shortsaleil

Building Financial Freedom Through Real Estate Investing

March 28, 2012
Leave a Comment

Jeff Donnellan Re/Max

A book that I recently read had this quote and I was deeply impacted by the thought of having control over my time.

” What do you consider the signs of a successful life?  Many people think that accumulating wealth & belongings is the central sign of success: others are happy to have their health and retirement security.  You need to come up with your own definition,  but here is an idea about success that deserves consideration.  Success may be defined as achieving complete financial and personal freedom.  That allows you to do as you please while maintaining complete control over how you spend your time.”  – Michael Thomsett

Everyone has a dream about their future and how they would spend time if money was not a factor.  Your work doesn’t define who you are, but provides a means to an end.  A way to pay for living expenses, obligations and hopefully enough to save for investing or retirement.  Real estate investing can be a means to an end and a way to take control of your time while becoming financially free.  Rental properties have four advantages that no other investment can combine.

– Cash Flow

– Appreciation

– Leverage & Loan Amortization

– Tax advantages

A rental property can generate monthly income that can be used to pay bills or reinvest into the property to increase its value or overall ownership.  Most real estate appreciates over time.  A home purchased today for $250,000 that appreciates at 3% per year will be worth $336,000 in 10 years.  Residential home loans can leverage your down payment.  With a 20% down payment a buyer can borrow five times more than what they put in and over time the loan is amortized to pay down more principal.  This allows the owner to gain more equity each year of ownership.  The tax advantages of owning real estate can be significant.  The interest paid on the loan is a tax deduction as well as depreciated home value.  The IRS allows the value of a home to be depreciated down to zero over 27.5 years.  This creates a paper lose when the home is creating cash flow and appreciation every year.

Real estate should be viewed as a long-term non-liquid asset and its value compounds over time.  This period is usually 5-10 years and called seasoning.  If a property cash flows the owner can choose the correct time to sell for maximum profit in a good market,  instead of being forced to sell and lose value in a bad market.

Many people who I speak with are interested in real estate investing, but don’t know how to begin.  Saving enough cash for down payment can be difficult and usually doesn’t come quickly.  I tell them to think of the time used to save as a learning period as well.  Learn as much as possible about mortgages, properties available and plan the details of the purchase.  One way to begin investing immediately is to buy a 2-4 flat and live in one of the units.  By taking this approach you can get owner occupied financing ( lower rates, better loan terms & smaller down payment).

Another way to begin is called move up and rent out.  This is where the owner of an existing home rents out their current home and purchases a different home to live in.  Again the advantage of owner occupied financing comes in to play so cash flow is more likely.  The challenge in this scenario would be financing.  Today you would have to qualify for both loans or have more than 20% equity in your current home.  This is to prevent a “buy & dump” which is when some one purchases a new home and stops paying for the old one.

The next most common way to begin is buying real estate as pure investment.  Usually a larger down payment of 25% is needed, but the larger down payment will help the investment cash flow because less money is going toward paying a mortgage.  Real estate investors at this stage are looking at properties for ROI or return on investment, and not as a stepping stone.  Make sure your Realtor or real estate adviser can provide details on ROI for each property so you can make an informed decision.

Real estate investing is not for everyone.  There are some down sides like dealing with tenants needs, repairs, & possible vacancies.  Choosing the right team to help you is of the most importance.  A Realtor with investment experience can help in the selection of properties or help manage rentals.  A mortgage lender can suggest the best form of financing and qualify you for the appropriate purchase price.  An accountant can plan your taxes in order to take advantages of the most deductions and pay less in income tax each year.  Real estate attorneys act as an insurance policy & protecting your interests from losses.  Selecting the correct advisers will set you up for success.

http://www.webhomesearcher.com