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IRA Investing in Real Estate: What You Need to Know?

February 1, 2023 by Marco Santarelli

Investing in real estate as a part of your retirement planning requires you to learn the governing rules and regulations that will affect your decision. Some conventional IRA experts say that it is better to stay away from investing in real estate through IRAs due to the strict government control over them and the hefty penalties imposed on wrongful transactions.

However, if you have a bit of help from a knowledgeable adviser, do your own due diligence, are aware of the rules governing IRAs, and have a keen eye to spot real estate deals, then real estate investing may be the way for you to further diversify your IRA account.

In order to make a real estate investment with your IRA, you need to make sure your IRA is with the right type of custodian, one that will allow you to make alternative investments.  However, it is important to keep in mind that the custodian of the IRA, when you choose to go self-directed, only carries out the details of your investment transactions in your specific direction.

Therefore, the custodial firm you select for your account is not responsible for an errant investment, a poor purchase, or a prohibited transaction made on your part because your custodian is essentially a third party to your investment selection.

Investing in real estate through a self-directed IRA can be a viable option for those looking to diversify their retirement portfolio and potentially earn higher returns. However, before making this decision, it is important to thoroughly understand the pros and cons, as well as the rules and regulations that govern self-directed IRA investments.

Pros of Investing in Real Estate with an IRA:

Diversification: Real estate investments can provide portfolio diversification, thereby minimizing total risk. By spreading investing dollars across different asset classes, investors might potentially lessen the impact of market swings in any one area.

Potential for High Returns: Real estate can offer higher returns compared to traditional stocks and bonds. This can be especially true for well-chosen properties that appreciate value over time and generate rental income.

Control: Self-directed IRA account holders have more control over their investments, including the ability to choose properties and make decisions about financing and management. This level of control can be appealing to those who prefer to be hands-on with their investments.

Tangible Asset: Real estate is a tangible asset that can offer stability and a hedge against inflation. Unlike stocks and bonds, which can fluctuate in value, real estate can offer a sense of security, especially if purchased at a reasonable price.

Cons of Investing in Real Estate with an IRA:

Complexity: Real estate investing can be intricate and may necessitate extensive research and due diligence. Among other variables, investors must examine market conditions, property conditions, financing opportunities, and rental demand.

Risk: Investments in real estate are susceptible to property market declines, decreased rental income, and property damage. Although there are measures that may be used to mitigate these risks, it is essential to recognize that real estate investing is not risk-free.

High Costs: Investing in real estate may be a costly endeavor due to the variety of fees that may be incurred, such as those associated with the financing and management of the property. Investors must not only have the financial means to meet these costs but also be prepared to make the kind of long-term commitment that is typically required by real estate investments.

Restrictions: Self-directed IRA investments are subject to stringent rules and restrictions, including prohibited transactions and disqualified individuals. Noncompliance with these rules may result in significant tax penalties. Investors must be aware of these restrictions and understand their legal obligations.

What Real Estate Qualifies For Being Purchased Through an IRA?

A real estate investment made to a self-directed Roth IRA, if you plan on holding it directly in your retirement portfolio, should only be rented out to a non-disqualified person.  It should be purely a business transaction, where the rental or lease income from the property goes back into the IRA account.  The real estate should not serve a primary or secondary use for the IRA owner, and should not be used as a vacation home.

Neither can you use the IRA property as a personal residence or for the benefit of any disqualified family member, even if you or the disqualified family member pays at or above fair market rates to use or rent out the IRA property, since this would also be considered a prohibited transaction?

All the taxes, expenses for property repairs and property maintenance work should be paid directly from your IRA account.  Even if you don’t manage to find a tenant immediately, then you will have to continue with the payment of taxes and mortgage, so your IRA account needs to be flush with funds to finance the continuing expenses a real estate purchase will incur.

Most custodians disallow or disapprove of a mortgage facility to fund the real estate investment and only allow non-recourse mortgages, which are more expensive. Non-recourse mortgages may incur a higher rate of interest and generally require more money down.

Other guidelines to consider when making an investment inside your IRA include:

Your IRA cannot indulge in any property transactions with disqualified persons, including immediate family or a company in which you or a family member hold a specified percentage of shares.

Neither you personally nor other disqualified persons can give a loan to the IRA for making any investment or purchase.

The IRA is the owner of the purchased property, and all legal documents will be executed in the name of the IRA.

All income from investments made through the IRA should go back to the IRA account.

What Kind of Property Is Suitable and Can be Purchased Through the IRA?

You can purchase various types of real estate through your self-directed or Roth IRA, including single-family homes, multi-unit properties, condos, apartment buildings, mobile homes, and commercial and retail spaces.

Since it is not possible to reside in or use the buildings owned by the IRA for personal purposes, they need to have good potential as rental or lease properties.  If you have a property management consultant working for you, they might be able to work out a good deal for you.  Reliable, consistent, and quality tenancy is essential for your rental property to achieve good returns.

A reputable property management company service will help to ensure you need not have to worry about other management problems like leaky pipes or troublesome neighbors.  However, the property management fees should be paid out of your IRA account.

Rental Market Considerations

Buying a property to rent is very different from buying property for self-use. Your rental residential property need not be located in the same suburb or close to where you live. Research the property and rental values in your state or county. You will be able to spot areas where there is a strong and sustained demand for rental homes.

Rental values are also high for areas that boast good connectivity with city centers or commercial and corporate hotspots.  A boom in employment may also trigger a higher rental demand.  Small towns and suburbs are seeing tech giants and start-ups setting up offices, which in turn has resulted in a demand for rental properties from young professionals.

University towns generally have good demand for condos and apartments.

When buying property for investment purposes, it may also be a good option to buy in an upcoming area with good connectivity to urban nerve centers.  Proximity to hotspots may also be a good sign that the next region to go upscale will be yours.

The Bottom Line

In conclusion, investing in real estate with an IRA can offer potential benefits, but it's important to thoroughly understand the risks and restrictions involved. Before making a decision, it's recommended to consult with a financial advisor to ensure that it aligns with your overall financial plan and goals.

Real estate has traditionally given good returns. However, a profitable investment won’t just happen on its own. If you plan to invest in real estate, then you should thoroughly complete your own due diligence, research your target market, speak to experts, hire an advisor, read up on the related news, and understand all the legal regulations before taking the plunge. As with all other forms of investment, it is the educated and well-informed investor who takes calculated risks that makes the most of their dollar.

And one last piece of advice, you may want to consult with a real estate attorney and a real estate tax accountant before you dive into investing in real estate with your IRA.

Filed Under: Real Estate Investing, Self-Directed IRA Investing Tagged With: IRA Investing in Real Estate, IRA Real Estate

What is Self-Directed IRA Real Estate?

February 1, 2023 by Marco Santarelli

Self-Directed IRA Real Estate

A self-directed individual retirement account (SDIRA) is a type of IRA, managed by the account owner, that can hold a variety of alternative investments. A self-directed IRA is a type of retirement plan that gives the account holder control over their funds and investment choices. It allows for alternative investments such as real estate and private equity to be used to grow retirement savings.

The account owner has the power to make informed investment decisions and can choose to invest in assets they are knowledgeable about, thereby enhancing their IRA's earning potential. The account holder of a Self-Directed IRA can invest in a broader range of assets, including real estate.  A self-directed IRA is similar to a traditional or Roth IRA in that it allows you to save for retirement tax-free and has the same IRA contribution limits.

The only distinction between self-directed and other IRAs is the type of assets held in the account. Self-Directed IRA real estate investing permits individuals to invest in real estate with their retirement funds without paying taxes or penalties on the funds spent or the profits produced. Instead, the investment grows tax-free or tax-deferred until retirement, when it is withdrawn.

Self-directed IRA plans are considered more powerful than traditional IRAs because they offer a wider range of investment options. In addition to traditional stocks, bonds, and mutual funds, self-directed IRAs allow the account holder to invest in alternative assets such as real estate, private equity, and precious metals, providing a potentially broader and more diverse investment portfolio. The account holder also has more control over their funds and investment decisions, as opposed to having a financial advisor make these choices for them.

Investing in real estate through a Self-Directed IRA can provide a number of advantages, including the possibility of higher returns, diversification of a retirement portfolio, and the ability to invest in a tangible asset with the potential to appreciate in value. However, it is critical to understand that investing in real estate through a Self-Directed IRA entails risks and responsibilities, such as the need to manage and maintain the property as well as comply with the rules and regulations governing IRAs.

How to Buy Real Estate with Your IRA?

Did you know you can invest your IRA in real estate? Like many people, you might have heard about this before but are not quite sure how it can be done. I’ll walk you through the simple three-step process and how it works. The good news is it’s simple and easy. Let’s walk through each of the three steps one at a time. Following this process allows you to gain control over your retirement account and invest in assets you want to invest in.

STEP 1:  You Need a Truly Self-Directed IRA

First, you will need a self-directed IRA (SDIRA).  If you were to go down to your bank or brokerage and tell them you need a self-directed IRA they would probably tell you that’s what you have.  However, their definition of self-directed means you can choose from a list of limited investment options that they charge a fee or a commission on.

If instead, you ask them if you can take title to a specific property in your IRA, what will they tell you?  “You can’t do that” or “you can’t do that here.”  Why?  Because they can’t charge you a commission on the real estate you purchase so they simply do not permit these types of investments.

What makes an IRA self-directed?   The short answer is, it depends entirely on the custodian or trust company that holds your IRA.  Each IRA trustee is allowed to impose restrictions on the types of investments they hold.  Therefore, you need to choose a truly self-directed IRA custodian, one that allows you to choose your own investments, whatever they might be.

There are several truly self-directed IRA custodians that we work with that are not commission-based institutions like your bank or brokerage.  A self-directed IRA custodian will typically charge an annual fee for the IRA service and does not charge commissions or take any percentage of your profits.  This affords you the freedom and flexibility to select your own investments.

Most IRA custodians are not self-directed so step one is to identify a truly self-directed IRA custodian and open an SDIRA.  Once you’ve identified your new custodian, it only takes a few minutes to open a self-directed IRA account.  Most of the process can be handled over the phone or online.

STEP 2:  Deposit Money in Your New Self- Directed IRA

Next, you deposit money into your new self-directed IRA.  You can do this in a few different ways.  First, you can make a contribution.  Contributions come from your earned income and you can simply take money from your savings or checking account and deposit it into your new self-directed IRA.

Second, if you have already started a retirement account through a previous employer you can move that money into an SDIRA.  You can “roll over” an old 401(k), 403(b), or any other thrift savings plan (TSP) directly into your new self-directed IRA.  Third, if you have an IRA already, you can transfer assets or cash from an existing IRA at your bank or brokerage to your new self-directed IRA.

When you do a rollover or transfer properly, there are no taxes, penalties, or fees associated with moving your money from one custodian to another. Now that you have an SDIRA set up and you have money in it, you are ready for the third and final step in the process, to make your first real estate investment.

STEP 3:  Make an Investment

This is the final step.  You make an investment, in this case, a real estate investment.  If this is your first time purchasing real estate in your IRA it is always advisable to contact your custodian first to ask what paperwork you will need to submit.  Generally, there is a “Direction to Invest” form that you complete that instructs the custodian on what you are purchasing in your IRA, how much the investment will cost, and where you need to send funds for closing.

One of the most important things to keep in mind is, “Who is going to own the real estate?”  Since you are using your SDIRA, it’s not you but your IRA who is purchasing the asset.  Therefore, when you write your offer to purchase, the purchaser's name should read as:

XYZ Trust Company FBO Your Name IRA, #12345

Your custodian will sign and process all of the recordable documents since it is the custodian actually making the asset purchasing.  Now your SDIRA owns the real estate.  When your IRA owns the investment, all the expenses will be paid from your IRA.  IRS rules do not permit you to pay expenses personally.

Paying bills for your SDIRA investments is as simple as instructing your custodian to do it.  With regards to the income your SDIRA makes, here's the best part of all — all income and profits will return to your IRA, tax protected!  No income tax, no capital gains tax — no tax!  By investing in a tax-protected environment your wealth can grow exponentially faster than if you are paying taxes as you go.

By following these three simple steps, you will gain control over your retirement account and become an expert SDIRA real estate investor in no time at all.

Pros of Self-Directed IRA Real Estate Investments

Diversification: Real estate investments can provide diversification to an investment portfolio, reducing overall risk.

Potential for High Returns: Real estate can offer higher returns compared to traditional stocks and bonds.

Control: Self-directed IRA account holders have more control over their investments, including the ability to choose properties and make decisions about financing and management.

Tangible Asset: Real estate is a tangible asset that can offer stability and a hedge against inflation.

Cons of Self-Directed IRA Real Estate Investments

Complexity: Real estate investments can be complex and may require a significant amount of research and due diligence.

Risk: Real estate investments carry the risk of property market downturns, declining rental income, and property damage.

High Costs: Real estate investments can be expensive, with costs including property purchase price, financing fees, and property management fees.

Restrictions: There are strict rules and restrictions in place for self-directed IRA investments, including prohibited transactions and disqualified persons. Failure to comply with these rules can result in significant tax penalties.

In summary, Self-Directed IRA real estate investment allows individuals to use their retirement funds to invest in real estate, potentially providing benefits such as higher returns, diversification, and the opportunity to invest in a tangible asset. However, it's important to understand the risks and responsibilities that come with investing in real estate through a Self-Directed IRA.

Filed Under: Real Estate Investing, Self-Directed IRA Investing Tagged With: IRA Real Estate, Self-Directed IRA Real Estate

How to Calculate Market Value of Property in 2023?

February 1, 2023 by Marco Santarelli

When a real estate housing market crashes, there are so many foreclosure and bank REO sales, figuring out the real value of a property can be difficult. When there is a large supply of properties available for sale in the housing market, it can be challenging to determine the true value of a specific property.

In a market with a high number of properties for sale, competition among sellers can drive down prices, making it difficult to determine what a property is worth based on current market conditions. Additionally, there may be a wide range of properties available, with varying sizes, locations, and features, making it challenging to compare properties and determine the true value of a specific property.

As a result, it can be difficult to determine the real value of a property in a housing market where there are many properties for sale. The comparable sales method is the most commonly used — and still the most accurate one — to determine the value of single-family homes, condominiums, and smaller multi-unit properties (two to four units).

How to Find Property Value Online

Start by researching information about sold properties on your local government websites for your target area. Many tax assessor's offices and county courthouses offer searchable online databases that allow you to view the prices for properties within a specific area. They usually list full details about the properties, including square footage. Plus, subscriber websites such as Electronic Appraiser (www.electronicappraiser.com) give you detailed information, particularly in areas where online data is scarce.

Free websites such as Zillow (www.zillow.com) also offer property data, but the information is less detailed than the paid sites. For example, the seller's name may be missing, which could be relevant if the seller was a bank, as in the case of a foreclosure sale. If that's the case, it can't be considered a comparable sale because the property was sold in distress.

Be careful about using websites that offer a computer-generated valuation. These are called automated valuation models (AVMs), which aggregate sales data from comparable properties to determine an estimated price. While AVMs can be a benchmark for determining value, they can be off by as much as 10% or more. With a little research, you can pinpoint the value to as close as 3 to 5% percent.

The most useful computer database for getting information about comparable properties is the local MLS. This database shows the number of days on market and includes notes that indicate whether the property was updated, whether the seller offered concessions on the sale, and so on. This additional data is generally not available through other sources, so asking a real estate agent or appraiser to help you will be crucial because most MLS systems aren't accessible to the general public.

While many factors come into play when you're evaluating a residential property's value by “comps” (comparable sales), the three key factors are location, the size (square footage) of the home, and the number of bedrooms and bathrooms. Obviously, you'll need to look at many other aspects before you can pinpoint the exact value of a property, but these are the “big three”. You should be able to look at comparable sales involving properties with these three factors and get a good idea of the value of the property you're selling

Location

Location is extremely important when you're comparing sold properties. A professional appraiser typically looks at houses within a one-mile radius or less, and so should you. In the case of a subdivision — where the houses are all similar and built in the same time period — you need to compare similar houses with similar styles in the same subdivision to get an accurate valuation.

If there's a wide mix of properties in the subdivision, you may need to go outside of it to get comparable sales. Just be careful with “dividing lines”. Geographic lines such as opposite sides of the river, the park, or a main highway can be invisible dividing lines that put the property in another school district and may not garner equitable comps.

Square Footage

When determining a home's value, be sure to evaluate the square footage. Note that appraisers typically look at homes that are within 20% up or down in square footage as comparables. Generally (especially within a subdivision), most homes fall within a fairly limited size range. Therefore, you should be able to develop a good gauge for the selling price of homes in those particular sizes.

Of course, not all square footage is created equal. Most people think that if a house has 1,000 square feet and is worth $100,000, then the 1,100 square-foot house next door would be worth $110,000. Wrong! The extra 10% in square footage equals only a few percentage points in value.

If these two houses offer the same location, style, and number of bedrooms and baths, the 10% additional square footage won't change the valuation much. Why? Because there is a fixed cost on a house based on the value of the land, cost of construction, sewer, subdivision plans, and other factors. An extra few hundred feet of space involves very little cost — only wood, nails, carpet, and possibly some minor electrical and plumbing costs.

Rooms

The number of bathrooms and bedrooms is more relevant than simply the raw square footage. In other words, a three-bedroom home with 1,200 square feet might be worth more than a two-bedroom home with 1,250 square feet. It also matters where the bedrooms and bathrooms are located – on the main floor or the basement.

While finished basements can add value, the amount of that value is less than it is for above-ground living areas. Plus, this greatly varies depending on different regions of the country. In humid areas, below-ground living space isn't as valuable to homeowners as in dryer areas of the country.

To determine a home's value using comps, also look at the quality and number of bedrooms and bathrooms. Three-bedroom homes are generally a big plus over two-bedroom homes, but four or five-bedroom homes don't add as much over a three-bedroom if they are roughly the same size in square footage. Likewise, two bathrooms are a big plus over one bathroom, but three or more don't add as much value.

When comparing bathrooms, make sure you understand the different types of bathrooms and compare them correctly. A full bathroom includes a shower, bath, toilet, and sink. A three-quarter bath has a shower but no tub, plus a toilet and sink. A half bath has a toilet and sink but no tub or shower.

A three-quarter- or full-bath creates roughly the same value, particularly if another bathroom in the house has a tub. A half bath has less value unless there are enough other bathrooms in the house. Also, a five-piece bath (separate shower and tub) generally wouldn't add more value than a regular full bathroom with a combination shower and tub.

Other Factors

There are other factors to consider that affect the value of a home, but generally, you’d give this less weight than the location, size and number of bedrooms and bathrooms. Some houses have one-car or two-car garages, some have carports and others have neither. The garage factors in some value, depending on the rest of the neighborhood.

For example, if the neighborhood comps all have two-car garages, this can affect the value as much as 10% on the subject property if it only has a one-car garage or no garage. However, if the houses are all small and there's a mix of garage options, the garage won't be as big of an issue.

Likewise, a four-car garage in a three-car garage neighborhood probably won't count for much either. One exception is with condominium developments.  Parking spots or garages are generally sold with condominiums and can have substantial value, particularly in large cities where parking is limited to the street.

In addition to looking at properties sold in your target area, you need to look at properties that are for sale. While asking prices are not sold prices, it will give you an idea of where your local market is heading – up or down. Also, keep in mind that if your strategy is to flip the property, the properties for sale are your direct competition, and thus the asking prices are very relevant.

For example, if you find properties that have sold for $150,000 but the current inventory on the market is priced at $140,000, the asking prices of your competition become just as relevant, if not more, as the sold prices of other homes.

If you regularly invest in the same neighborhood, take some time to build yourself a “due diligence” notebook of properties that have sold, are under contract, and are for sale within your area. Have your realtor check the MLS every week for new listings and sold properties so that your information is constantly up to date. Remember, you are only as good as your data, and the more information you have, the more accurate your values will be!

It's important to note that no single method is perfect and that different methods may result in different valuations. A professional appraiser or real estate agent can help to determine the most accurate market value by considering multiple methods and factors such as location, size, condition, and recent market trends. Additionally, obtaining a professional appraisal is often required when obtaining a loan or selling a property.

Filed Under: Financing, Real Estate Investing Tagged With: How to Calculate Market Value of Property, how to find property value online

Top Ten Tax Deductions for Landlords in 2023

February 1, 2023 by Marco Santarelli

No landlord would pay more than necessary for utilities or other operating expenses for a rental property. Yet millions of landlords pay more taxes on their rental income than they have to. Why? Rental real estate provides more tax benefits than almost any other investment. The cost of operating and maintaining a rental property, such as repairs, insurance, and property management fees, are tax-deductible.

This can reduce taxable income and provide a financial benefit. Every year, millions of landlords pay more taxes on their rental income than they have to. Why? Because they fail to take advantage of all the tax deductions available for owners of rental property. Investment real estate provides more tax benefits than almost any other investment. Often, these benefits make the difference between losing money and earning a profit on a rental property.

Here Are the Top Ten Tax Deductions for Owners of Residential Rental Property:

1. Interest

Interest is often a landlord's single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity. Interest paid on a mortgage used to finance the purchase or improvement of a rental property is generally tax-deductible.

2. Depreciation

Landlords can claim depreciation on the cost of a rental property over time, which can provide a tax benefit by reducing taxable income in the short term. The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years.

3. Repairs

The cost of repairing or maintaining a rental property is tax-deductible, as long as the expenses are directly related to the rental property and are not capital expenditures. The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) is fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

4. Local Travel

Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.

If you drive a car, SUV, van, pickup, or panel truck for your rental activity (as most landlords do), you have two options for deducting your vehicle expenses. You can:

  • deduct your actual expenses (gasoline, upkeep, repairs), or
  • use the standard mileage rate (56.5 cents per mile for 2013). To qualify for the standard mileage rate, you must use the standard mileage method the first year you use a car for your business activity. Moreover, you can't use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken a Section 179 deduction for the vehicle.

5. Long-Distance Travel

Landlords can deduct travel expenses related to managing a rental property, such as the cost of traveling to inspect the property, attend tenant-landlord meetings, and make repairs. If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan your trip carefully, you can even mix landlord business with pleasure and still take a deduction.

However, IRS auditors closely scrutinize deductions for overnight travel — and many taxpayers get caught claiming these deductions without proper records to back them up. To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long-distance travel expenses.

6. Home Office

Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work but also to a workshop or any other home workspace you use for your rental business. This is true whether you own your home or apartment or are a renter.

7. Employees and Independent Contractors

Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).

8. Casualty and Theft Losses

If your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called casualty losses. You usually won't be able to deduct the entire cost of property damaged or destroyed by a casualty. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.

9. Insurance

Premiums paid for insurance coverage on a rental property, including liability insurance and property insurance, are tax-deductible. You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers' compensation insurance.

10. Legal and Professional Services

The cost of professional fees, such as the cost of hiring a property management company or accountant, are tax-deductible. Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.

Did You Know?

Did you know that:

  • Landlords can greatly increase the depreciation deductions they receive the first few years they own rental property by using segmented depreciation.
  • Careful planning can permit you to deduct, in a single year, the cost of improvements to rental property that you would otherwise have to deduct over 27.5 years.
  • You can rent out a vacation home tax-free, in some cases.
  • Most small landlords can deduct up to $25,000 in rental property losses each year.
  • A special tax rule permits some landlords to deduct 100% of their rental property losses every year, no matter how much.
  • People who rent property to their family or friends can lose virtually all of their tax deductions.

If you didn't know any of these facts, you could be paying far more tax than you need to.

It is essential to keep in mind that certain tax deductions can be subject to limitations or restrictions and that an individual's eligibility for particular deductions might be determined by their particular tax status as well as the kind of rental property they own. Furthermore, due to the fact that landlords are required by the IRS to establish the authenticity of all tax deductions, it is essential to keep precise and comprehensive records of all costs associated with rental properties.

In a nutshell, tax deductions for landlords can assist in lowering the amount of income that is subject to taxation and provide a financial benefit. However, it is essential to have a solid understanding of the constraints and boundaries imposed by particular deductions, as well as the need of maintaining precise records to substantiate the legality of deductions claimed. As always, be sure to consult with your tax adviser or tax professional.

Filed Under: Financing, Real Estate Investing, Taxes Tagged With: Tax Deductions, Tax Deductions for Landlords

How To Get Started in Real Estate Investing With No Money?

February 1, 2023 by Marco Santarelli

In this article, we'll go over the 10 best strategies for investing in real estate without a lot of money or experience. You will gain some insight into how to begin investing in real estate without spending hundreds of thousands of dollars. Investing in real estate refers to any property owned solely to generate profit, either through rental income or through market value appreciation. There is no such thing as no money down in real estate because the money has to come from some source. If you want to invest in real estate with little or no money, you need to develop the ability to recognize, understand, and even take advantage of other people’s money.

You will still need little money for making a down payment when opting for financing real estate through conventional loans. Real estate is an asset form with limited liquidity relative to other investments. Any type of real estate investment requires some amount of capital and is also highly cash flow dependent to call it a profitable investment. Investing in real estate by using other's money is the stamp of authenticity for some of the most successful people in the real estate investing business.

Why? Mainly because these successful investors have grasped the art of investing in real estate with no financial input at all. For the financially strapped investors and the new investors, investing in real estate with no money is an attractive way of testing the waters. Moreover, all this can be done without necessarily having the credit or financial capabilities to do so. The experienced real estate investors, on the other hand, have realized that making use of other people’s money frees their cash for other investment opportunities and also clears up their available funds.

Investing in real estate is a great step towards achieving that much desired financial freedom. If you want to start earning a consistent & reliable passive income, you need to start investing in real estate. I know many people struggle with these trite questions – how do I start investing in real estate or where to get that “cash” to buy a property. This is the question that haunts many people who want to invest in real estate but have never invested before. Investing in real estate is a tried and tested way of building wealth. Forget the infomercials on tax liens or books talking about how you get a house free from the government.

10 Best Ways to Invest in Real Estate With Little or No Money

how to invest in real estate
Image: Pixabay

1. Purchase Money Mortgage/Seller Financing

The first proven way to invest in real estate with no money is through seller financing. When buyers are unable to secure a loan from financial institutions, they may opt to seek real estate financing from the sellers. With conventional real estate transactions, the buyers will provide the sellers with the cash, to gain ownership of the property. However, with a purchase money mortgage, the seller extends finances to the buyer. The buyers will then repay the sellers, for the agreed terms.

2. Investing In Real Estate Through Lease Option

The second proven way to invest in real estate with no money is through the lease option. Under the lease option, the property owner charges the buyer a monthly or yearly premium, in the form of higher rental payments. The excess rental fee will then be channeled towards the purchase price. With this type of agreement, the investor can purchase an investment real estate using a slightly higher rental fee.

Investing In Real Estate Through Lease Option
Image by Andreas Breitling from Pixabay

3. Hard Money Lenders

If you have no money to invest in real estate you can opt for hard money lending as a viable funding option. Instead of coming from a bank, the funds used in real estate investment will come from groups or private individuals. Since these types of loans do not necessarily need to go through corporate procedures, they tend to have fewer qualification requirements. This, in turn, means that they can be secured fast. Moreover, private lenders might be more than willing to back up risky projects.

hard money lending in real estate
Image by Niek Verlaan from Pixabay

Therefore, the interest charged on hard money loans is higher since lenders are taking greater risks and the terms are normally 12 months or less. Hard money loans require the borrower to cover closing costs, application fees, appraisal fees, and any other costs associated with the purchase of a property. Real estate investing is an ever-evolving industry. Real estate is said to be one of the best investments that an individual can make. Click on the link for the ten best real estate books that will get you started in 2020.

4. Microloans

There are a variety of new financing options that have opened up the market for new real estate businesses to profit. As the name suggests, microloans are normally geared towards startups or newer businesses, which require resources to generate further growth. Microloans are much smaller than what traditional financial institutions offer. The lower balances will, in turn, mean these programs are less strict in their qualification requirements i.e. credit score. A microloan is a good funding option to invest in real estate with no money.

investing in real estate with micro loans

5. Forming Partnerships to Invest in Real Estate With Little Money

Real estate partnerships are common for investing in real estate with little or no money. If you want to invest in a property, but the price tag is out of range, then an equity partnership may be what you need. An equity partner is an individual whom you bring into a transaction, to help finance a property. There are different ways that partnerships may be structured, and thus it is up to the buyer and the partner to agree on a more viable structure.

real estate partnerships
Image by Gerd Altmann from Pixabay

6. Home Equity Loans

If you have no money for your second investment in real estate, you can go for Home Equity Loans. The majority of investors tend to capitalize on the equity of their primary home, and then use it to finance the new property. Banks and several other financial institutions offer different products such as Home Equity Line-of-Credit and Home Equity Installment Loan, which allows the buyers to capitalize on the equity that they already have. If you have just started in real estate investing, you can click on the link and read our blog on “All About Real Estate Investing For Beginners.” It will teach you the most important guidelines which are inevitable if you wish to succeed in residential real estate investing.

7. Trade Houses

Trading houses is another viable way of acquiring new property. By trading an old property with a new property, you will not only be able to acquire a new property but also avoid the capital gains associated with the selling of a property. This is another proven way to invest in real estate with no money. With that said, buying an investment property for sale with no money down is not a new phenomenon.

Also, it is clear to us that there is no such thing as no money down in real estate investment because the money is going to come from somewhere. Apart from the ways discussed above, there are several other ways to buy an investment property with no money down. Invest in real estate today, by choosing any of the approaches discussed above. You may also like to read our blog on “Buying Rental Properties With No Money Down.”

8. Special US Govt. Schemes Like USDA Loans

With an end goal to fill underpopulated zones of the U.S., the U.S. Department of Agriculture's Rural Development office gives mortgages with down payments as low as 0%. These loans are offered only in towns with populations of 10,000 or less. All things considered, 10,000 is very sizable for most towns, so 97% of the U.S. is secured.

USDA Home Loans For Real Estate
Image Credit: rd.usda.gov

USDA loans are zero-down-payment mortgages for rural and suburban homebuyers. These loans go to those who qualify as having a low or moderate-income. They’re mainly for borrowers who aren't wealthy and can’t get a traditional mortgage. To check whether your area qualifies for this loan, you can visit USDA.gov and read their terms and conditions.

9. SBA Loans For Investing in Commercial Real Estate

The SBA works with lenders to provide loans to small businesses. If you’re looking to purchase commercial real estate, the SBA 504 loan is the best choice. An SBA 504 loan is commercial real estate financing for owner-occupied properties. Business Administration or SBA loans require only a 10 percent down payment by the small business owner and funding amounts range from $125,000 to $20 million. With an SBA 504 loan, money can be used to buy a building, finance ground-up construction, or building improvements.

10. By Owning Shares of Real Estate Investment Trusts

A REIT is a real estate investment trust. REITs have several advantages, the foremost being liquidity. If you own 20% of an apartment building, you cannot get your money out unless someone else buys your share or the property is sold. When you own shares in a real estate trust, it is generally as easily sold like shares of stock. You can buy targeted real estate investment trusts such as those in firms that build medical buildings, nursing homes, malls, and industrial parks. It is easier to diversify your holdings by owning a variety of REITs, and you never have to manage anything.

The modest downside is that they take a chunk of the profits in administrative overhead before distributing the remainder to shareholders. A related financial product is the real estate mutual fund. These mutual funds are more liquid than REIT shares. They are more diversified, too. They may invest in REITs, the publicly traded shares of homebuilders, and companies that sell building supplies. Real estate ETFs are simply ETFs that invest in the same sorts of businesses. A REIT ETF is an E TF that invests in REITs. You'll have lower returns, but there is less risk than investing in a REIT. In every case, you don't have to invest in real estate directly, much less manage it.

Conclusion

Real estate investing is the purchase, ownership, management, rental, and/or sale of any type of real estate for profit. It is definitely a good idea because real estate offers a unique combination of safety, steady cash flow, and strong odds of high capital gains. You may earn less than investing in the stock market at its peak, but neither can you lose everything. A well-planned and executed real estate investment can generate an ongoing passive income, and it can prove to be a good long-term investment if the property value increases exponentially over time.

You may even incorporate it into your entire wealth-building strategy. If you're new to real estate investing, it's critical to read good real estate books and learn from experienced investors who have made millions by investing in some of the country's best real estate markets. Following the housing market decline in 2007, single-family rental properties became favorable options for investors, saving in construction or refurbishment prices.

The quick turnaround for an owner to rent out their property means cash flow is almost immediate. For a majority of investors, it is one of the most important decisions they will make. Therefore, choosing a real estate professional/counselor continues to be a vital part of this process. They are well-informed about critical factors that affect your specific market areas, such as changes in market conditions, market forecasts, consumer attitudes, best locations, timing, and interest rates.

NORADA REAL ESTATE INVESTMENTS strives to set the standard for our industry and inspire others by raising the bar on providing exceptional real estate investment opportunities in the U.S. growth markets. We can help you succeed by minimizing risk and maximizing profitability.

This article aimed to educate investors who are keen to invest in real estate with little or no money. Purchasing an investment property requires a lot of studies, planning, and budgeting. Not all deals are solid investments. We always recommend doing your own research and take the help of a real estate investment counselor. Keep your expectations realistic, and do your homework and research before making any decisions, just like you would with any other investment.


References

  • https://www.biggerpockets.com/forums/50/topics/77768-10-ways-to-buy-an-investment-property-with-no-money-down
  • http://www.4smartmoney.com/benefits-real-estate-financing

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