How to Do Real Estate Investment Right

While we can’t all build a portfolio of hotels, condos and resorts with our names on them like Donald Trump, plenty of individuals include real estate investment in their long-term strategy to build wealth.

For most people, their home is their biggest asset, particularly after they’ve owned it for a decade or more and have paid down their home loan to build equity. Of course, most people also appreciate the inherent value of living in a place they own and love.

From an investment point of view, your primary residence not only builds in value over time, it also provides you with a tax benefit when you write off your mortgage interest payments on your taxes. In addition, you receive protection (up to $250,000 or $500,000 if you’re married) from capital gains taxes when you sell it.

If your home has increased in value over time, you may be thinking you’d like to own more real estate. If so, you can look into purchasing a second home or vacation home for yourself—or purchasing a property you intend to sell or rent.

Vacation Home Purchasing as Real Estate Investment

A second home you use for vacations can be treated the same way as your primary residence, with your mortgage interest payments tax deductible, but typically you’ll need to make a down payment of at least 20% to 25%—and you must have good credit along with the income to handle the additional mortgage payments.

If you opt to rent out your home for more than 14 days a year, the property will be considered an investment property and the tax treatment changes. You’ll only be able to deduct the expenses considered part of the investment—such as mortgage interest and maintenance or repair costs—proportional to the number of days the property is rented.

A vacation home can be an excellent investment both for your quality of life—but also as a future retirement home or an asset to earn income or to sell when you retire.

Buy and Flip or Buy and Rent?

If you’re more interested in owning real estate for purely investment purposes, you’ll need to think carefully about how much time and money you want to put into a real estate investment.

You should work with a REALTOR® who invests in property and knows about your local market, but you also should educate yourself about your current market conditions. Ideally, you should buy when prices are low and sell when prices are high, but market timing can be difficult.

Some investors opt to buy property that needs repair, do the work and then sell it within a short time period (“flip”). Whether that works for you depends on whether you can do some of the work yourself or have reliable contractors available.

In addition, you need to be fairly certain you find a property at the right price and then find a buyer willing to pay enough so you make a profit beyond the money you put into it. You should have funds available for a down payment of 20% to 25%, good credit, and funds for the repair work—as well as to make the payments until the property sells.

Many real estate investors prefer to buy a home and rent it, but you need to be prepared for the possibility your property could remain empty in between renters. You’re also responsible for all maintenance and repairs, so you need to be prepared financially and emotionally for that commitment. You need to educate yourself about home prices in your area—but also about rental rates and demand to see if you can keep the property rented at a rate to cover your mortgage payments (or most of it).

Acquiring and managing a real estate investment requires a team of professionals including a REALTOR®, a tax advisor and good contractors you can rely on to renovate or repair a property to keep it attractive for renters or buyers.

Source : realtor.com

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Know the Rules for Buying Property With Your IRA

Your Individual Retirement Account can invest in more than stocks and bonds—an IRA also can buy real estate.

But it isn’t as simple as finding a property, investing and moving in. Be prepared to do a good amount of research and financial planning before you start signing papers.

How Buying Property With Your IRA Works

First, you need a self-directed IRA fund. As the name implies, all investment decisions using your IRA are made by you, instead of the IRA holder. But while you make all the decisions, you need a custodian to make investments on your behalf.

Custodians are companies “strictly there to manage the transaction, the paperwork and the reporting,” says Denise Winston, financial expert and author of Money Starts Here! Your Practical Guide to Survive and Thrive in Any Economy.

Custodians will also charge fees related to administrative and reporting purposes, and they don’t give direct advice.

“They may have a seminar, a report or some articles to help you be a better investor, but the deal is the liability relies on us, as a consumer,” Winston clarifies.

You also aren’t limited to buying a house with your self-directed IRA. Some investment examples include these property types:

• Vacant lots
• Parking lots
• Mobile homes
• Apartments
• Multifamily buildings
• Small businesses
• Boat slips

Avoid Pitfalls

Self-directed IRAs can get tricky, and if you’re not careful, you can wind up in a sticky situation.

For example, don’t expect to live in your property until you retire.

“This is not any kind of personal transaction,” Winston says. “This can’t be a primary, secondary residence or a vacation residence. It strictly has to be a business transaction.”

Neither you nor your immediate family can benefit from the investment before you reach the IRA’s distribution age. If you do, you’ll be slapped with a tax penalty and could have your IRA invalidated.

Everything you use to fund an IRA investment property must come out of your IRA. Likewise, money that comes out of the investment property must be given back to your IRA. So if you buy an apartment and rent it out, that rent money must go back into your IRA—not your wallet.

Similarly, if your investment property requires repairs—like a new water heater—you need to use your IRA to pay for it. If your apartment isn’t rented for months, you’ll still have to use your IRA to pay for the taxes.

“If you don’t have a reserve in there, you have a big problem on your hands,” Winston adds.

Tips

A self-directed IRA can be a great choice for some people—provided you’ve done your homework. A rule of thumb from Winston: “Only invest in what you know and you can explain.”

Potential investors should meet with a financial planner, an attorney, or both before investing in a property. Go over all governing rules for the investment and don’t get caught unaware by any applicable taxes or tax implications.

“There are very specific rules, and it’s a very specialized transaction,” Winston says. “Do your due diligence and research before you get too gung-ho.”

When planning, be sure you have enough money in your IRA to cover taxes, emergencies, maintenance and other potential problems. If you don’t, you’ll have to make the maximum annual contribution and hope it’s enough.

“Live ‘as if’ and do it with pen and paper first,” Winston suggests. “Ask, ‘What if this happens? Where would I get the money?’ You’ll quickly see where the gaps are.”

Source : realtor.com

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How to Find Distressed Properties

If you’re looking to save a bit of money, and you don’t mind making some hefty repairs,distressed properties may be your answer.

Distressed properties are homes whose owners cannot maintain them. Either these properties suffer from neglect and are in poor condition, or they are at risk of foreclosure due to non-payment of mortgage and/or taxes.

And if you’re willing to do the legwork—and handle the repairs—these homes are oftensold at below-market rates, but you’ll have to find them first.

Spotting Distressed Properties

One way to find distressed properties is to choose a target neighborhood, then drive around and eyeball the homes there. Be on the lookout for these telltale signs:

• Properties that stand out from other homes on the block because they are in a state of neglect
• Properties where the lights are not turned on at night
• Homes with yards overgrown with weeds
• Broken windows and shutters in need of repair
• Faded and peeling paint
• Notices post on doors or windows
• Uncollected newspapers and junk mail

Once you spot a potential property, make a note of the address to save yourself time later.

Make Your Offer Directly to the Seller

After you have canvassed the neighborhood and identified homes that seem distressed, send letters to the owners of the homes. Your local tax assessor’s office will have the name and address of the property owner. You can also ask a REALTOR® to locate and contact the owner on your behalf.

Some homeowners will ignore you, but others might jump at the chance to sell to an interested buyer before entering into foreclosure.

Get Help From a Pro

Using a REALTOR® can cut down on a lot of the research and contacting legwork.

If you see a distressed property for sale, try contacting a REALTOR® directly and ask them why the owner is selling. If the owner is struggling or the home is need of repairs, it’s likely a distressed property.

This also gives you a chance to start a relationship with a REALTOR®. Decide which price levels and neighborhoods you are targeting, and ask an agent to contact you about distressed properties meeting your criteria.

Be Wary of Web Searches

Internet searches can yield a wealth of information about distressed properties, but there are a few risks:

• Many sites charge a fee to browse their database. Since you’ll have to pay upfront, you won’t know if the cost was worth it until you’ve already paid.
• Not all sites guarantee their information. What you’re looking at online may not be what you see in person.
• Some listings are outdated. You may waste time by looking at already-sold homes.

If you’re browsing online, be sure to stick with a reputable free site. Try browsing realtor.com®’s Homes for Sale to get an idea of what is available in your area.

Source : realtor.com

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