The Four Levers of Investing in Real EstateNovember 13, 2020 by Paul Begich
Paul here again to talk about a huge passion of mine – real estate investing! Specifically, buy and hold real estate investing.
Since Emily and I dove head first into rental properties our minds have officially been blown by the power real estate can have on personal finances. We no longer have a monthly mortgage payment or monthly rent payments! These costs are offset by the cash flow of our rental portfolio.
The best part is… this can also be YOU!
If you’re interested in learning more about rental property investing you’re in the right place! In this article I’m going to break down the different “levers” you can pull when investing in buy and hold real estate – and the strategy you take will depend on the lever you’d like to pull.
Without further ado, here are the avenues in which you MAKE MONEY in rental property investing….
1. Cash Flow
Cash is king right…? This is typically what people think about when they think of real estate investing. You buy a property, rent it out, and then collect the income generated by the property. More specifically, cash flow is the difference between the monthly debt service and expenses and then the income the property generates. Ideally, this number is POSITIVE! But, you can also have negative cash flow – and that might make sense in some markets or for some asset classes! Crazy right?!?!
Want Cash Flow? Here’s what you should invest in:
Value Add Properties
By adding value to a property through cosmetic renovations, improved management, raising rents to market value – you are ADDING VALUE to the property. Typically, heavy value add properties have a high monthly cash flow return. But this also means a heavy workload!
Under Market Value
This is easier said than done! But there are property owners out there that are in a pickle. Maybe they need to 1031 exchange quickly. Maybe there was a recent death in the family. Or maybe they are just sick of being landlords. All of these are examples in which a property owner may sell their property to you under the current market value of the property. Like the above, these properties typically cash flow well but are extremely tough finds.
Where are people moving? The general flow of a population typically will highlight locations that will see a high degree of appreciation (which we’ll highlight below). However, if you’re early enough, and you can buy up properties before the appreciation has taken hold then you’ve found yourself in a position where you own property at less than market value where rents are the absolute highest. What’s this mean…? You guessed it CASH FLOW!
By investing for appreciation you are making a bet that the property you are buying will be worth more when it comes time to sell. The difference between what you bought the property for and what you sell it for are your capital gains – this is appreciation. Capitalizing on appreciation is one of the surest ways to ensure your initial investment is protected – learn more about future appreciation projections here.
Want APPRECIATION? Here’s where you should invest:
Are there any future developments you’re aware of – maybe a transit line (cough, cough, Minneapolis!). These are great areas for capitalizing on appreciation. If you know people WILL BE moving to an area then its a very safe bet to ensure prices will continue to rise – meaning, when you go to sell you’ll have made a pretty penny in appreciation.
The North Loop is one of the most popular neighborhoods of Minneapolis. But, this also means it’s one of the more expensive neighborhoods of Minneapolis so you’ll probably be buying at the height of the market and not positively cash flowing. Does this mean you’re putting your money towards a bad investment? Not necessarily. Although in the iterum you may have negative cash flow when you go to sell in ten years time you better believe you’re going to receive a large gain from appreciation. Additionally, by investing in already established neighborhoods you’re more than likely buying a turn key investment – which means it won’t take a lot of work on your end! If this sounds like you, maybe you should consider investing for appreciation!
3. Debt Pay Down
Most investors hold a mortgage on their investment property; not all, but most. That mortgage can look a number of different ways but for the sake of this article let’s just say there’s a traditional mortgage. Every month your renters are paying down your mortgage. Meaning, each month you owe less and less on the property. This decrease in your owed mortgage amount and the value of the property is called debt pay down. Your renters are basically putting money in a little personal piggy bank!
Want DEBT PAY DOWN? Here’s how to capitalize:
Here’s the best part about debt pay down… it happens ANYTIME you utilize leverage and have a mortgage on a property. So you don’t even have to worry about investing for this specific strategy because there’s a 99% chance you’re ALREADY getting this benefit! Go you!
4. Tax Benefits
This is one of the BEST benefits of owning rental property – ESPECIALLY if you’re self employed! I’ll start by saying, I’m not a tax professional so you must, must, must seek professional guidance on this matter. But here are the basics – real estate is considered a depreciating asset by the government (even though we know each year the property is worth more from appreciation). The government allows (and actually INCENTIVIZES investors) to write off the depreciable value of a property against the income it produces. Here’s how it actually looks on paper – say your investment property makes $12,000/year in cash flow ($1,000/month – that’s awesome! Again, go you!). The depreciable value for the property in that year is $5,000 (there’s a whole thing on depreciation over 27.5 years which we won’t get into here). We can write that $5,000 in “losses” against the $12,000 in gains from the year – so instead of paying taxes on $12,000 you only have to pay taxes on $7,000. This IS NOT cheating the system! The way the United States tax code is set up the government WANTS investors to do this as it incentives housing for the general public.
Want TAX BENEFITS? Here’s who should invest:
Self Employed Individuals
Tax benefits aren’t so much as the what and the where but the who. The high income, self employed, business owners, and entrepreneurs are the best candidates to utilize the tax benefit lever when it comes to real estate investing. Reason being, as long as they run the rental property through the same avenue (LLC) in which they earn their high level of income then they can write off the depreciation from the property not only against the income the property generates but also against the income their job or business produces. For people that want to “park” their money somewhere outside of the traditional avenues of the stock market and have the high tax burdens of being a business owner then investing for tax benefits could be a good fit for you!
This was HANDS DOWN the most in-depth article I’ve written about investing – or frankly, real estate in general! I hope my passion for financial freedom through real estate investing shines through.
Having an impact on someone’s livelihood and sharing what I’ve learned in this space is a part of my moral fabric!
If you’re interested in connecting further on ANY of the above I will ALWAYS make time to connect. Schedule a time for a one on one private conversation here.
Have a fantastic week and happy investing!