90% of Millionaires invest in real estate, and so should You!

Look around you.

Just take a step outside and look around.

Come back after you've done that.

Now that you went outside and looked around- unless you live in outer space- you undoubtedly saw some form of real estate.

Real estate is just property consisting of land or buildings.

So your home, your neighbors home, the baseball field, and the park. You get the point.

The reason I have told you about real estate today is that I want to tell you of the amazing passive income generating investment known as rental properties.

How does real estate investing work?

So operating and running your own rental properties isn't as complicated as it may seem. Simply put you just buy a property via loan (very important), make sure it's nice and setup to be rented, then you write out a renter’s agreement contract, find a tenant, yall both sign it, and boom now you have monthly income coming in.

Well it isn't quite that simple. Each of those points have little nuances that you need to learn in order to be successful. And don't worry- you won’t be fixing toilets at 2am unless you really want to.

The main reasons that people invest in real estate, and why you should too- are the tax advantages so you keep more of your hard earned money. And passive income; the favorite buzz word of the finance world.

What kind of tax advantages does real estate offer?

Nobody likes paying taxes, and unfortunately I can’t quite recommend tax fraud (this is satire- do not commit tax fraud). So how can we minimize how much taxes we pay? Real estate. The government wants people to buy and rent out property. In order to encourage this the government has many laws to help you (property owners).

These include:

• Mortgage Interest Deduction

• Property Tax Deduction

• Depreciation

• 1031 Exchange

Let’s start by explaining a little more about each of those potential write offs.

Mortgage and Property Tax Deduction

The first two are pretty simple. You can write off the interest on your mortgage, and any property taxes against your rental income.

Let’s say you have a $120k dollar home, you put 20% down ($24k) and get yourself a $96k dollar loan for 30 years with a 3% interest rate (standard). This means you will be paying about $2880 dollars per year in mortgage interest.

And depending on where you live (property taxes vary from state to state) you will get a property tax amount. Using Texas as an example- you would pay $2028 dollars a year in property tax (1.69%). This equates to a write off of $5,008 dollars against your rental income.

This means you will have $5008 dollars less of taxable income. This is why you always hear of highly wealthy people not paying taxes. Because the rich don’t have money, they have assets. So they don’t actually have much more taxable income than the rest of us. .

[Term Definition: An Asset is anything that puts money into your pocket, and doesn’t take money out of it. Things such as rental properties, stocks, gold, or any other investment. Unlike things such as your personal home, and your personal car which are liabilities.]

Depreciation

Depreciation is the basic principle that things deteriorate over time. The value of a property may still be going up but the actual building itself has a limited lifespan. Wood will only last so long, right? But fear not, for the government has your back with this one. You can depreciate the value of things you spend money on related to your rental property.

Depreciation commences as soon as the property is available to use as a rental. Most U.S. residential rental property is depreciated at a rate of 3.636% each year for 27.5 years. Only the value of buildings can be depreciated however, so you cannot depreciate land.

As an example let's say you renovate the kitchen. It costs you $10,000 bucks, and you expect its lifetime to be about 10 years (for ease of math). So the rate at which this kitchen would depreciate is 10 percent per year (to get to 100% by the end of its lifetime). So you could write off $1k per year as depreciation on that kitchen renovation.

Cost Segregation Analysis. This will be your best friend with depreciation. To sum it up shortly- you hire a cost segregation consultant who will analyze your real estate to identify and segregate the property.

This allows for greatly accelerated depreciation of certain components of the property you are acquiring. And in turn can lower your tax burden, increase cash flow, and free up extra funds to reinvest.

[Tip: Look up “Cost Segregation Analysis” to find out more, there's way too many nuances to cover everything in this article]

The 1031 Exchange

The 1031 Exchange is one of the most awesome things in real estate related law. It lets you take your property and sell it, and as long as you invest all the money into a new property of a higher value- you pay no taxes on it until later.

[Note: This simply defers the taxes, until you sell a property that you used a 1031 to get. Meaning you get hit with a whole lotta taxes if you decide to sell.]

This tool can be used to amass great wealth for relatively little. Since the government can’t tax you like normal- where they would be taking upwards of 25%; you can use this extra money to buy bigger and better properties. Raising your rental income, and net worth at the same time.

Using the 1031 Exchange lets people who don’t have the most capital (money), grow their real estate portfolio quickly. Make sure and abuse this law so you can get to the portfolio size of your dreams, and live your life how you want to.

[Tip: Do not sell the property. You can avoid paying these taxes all together if you just keep 1031 Exchanging/Holding onto the property. Indefinitely avoiding this taxation all together.]

Passive Income From Rental Properties:

Now onto why everybody is actually here. For the passive income. For the dream of chilling on a beach in Dubai, toes in the sand, sun in the eyes, and a nice cold glass of rye. [I'm something of a poet myself]. Rental Properties can be a great way to build passive income. But as with all good things- it takes time.

How do rental properties make money?

Like I said earlier, rental properties can be the King of passive income generation if you do everything correctly. This comes from rent payments by the tenant. This rent is usually around 1% of the total property value. So a 300,000 dollar home should be charged at around 3000 dollars. But you can usually set it to what you want- (barring any local/state laws).

How to set rent?

Many beginners may be tempted to set the rent high, however high rent doesn’t always mean high income for you. Because the higher you set the rent the harder it could be to find long term tenants.

[Example] If you let's say set rent at $1000 bucks, and you found a tenant who stayed for 12 months you would have made $12k (gross). But if you set rent at $3000 dollars, and you only could get tenants for 2/12 months then you only made $6k.

While still a good sum of money, you still have a high vacancy rate- which is bad. You want to find the happy middle ground, in which you don’t go over a 5% vacancy rate, but are still profitable. This usually works out to be 1% of the property’s value.

Post Mortgage Profitability

You will see a decent bit of money each month when you first get the property. Like maybe 100-500 in profit, depending on the circumstances. This is because you have to pay things like the mortgage, mortgage interest, property taxes, and miscellaneous expenses.

The real money starts to come in once you’ve held the property for 30 years; or your mortgage is up. Meaning you own the property outright. This instantly shoots your profit through the roof. Because you no longer have to pay the mortgage/interest on it- which eats at your profit, being the biggest of all expenses.

[Tip: The trick I've found by studying and talking with other real estate investors is to either hold the property long term, or use the 1031 Exchange.]

[Tip: Another way of getting started with real estate is to try house hacking. House hacking is when you (ideally) find a multi unit property, live in one of the units and rent out the others at a rate that covers both the properties expenses and your own expenses. You can still do this with single family homes, but it's then called roommating.]

TL;DR:

So as to answer the question of should you get into real estate property investing.. Do you like money? Do you like the idea of owning properties? Do you like amassing great wealth?

If you answered yes to any of these- then yes you should totally go give real estate a try. In my experience it’s actually quite fun learning the DIY to fix houses, talking with managers, running your own business, and getting to see that sweet sweet victory, known as passive income.

[P.S. - if you enjoyed this article, feel free to leave a like, comment, and subscribe (via the email box down below) to be notified of when a new article comes out.]

[Note: If you are more of a fan of audio based content I have a podcast that goes over similar topics called, "The Money on Demand Podcast." You can find it most everywhere podcasts are listened to , or by clicking this link here.]

[Disclaimer: I am not a tax advisor, I am not a CPA, I am not a financial advisor of any kind. All of this should be taken up with your respective legal professional on the topic before acting upon it.]