Thoughts on Real Estate Investing – Bruce’s Rules and Observations
- Aim to obtain at least a 10% cash-on-cash return in the first year after buying a property. The key to successful real estate investing is buying right. Remember the first and final rule of real estate: location is the key factor.
- Real estate is a necessity; hence it is a reliable investment that you can see, visit and work to improve. Try that with a stock or bond!
- A 25% or higher down payment increases your cash flow and lowers risk, but may increase your possibility of paying current taxes on your real estate investments. Finance part of each of your properties in the current low interest rate environment to increase your rate of return. I think attempts to put too little down on these investments are foolish.
- By financing properties, assuming you have a good credit profile, you can buy more of them.
- When you increase the number of properties you own, if they cash flow properly, you are actually reducing your risks of having to dip into your personal checking account to pay the monthly real estate bills.
- Newer properties likely have higher appreciation potential and lower repair costs. Due your due diligence on older properties!
- Aim to keep your properties rented at all times. Minimizing vacancies maximizes returns.
- Hire a good property manager who does more than just collecting checks.
- Real estate has three basic sources of return: cash-on-cash return, debt pay-down return and appreciation potential. Over an extended period, obtaining wealth embedded in real estate is a great thing.
- Even if you are a high income individual and are not a real estate professional, you benefit from real estate by having a tax shield on your investment income that likely will prevent most current taxes. Having after tax cash is more valuable than having cash that will be taxed.
- Real estate appreciation gains can avoid taxation when you die due to the step-up in basis rules.
- Real estate is ideal for using the Section 1031 exchange rules. With those rules you can move into different investments to improve returns without paying current taxes.
- Real estate can potentially be refinanced with the ability for you to receive tax free cash in retirement.
- Those who build and move into a main home, and then live there for at least two years, can then reap tax free gains when they sell. People who do this a number of times may end up with a paid up house!
- Don’t fall in love with a property if you can’t love its financial profile.
- Real estate investments are an inflation hedge.
- Make sure you have the proper legal structure for your investments to protect you against lawsuits and adequate insurance.
- Under certain circumstances, real estate losses may help to offset the taxability of other income, especially if you qualify as a real estate professional.
What is Your Chance of Being Audited?
According to recent IRS figures, your chance of being audited is declining due to budget cuts. Here are the figures:
Income below $200,000 — 0.9%
Income over $1 million – 10.9%
Business returns – 0.6%
Business returns with assets over $10 million –16%
Note: The IRS is increasingly relying on document matching programs (technology) to catch potential offenders so be sure to report all those 1099s, etc. that you receive.