When investor groups get together, if the discussion turns to real estate, often the same concerns come up. These are often myths or over-exaggerated stories of money lost in real estate.
It takes a lot of money to get started:
If the first deal you want to do is to buy a rental home, then this is a correct statement. However, if you know how or want to know how to shop for discount deals on homes, you could be wholesaling to rental investors in days or weeks. The money necessary to get a deal from the purchase to the sale to your buyer is usually just a small earnest money deposit. There are also lease-to-own strategies that allow the investor to lease a home and place a tenant in it with little or no money out of pocket but these are not widely available to most renters.
If you have enough for a down payment, you can use the leverage of a mortgage to buy a rental home and start depositing positive cash flow every month right away. As a simple example, if you invest $30,000 into a $150,000 home as a down payment, if you can rent it out and clear $300/month after expenses, this equates to whopping 12% ROI. Where does an investor get this kind of return from a brokerage account?
Real estate is risky:
It is true that jumping into “fix & flip” investing as you see on the TV shows can be very risky if you do not learn a lot about your market area and how to price repairs and renovation. Those TV shows often do not mention costs that are involved since this does not make for an exciting show.
However, if you stick to wholesaling and do it right, you can sell to other investors, holding the property for very short periods, and make a nice profit along the way. The risk is highest if you do not develop your list of investor buyers first. Having these relationships and knowing what they want takes much of the risk out of this strategy.
Rental profits are not worth the landlord hassles:
First, you can farm out your management duties, though it will cut into your profits. When you can put a few hundred dollars every month into the bank after expenses, posting a double-digit return on your investment, it is worth a little hassle.
You can not do it in a retirement account:
Simply, yes you can. You will probably have to transfer to a self-directed IRA or 401k, but they are designed to give the investor a lot more options for their investing. There are a lot of rules, but a self-directed account custodian experienced with real estate can handle it. Fees are higher, but the returns on real estate easily make up for that.
Many investors do not realize the advantages the IRS provides for real estate investors that are not available to other asset classes.
• Depreciation of the structure cuts tax exposure.
• All expenses, taxes and insurance costs are deductible against rental income.
• With the 1031 Tax Deferred Exchange, properties can be sold, and the profits rolled into other properties while avoiding capital gains.
Everything considered, once you get past these myths and over-stated concerns, real estate investment is perhaps the very best way to build wealth for your retirement.