold.
I have read about Rent to Own strategies and they have also interested me. I looked around my area and there are no such properties and very few rentals available.
If you don’t mind, could you please share the strategy you use or point me in the right direction?
Hire a mentor to walk you through everything.
I don’t think I’m at that stage yet. I’m simply trying to figure out whether this is a possibility for me.
REIT = “Hand me your money and trust me”. Landlording = a business under your control
Yeah I see your point and you do have to trust someone else to manage your money for you. But you are not totally out of control, you have the liquidity to buy and sell whenever you want. You also have the ability to research and apply your knowledge of real estate into the equation. You can read the financial filing of the company and understand their investment strategy and current holdings. They are required by law to inform their investors. Another point is that you are diversifying your investment with a single purchase with practically no requirements for initial investment.
But then again, your investment relies heavily on the overall market and anything can happen.
What I like about owning properties is that you actually own something tangible. The bank can give you a loan if you put a house as collateral, they will not give you a loan for a piece of paper that says you own a REIT. Also if you own you are practically a business and being a business has its perks.
But what I don’t see myself doing is being bothered with small problems from tenants and having the headache of being bothered with things that don’t interest me. I want to have sort of a passive involvement with the process, being active in areas that interest me and where I feel I’m being efficient with my time. Because what it comes down to I really want time to enjoy life.
What I’m trying to figure out is whether there is a strategy that fits my outlook on investing.
What about the advantages of depreciation and the write-offs involved with being a business?
- That is a HUGE reason to own your own real estate.
I think around 13% off of REIT’s isn’t too unreasonable if you know what you’re doing.
- As someone else said - you don’t have control of the investment. So there is very little “knowing what you’re doing” involved in the equation. Buying into a real estate investment trust is like buying into a stock, you can take an educated guess but in reality you never know what your stock’s performance will be year over year. And historically over the long run REIT’s rarely if ever yield 13% per year - it is usually like 5% or less for an average REIT.
But I see how you’re saying that you get high returns and it’s not worth it for you. I don’t have much experience in real estate but my family is in the construction/remodeling business and I’m thinking how I could incorporate that into my investing.
- That’s why you take the time to read books on the subject. It’s really not that hard. I knew “0” about real estate in the beginning, but I have read books on the subject and I got experience with my own rentals…and now I know a lot about buying/renting lower and middle income rental properties - which happens to be a pretty profitable niche.
I think I can do well fixing up properties/flipping but it’s a little intimidating when you first start out. Also I think I read that when you flip properties you are in a different tax category and can’t depreciate, is this true?
- Depending on the situation. If you rent it for 10 years, then rehab & flip it, you can depreciate for the time you’re renting it. If you buy it, rehab it and sell it within a few months with the intention of never renting it out AND only to rehab it - yes you pay taxes at the normal rate. Some people can lower their tax burden by using an S-corp when doing rehabbing. However, I recommend you sit down and talk with a CPA who is familiar with real estate investing
There’s also the thing with the capital gains taxes each time a house is sold.
- No big deal. You pay the normal tax rate when you hold a house less than one year, and pay the long term capital gains rate when you hold it for longer than a year (currently 15%). Paying taxes is part of life. It’s better to make a ton of money and pay a ton of taxes, than make no money and pay no taxes. And of course it’s intellectual to use as many legitimate writeoffs and deductions as the law allows you to use too!
If you don’t mind, could you please share the strategy you use or point me in the right direction?
- What works good for me? Buying & renting lower income and middle income properties. And also, I am getting ready to get into rehabbing homes for profit even though the market has still not rebounded completely (note I have rehabbed plenty of properties for renting, but none for resale/capital gain). Books on the subject? Here are a few of many that I can recommend - I have read all of these and many more.
REHABBING
http://www.amazon.com/FLIP-Find-Sell-Houses-Profit/dp/0071486100
http://www.amazon.com/Flipping-Confidential-Secrets-Renovating-Property/dp/0470068353
http://www.amazon.com/Buy-It-Fix-Sell-It-PROFIT/dp/0793169380
LANDLORDING
http://www.amazon.com/1-Minute-Rental-Property-Riches/dp/1430308060
BUSINESS/FINANCE 101 (IMPORTANT! …no matter what you think you know or not already on this subject)
http://www.amazon.com/Taking-The-Mystery-Out-Money/dp/B000RHL9I8/
http://www.amazon.com/Rich-Dad-Poor-ebook/dp/B004XZR63M
http://www.amazon.com/Rich-Dads-CASHFLOW-Quadrant-Financial/dp/1612680054
http://www.amazon.com/Rich-Dads-Guide-Investing-Invest/dp/1612680208/
MOTIVATION (IMPORTANT TOO!)
http://www.amazon.com/Unlimited-Power-Science-Personal-Achievement/dp/0684845776
http://www.amazon.com/Awaken-Giant-Within-Immediate-Emotional/dp/0671791540
SALES SKILLS
http://www.amazon.com/How-Close-Every-Sale-Girard/dp/B001Q3M6ZM
http://www.amazon.com/How-Sell-Yourself-Joe-Girard/dp/0446385018/
http://www.amazon.com/How-Sell-Anything-Anybody-Girard/dp/0743273966/
http://www.amazon.com/Mastering-Your-Way-Top-Girard/dp/1439265674/
A HIGH PROFIT BUSINESS TO CONSIDER
http://www.amazon.com/Deals-wheels-finance-mobile-profits/dp/B0006S1ZJG/
http://www.amazon.com/Making-Money-Mobile-Lonnie-Scruggs/dp/B001VGTSGY/
Alright thanks. I might have read some of those books already but I’ll try and see what works for me.
Another option for you would be private lending.
You make better returns, 12%+, and don’t have the hassle/tax burden of rehabbing/rentals. If done in an IRA you have no tax liability!!
You are also more in control of your investment. You pick who to invest your funds with and secure it with a first deed of trust against the real estate at 70%LTV.
We always need more private lenders in the marketplace.
How do I get involved with private lending and what are the capital requirements?
Most private lenders want the borrower to have at least 20% to 25% in the deal plus closing cost and the rates can be from 5.9 and up to 15.9 depend on your personal credit.
If you have IRA money, talk to a self-directed IRA custodian.
They will assist you in setting up your IRA account to do lending.
If you have money outside an IRA, network with investors and have a lawyer/title company draw up the deed of trust and promissory note.
Loans can be from 5k to 100k+.
Some borrowers are looking for just rehab money, some for purchase and rehab money.
You decide what rate and cost to charge for your money.
You are responsible for your own due diligence.
REI/Rental risks can be mitigated, while “aggravations” can be outsourced for minimal cost (and optimal opportunity cost to you and your sustained sanity). All the while, you will be owner of a hard asset that you can drive by, renovate, re-populate, or sell, etc. The tangibility alone gives it higher value than a REIT, in my opinion, and without the regulations, limitations, and market risks.
It’s basic cash flow, and time is evermore your friend with rentals. With the right paradigm and solid grasp of the economics of a deal, its hard to go wrong. Though not without a learning curve (even outsourcing the physical and functional aspects requires relationship development, management, and maintenance with contractors and prop mgrs), YOU remain the one in CONTROL. A REIT is just a collection of anonymous inventory managed by people unknown to you, while the portfolio vehicle itself is also managed beyond your control. Too much like the mainstream capital markets for my taste.
There are some solid business models out there for gaining traction as a rental owner, and the empirical economics of those ultimately successful in this arena are hard to ignore.
I’ve never heard of someone compounding great wealth thru REIT investing.
Peace,