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7 Expert Strategies for Real Estate Investing

Act now and keep learning throughout your life, and you’ll find that real estate investing can provide you with a wonderful foundation of wealth and happiness.

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“Investment rule number one,” Robert Kiyosaki says, “is to always know what kind of income you are working for.”

There are three different types of income. These are:

  • Earned Income Income derived from a job or some other form of labor. In its most common form, it is income from a paycheck. Because you can receive only as much earned income as you have hours to work, your ability to build wealth in this way is severely limited—a dilemma that is compounded by the fact that earned income is also the most heavily taxed type of income.

  • Portfolio Income Income derived from a portfolio of paper assets, such as stocks, bonds, and mutual funds. Portfolio income is by far the most popular form of investment income, since paper assets are relatively easy to manage and maintain as compared to physical assets. However, in some forms (e.g., stocks), the returns are highly unpredictable, while in others (e.g., mutual funds), their returns—while more predictable—are typically small or even negative.

  • Passive Income Income that is not tied to a specific time or activity, and that can flow to you without any specific current effort expended on your part. The primary example of passive income, accounting for some 80% of this type of income, is real estate investment income. Not only can real estate produce significant financial returns that grow over time, but, because of its regular cash flow, it is also the most predictable form of investment income. Plus, it offers many valuable tax advantages. It is for all of these reasons that real estate income is Robert’s favorite type of income.

The challenge to generate income from real estate investments requires more preparation, practice, and persistence than any other form of income. Many people can invest in real estate and be successful to some degree. To be successful on a much larger scale, it takes those who master the essential skills and strategies used by the experts. Here are seven helpful strategies used by top real estate experts.

Strategy #1- Don’t try to do it all yourself

Your opportunities for growth and profits will remain limited if you try to do everything yourself. Real estate is complex, and beginners tend to lack an overall understanding of the real estate investments process. Beginner investors can find themselves being to cautious, or too careless. They’ll make mistakes, and while some mistakes are bound to happen, too many can be costly and lead to disaster.

The best insurance against making too many costly mistakes is experience. But if you are new to the real estate game, you’ll need to leverage the experience of others!

Having the right partners can increase your returns in an investment venture and sometimes dramatically! Some real estate investors believe that they can retain more profits if they do the work themselves, but that is not a strategy for the wealthy and successful real estate investors. Another reason for putting together an experienced team is scalability!

Simply put, if you want to expand your real estate portfolio over time, you have to recognize that you can’t find all the properties, fix all the problems, and manage them yourself. By building a team of property managers, real estate brokers, lenders, attorneys, and accountants, you can multiply the time and talent you have at your disposal, essentially without limit.

Strategy #2- Plan your tax strategy

Real estate investing has tremendous tax advantages. But to realize these advantages fully, you need to set up your real estate investing activities in the right way from the start.

Several provisions of the US tax code were written with the specific intent of encouraging real estate development and investing. The tax provisions give you the ability to shelter most, if not all, of the cash flow that your properties generate from federal and state taxation. Sometimes even wiping out some of the taxes on personal income not related to real estate.

The government treats real estate investing as a business, and because of this, you can deduct a wide variety of direct and indirect expenses that are associated with managing and maintaining a property. Things like repairs, utilities, office expenses, property-manager salaries, advertising and more. You can also deduct some significant ‘phantom’ expenses like depreciation; costs that are recorded in the property’s books but that you don’t actually pay out-of-pocket.

To make the most of these tax benefits and savings, you need to have a real estate or tax accountant on your team who can help you craft a tax strategy ahead of time. This will allow you to maximize your returns and minimize your taxes legally and legitimately.

Strategy #3- Plan your legal strategy

Owning real estate can be a lucrative way to generate income. But like many business endeavors, real estate ownership can come with significant risks. Legal risks like landlord-tenant relations, or non-performance of contractual obligations, are among the most significant of these. To be successful as an investor, you need to manage your legal risks.

Why do you need a sophisticated legal strategy? Isn’t insurance and a good lawyer enough? No, unfortunately. When legal risks in real estate investing are not properly managed, litigants can win judgements against you that will significantly reduce the value of your assets. In worst case scenarios, they may even be able to take your real estate assets themselves, or un-related assets such as business assets and personal residence.

It is imperative that you protect yourself against the potential legal risks at the start of your real estate investing career. This is another area where you are likely to only have a fraction of the knowledge you need. Finding and partnering with expert legal services to build a legal strategy is key, right from the start.

Strategy #4- Know your market

You’ve heard it before…location, location, location! Known as the three most important factors in determining a property’s value, location extends beyond obvious factors like a run-down neighborhood, or an office park in disrepair. The role of location in a property’s value begins before you event start thinking about geography. It starts with the property’s intended purpose!

For instance, if you’re planning to invest in commercial space, what types of businesses will you be appealing to? Customer-facing businesses, like doctors, attorneys, and retail shops, will have vastly different locational requirements than will manufacturers or wholesale entities. Likewise, if you’re looking at renting apartments, the locational priorities of students, families, seniors, and other prospective renters are likely to vary widely.

Therefore, once you’ve chosen a type of property to invest in, you’ll want to carefully evaluate all relevant locational factors, such as transportation options, crime and safety, proximity of schools, retail establishments, and restaurants, population dynamics, zoning ordinances, property taxes, and many other factors—all of which will influence an area’s property values far into the future.

Even then, however, you’re not done, because statistics and fact sheets can tell you only so much. You’ll also want to drive the area in person in order get a feel for the location in the same way that a prospective tenant or homebuyer might do so. How long does it take to get to the freeway, the grocery store, or other businesses services? How noisy or heavily trafficked is the area during the day? How safe does it feel at night?

As you compile these observations, ask yourself: “If I were a prospective renter, would I really want to live or work here?” Your answer to that question will go a long way toward determining whether you’ve found an exceptional—and potentially profitable— location.

Strategy #5- Projecting your cash flow, honestly.

Once you have decided on a property type and investment location, it’s now time to start looking into specific properties. Keep in mind the primary purpose in real estate investing is to generate positive cash flow. To make the kind of money you want, each property you acquire needs to generate positive returns, otherwise you are just wasting your time and investment dollars.

When a property owner is trying to SELL a rental property, they usually prepare a financial ‘pro forma’. This contains both income and expenses. Usually, income comes largely from the rents, and you want to make sure these rents are realistic. If rent increases have been small in the recent years, they are unlikely to jump 10% per year. Occupancy rates for an apartment that is only half-leased for the past few years are unlikely to hit 80-90% occupancy in the immediate future.

You want to take into consideration all of the costs involved in purchasing and maintain the property in question. Usually, rental property costs are mainly operating expenses (managing and maintaining the property) and debt-servicing costs (interest expenses on loans you obtained to pay for the property).

But there can be hidden costs. Does the property need new flooring, or significant work? Are there new government regulations that you need to comply with? Insurance costs, HOA dues, taxes?

Making an honest assessment of the full range of income and cost factors will strike a good amount of potential properties from your list. But eliminating high-risk or low-return properties will generally mean that you increase your opportunity for properties that do make good returns and low risk investments.

Strategy #6- Be good to your tenants.

It’s common for new real estate investors to focus on the bottom line. But you must be careful not to take the emphasis on money too far. You want to protect your cash-flow for the long term!

If you are renting or leasing your properties, you want to take care of your ‘customers’ like any business; make sure they are happy, or you won’t be in business very long.

This doesn’t mean that you must be extravagant or go overboard. But it does mean providing clean, well-maintained properties and regularly inspecting your rental units. It also means responding quickly and courteously when problems do occur.

Going to all of this trouble and expense is a cost you need to plan for if you want your properties to remain fully rented with good, positive online reviews.

Strategy #7- Trading up

Remember the game Monopoly? There is one key principle in that game to remember: Four green houses lead to one red hotel.

Most real estate investors realize even after just a short time in the business that the big profits come with larger and larger properties. It’s difficult, for example, to generate a sizable income when your sole investment property is a $150,000 duplex or a starter home. The solution is trading up!

Trading up involves selling a smaller or less profitable property and ‘cashing out’, to then purchase a larger a more lucrative piece of real estate with the proceeds. There is one catch, however. Every time you ‘cash out’ you receive a ‘capital gain’. Capital gains are taxed (at a lower rate than personal income) by both the Federal government and many state governments. So, how do you get ahead when you are giving up so much of your gain in taxes?

The answer is: you don’t give the money up. It is not hiding income or doing anything illegal. The government wants you to purchase larger and larger properties because that means better housing and commercial property is being created. And the government gives you some powerful incentives to do just that.

The most important incentive is something known as a ‘1031 exchange’. The number “1031” is the section of the Internal Revenue Service Code that governs a certain class of real estate transactions. In simplest terms, 1031 exchanges allow you to roll over the capital gains from one investment property into another. But you have to adhere to the rules precisely. If even a single form is filled out incorrectly or the smallest requirement is not met, the IRS can disallow the exchange.

Successfully completing a 1031 exchange is a lot of work. But it’s worth it. In fact, if you want to be phenomenally successful as a real estate investor, 1031 exchanges (and other tax-friendly ways of trading up) are tools that you’ll want to use more and more frequently as your investing business expands.

Implement and Keep Learning

The seven strategies above are real estate tips and secrets that help an investor become financially comfortable, or even wealthy. But they are still just ideas and tips. The only way to make these strategies work is to implement them in your real estate business.

You also need to keep learning, because these strategies barely scratch the surface of all of the knowledge you need in order be a life-long and successful real estate investor.

Act now and keep learning throughout your life, and you’ll find that real estate investing can provide you with a wonderful foundation of wealth and happiness.

Original publish date: September 21, 2022

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