Benefits of Investing Your Money In Real Estate

As entrepreneurs find success with their primary business ventures, many search for the proper investments for their profits.
Of course, we can and should all start traditional tax preferred vehicles like an IRA and 401k. These are the bedrock of good ‘benefit’ planning for ourselves and our employees. I’m also convinced more entrepreneurs should consider rental real estate as an important part of their portfolio.

I realize many business owners shrug off this concept after the recent downturn in real estate values, but let me list a few reasons that may change your mind:
1. Gain more leverage. Real estate is one of the few investment vehicles where using the bank’s money couldn’t be easier. The ability to make a down payment, leverage your capital, and thus increase your overall return on investment is incredible.

2. Increase, tax-free. Buying rental property based on speculation of its value is a dangerous tactic since cash flow is the key. Appreciation over the long-run is certainly realistic and at the least you should be considering a tax-deferred strategy. In the future, you may even consider a 1031 exchange, charitable trust, or an installment sale to lesson your tax liability further.

3. Tax free cash flow. It’s no secret that because of depreciation and mortgage interest deductions (if you leverage your capital), your cash flow should be tax-free. That’s right! The far majority of the time an investor will never pay taxes on their cash flow and can wait for capital gains on the sale of the property in the future.

4. The tax write-offs against your other income. Depending on your classification as an Active Investor or Real Estate Professional and your income level, there is a good chance your rental property will not only give you tax-free cash flow, but an overage of tax deductions you can use against your other income. With that said, this is something you want to discuss with your tax professional before investing so your expectations are realistic.

5. Increased tax deduction strategies. Rental property affords investors with another incredible opportunity to convert personal expenses to potentially valid business deductions. Don’t forget that rental real estate is a business. This means that travel expenses to check on your payments and properties to family members who manage your properties (such as students away at college) can be deductible and increase the tax benefits when it comes to cash flow and the future sale of the property.

6. Rental real estate is a forced retirement plan. Americans are terrible savers. We lack the self-discipline to put a monthly deposit into our IRA, SEP or 401k as small-business owners. However, buying a rental property is a significant commitment that you are required to commit to and maintain. When you don’t give up on it and build future cash flow and wealth, you will always be grateful in the long-run.

I meet with a lot of successful entrepreneurs, and almost every one of them has taken profits from their businesses over the years to invest in rental property. Based on this fact and the list above, I have consistently urged my clients to buy one rental property a year and already have clients with rental properties earning them money they never imagined they ‘d have.

The far majority of us will never get rich overnight. It takes long-term investing and a diverse portfolio to build true wealth. Don’t forget real estate as an important part of the equation.

I’m also convinced more entrepreneurs should consider rental real estate as an important part of their portfolio.

Buying rental property based on speculation of its value is a dangerous tactic since cash flow is the key. Depending on your classification as an Active Investor or Real Estate Professional and your income level, there is a good chance your rental property will not only give you tax-free cash flow, but an overage of tax deductions you can use against your other income. Don’t forget that rental real estate is a business. This means that travel expenses to check on your payments and properties to family members who manage your properties (such as students away at college) can be deductible and increase the tax benefits when it comes to cash flow and the future sale of the property.

Things to Do Before Applying for a Mortgage

My wife and I are just starting the journey of buying our first home together. We’re both nervous and excited, because a lot can and does go wrong.

One of the first steps I took was to figure out exactly how much house we could comfortably afford to buy. While there are a variety of affordability calculators out there, I wanted to get pre-approved before we ventured out to find our dream home. Turns out, the fact that we don’t plan on moving until next summer made it too early to consider getting pre-approved.

That said, the effort wasn’t completely wasted. I learned three things that every prospective home buyer should know in order get their house in order, so to speak– things that will make for a smooth process when applying for a mortage.

1. Get Your Credit House in Order

Home buyers need to do everything in their power to boost their credit score before applying for a mortgage. This means paying down credit cards and making sure your credit is as squeaky clean as you can get it.

It’s a good idea to check out your credit reports well in advance of applying for a loan to make sure there are no issues you need to address. You can pull reports from all three major bureaus for free at annualcreditreport.com. (Everyone whose income is going to be considered in qualifying for the loan needs to do this.).

If there are any issues, start fixing them immediately. Some red marks– even if they are due to inaccurate reporting and not because of your bad credit management– can take a while to clean up.

When I pulled my credit report I was pleased to find that my credit score is still in healthy shape. It could be better. I have too many accounts carrying balances. To get my credit house in order, I plan on paying off the one card that’s holding a balance from our last vacation, despite the fact that it charges zero percent interest.

2. Protect Your Credit Reputation.

Once your credit house is in order, protect it. According to John Laymac of CBC National Bank, there are several things we can do between now and when we buy our new home:.
“Do not let anyone pull your credit, pay everything on time, do not close any accounts you may pay down to zero, do not apply for any new credit (besides the mortgage), do not buy a car, do not make other large purchases on credit and do not carry a balance on any revolving account that is more than 25 percent of the card’s limit. Use a mix of cards if you have more than one and pay the balance off or below 25 percent of the limit when the bill arrives.”.

That pretty much sums up what you need to do to avoid accidentally dinging your own credit before you start shopping for a loan.

What’s probably most surprising is that paying or closing accounts off a term loan are actually a very bad idea, especially before applying for a mortgage. Closing a major credit card can actually do damage to a credit score. Lenders look at the balance on revolving credit accounts in terms of its ratio to total available credit. Closing an account can have the unintended consequence of raising the ratio. Paying off a car is the same story; lenders want to see a long-term credit history. So, it’s actually better to put any extra money toward a down payment rather than paying off the car.

One other thing Laymac recommended we do is go to OptOutPrescreen.com and register to electronically opt out of electronic offers (spam and junk mail) of credit for five years. He said that “this is similar to the do-not-call list and the credit bureaus see it as a positive.” Bottom line: Prospective homeowners should do all they can to protect their credit before applying for a mortgage.

3. Open a Separate Account to Hold Your Down Payment Funds.

It goes without saying that a new homebuyer will be forking over money, and lots of it, at the closing. What you might not know is that the funds set aside for a down payment and closing costs shouldn’t be kept under the mattress, nor should those funds be in your main checking account.

Instead, homebuyers should open a separate account specifically for the down payment. I asked Laymac to explain why the separate account, and he said:.

“To avoid delays, establish a dedicated account for the down payment and closing costs and have all transfers into that account final at least 60 days before you start the process. Any non-payroll deposits into asset accounts must be explained in detail and any cash deposits can cause a loan to be declined. Banks typically only ask to see the two most recent months of account statements, so transactions prior to two months are not scrutinized. If you have no transactions in the account over two statements, there is nothing to explain and no additional documentation to provide.”.

Sell that stock or get grandma to send the Christmas money early. (If a money gift comes in later, you may have to provide your lender with a note from the gift giver stating that the money was a gift and no repayment is expected.) Then sock it away in a separate account that has been designated for the down payment.

Final Thoughts.

Following these three steps should make the mortgage application process less intrusive and painful. Buying a house comes with enough issues of its own, so why complicate matters with a mortgage mishap?

When I pulled my credit report I was pleased to find that my credit score is still in healthy shape. To get my credit house in order, I plan on paying off the one card that’s holding a balance from our last vacation, despite the fact that it charges zero percent interest.

Closing a major credit card can actually do damage to a credit score. Lenders look at the balance on revolving credit accounts in terms of its ratio to total available credit. Bottom line: Prospective homeowners should do all they can to protect their credit before applying for a mortgage.

How To Decide If A Home is perfect for your family

Buying a House can be terrifying and exciting at the same time. How do you choose the best location? What if the house has problems you can’t afford to fix? What’s the tiebreaker if you love two places equally?
The first and only way to begin the decision-making process is to grab your calculator. A dream home becomes a nightmare the moment you can’t afford it. “As you calculate, look beyond the listing price,” says Steve Jones, associate broker of Crawford Olson Real Estate in McCall, Idaho. Here’s why: A house with a vaulted ceiling costs more to heat than one with a low ceiling. And a house with a pool means paying to maintain it. All these extra factors can add up.

Full List: How To Decide If A Home Is Right For You

Another less-tangible way to decide if a home is right for you is to trust your intuition, says Pat Trainor, a realtor with Coldwell Banker High Country Realty in Blue Ridge, Georgia. “I believe that most buyers form an impression in the first few seconds after they walk into a house,” he says. Even as a seasoned agent, he says he formulates an impression almost immediately. “Is this a happy house? Or does it depress me? Notice how you respond– and trust your reactions,” Trainor adds.

Trainor says he’s noticed that when a house is a good fit for a buyer, the couple or family will begin to talk about where they ‘d place their furniture. “When a client is doing this, he or she is mentally moving into the home,” says Trainor. The upshot? If you’re viewing a house and find yourself imagining your sofa near the window and your green chair near the fireplace, pay attention. Chances are, the house is a nice match for you.
That said, there’s no such thing as a crystal ball when it comes to house hunting. When the kids leave for college– is inevitable, and wondering whether the house will be too small if you get a dog– or too big. Cindy Jones, also of Crawford Olson Real Estate, says that while it’s important to envision a home’s role over time, making a decision with too many variables in mind can work against you. “Buy the house for the way you are living today,” she says. Adapt as you go.

Another tip? Decide based on how you live, not where you’ll live. A house that offers dramatic mountain views and enormous windows onto a pond can seem like a wonderful place to call home. If you’re rarely home during the day, the views aren’t going to be visible most of the time. Focus on features that will please you indoors. This advice is particularly applicable to high-traffic parts of the house, such as the kitchen. A sleek, minimalist European stainless steel breakfast bar may set your heart on fire, but if you’ve got busy toddlers, a practical kitchen with lots of room and sturdy smudge-resistant cabinetry may be a better match.
Full List: How To Decide If A Home Is Right For You

When you finally do make a decision, should you make an offer right away? Sometimes yes. Sometimes no. “I usually advise sleeping on it overnight,” says Trainor. When a market is especially active, the exception can be. “This is a real gut check time. Would you be broken hearted if you lost this house to another buyer? Make an offer if the answer is yes. Seldom will you go wrong if you follow your heart.”.

“I believe that most buyers form an impression in the first few seconds after they walk into a house,” he says. Trainor says he’s noticed that when a house is a good fit for a buyer, the couple or family will begin to talk about where they ‘d place their furniture. That said, there’s no such thing as a crystal ball when it comes to house hunting. “Buy the house for the way you are living today,” she says. A house that offers dramatic mountain views and enormous windows onto a pond can seem like a wonderful place to call home.