When developing a business plan for the beginning real estate investor, first and foremost the investor needs to understand that this is a business. The investor needs to approach this as a business and understand that we need three things to succeed: customers, something to sell, and people who can make it happen. In the real estate business, our customers are our renters. We need to analyze those renters and determine with whom we will best interact. Is it single people just out of school, two person units, married or singles, single parent families, families, seniors, students, or other special needs such as handicapped, nursing homes and others. In determining your business plan, the first thing to do is determine who you want as a customer. Next, pick the property that will best suit the needs of those people. In the class, we talk about how to determine where there appears to be a shortage of a certain of housing units that would be more in demand and easier to rent at a higher profit margin. In addition, you need people to make it happen; that includes an experienced real estate attorney, an experienced CPA, mortgage broker, experienced realtor, a commercial banker, and a property manager. When I say experienced, I mean someone who owns real estate. They should own more real estate than you do and have owned it for much longer time periods. It is best to deal with someone who has gone through a slump and survived. Anyone can make money if the market is going up, the real test is determining if you can make money and survive in a downturn.
Tax advantages of real estate are one of the fundamental reasons that people invest in real estate. In the class we discus the depreciation deduction and how that can shelter your salary . Most beginning investors need more properties that provide more depreciation deductions to cover their salaries from taxes. There is a tax law that we discuss regarding the limitations of passive losses. You need to understand when that might take affect and how to minimize that affect for you. We also talk about tax deferred exchanges. Everyone thinks that a tax deferred exchange is the way to go. This is not always true. We present a balanced approach of how to determine when it is appropriate to not have a tax deferred exchange. You may end up paying fewer taxes in certain situations by doing a sale, then purchasing another property.
Everyone knows that location, location, location are the three most important aspects of real estate, but no one seems to be able to quantify what is a good location. We talk about the characteristics of a good location as having the possibility of either at least one of population growth, wages going up faster than inflation due to new employers moving in, or the ability to change the use. The change of use is what is most prevalent in today’s situation. Change of use takes the dirty house in nice neighborhood and makes it a nice house. Finding that good buy on the dirty house is the challenge in this market.
Another topic we cover is knowing when to sell. Yes, even a great investment has an optimum time to sell to maximize the rate of return. This is also covered further in our third class, The Next Step.
We discuss qualifying for a loan. Under current rules it may be difficult for the time investor to qualify for a loan. There are ways to minimize the impact of the new financing laws and help you get started.
That is always a question that should be on your mind. Many investors have determined, without any analysis, that it is always better to hold a property and pay it off. Unfortunately they forget about the loss of the deduction by the time the property is paid off and the tremendous amount of money tied up in the property now that it is paid off. A non-emotional approach is used to determine what is going to give you the highest rate of return.
A brief discussion talks about what the best investment would be: a single family, multi-family, condos, industrial, commercial, and so forth. We do cover this for a few minutes in class but is covered in more detail in our Next Step class.
A triple net lease is a management free and low risk type of investment for the investor who wants to maximize the cash flow and minimize their management involvement. These can be purchased as an interest in a partnership for as little as $100,000 or you could purchase your own building for $1,000,000.
Many investors do not realize they can buy many different assets with their IRA, Roth IRA or SEP funds. All you need is a self-directed plan. These are offered by companies that complete the necessary IRS forms and assist you with the process. Many of my investors have bought homes, tax liens, mortgage notes, and invested in my partnerships using their IRA funds. There are certain advantages and disadvantages to understand.
Professional management costs some money but gives you the ability to invest in areas you otherwise may not be able to. You can buy property further from your home that may give a higher cash flow to help cover the costs. The class details duties of a professional manager. What do they do, what they don’t do, and how much do they charge. For a complete understanding, come to our Management class. Click here for details
We provide the students with several versions of Excel spreadsheets to do financial projections; one for the “normal house”, fix and flip, fix and hold, long term hold of 15 years, and another example of reducing the effect of passive loss IRS rules.
In the current market condition, we like to cover how to buy properties at the public auctions. The instructor, Mr. Flint, raised a fund in the amount of $1,350,000 in late 2009 to purchase properties at the public auctions. By mid 2011 the fund had purchased more than 20 properties, most of which were at the public auctions. Therefore some first hand experience is given to the students.