Even though we believe that real estate investing is the best way to build wealth, that doesn’t mean that it’s a crystal-clear process. Investors typically have a lot of questions. For instance, how do you understand real estate finance? What does the legal side of real estate investing look like? Are there any tax advantages? At our 2022 April WealthBuilders Real Estate Workshop, we had several Q&A sessions. This blog and corresponding episode of The WealthBuilders Podcast is dedicated to answering your real estate investing questions.
Real Estate Investing Questions
Do you have an inspection done when you purchase a home with creative financing?
Regardless of your real estate financing, you should do an inspection. This is even the case with new builds! An inspection helps you avoid liabilities and expenses, and it allows you to go to the negotiating table with knowledge. (Insurance companies often require information from an inspection before they issue coverage, too.) For example, one of our real estate coaches, Mike Davis, found out the roof was damaged. So, he was able to negotiate for a new roof in his contract. In addition, Billy always recommends a sewer scope—especially on older properties. If a property has cast iron pipes, there can be corrosion that causes issues.
WealthBuilders advises that investors get at least $300 cash flow on a rental. What does that mean?
If you have a single-family rental unit, you should receive a $300 net profit at minimum each month per property. In other words, your tenant’s rent should cover your mortgage principle and interest, taxes, insurance, and management on the property PLUS $300 extra. For multifamily units, the recommended cash flow is different. Cash flow keeps you in a position to weather market changes, address unexpected costs (though you should have an emergency fund designated for each property), and save up for another rental property.
WealthBuilders advises that investors aim to purchase properties that are 3-4x the median income in that market. Is that median family, household, or personal income?
Median household income. This ensures that the largest group of people can afford to rent (or purchase) your property. You can easily search median income in any market on Google. Search ‘Median Household income in (place of interest) in 2022’ to find this metric. It’s really important that you search median household income rather than average because it will eliminate outliers.
Do you suggest putting each property in an LLC?
Our real estate attorney, Bill Bronchick, doesn’t recommend putting each property in their own individual LLC. Rather, he recommends grouping together like properties and keeping 2-4 properties in each LLC. For each LLC, you have a series of filings, including a tax return. So, if you cluster properties or do something called a series LLC, it accomplishes the purpose of an LLC—protection—without causing the unnecessary paperwork that having an LLC for each property would.
Do you set up an LLC or family trust before you purchase your first property?
Yes! However, in most cases you’re not going to be able to finance in the name of a new LLC. If it is your first property, you will likely have to finance it in your own name before you transfer it to the LLC. As a part of The Real Estate Coaching Program, clients receive a free consultation with our real estate attorney, Bill Bronchick, who teaches them how to do this.
Here’s my real estate investing question. Do I have to have a professional real estate designation in order to take the 27.5%-year depreciation tax advantage?
One reason why real estate is a great way to build wealth because of the tax benefits. Anyone can take advantage of the 27.5%-year depreciation on a single-family property. However, the real estate professional designation does allow you to go beyond the standard $25,000 loss.
Can Homeowner’s Associations change bylaws regarding renters?
Yes! HOAs have a lot of decision power over your properties. Many HOAs will limit the number of renters in an area. It can be nice as a homeowner because increased homeownership in an area tends to make the neighborhood nicer and increase home values. However, they can be very strict with vacation rentals and short-term rentals. For example, there was a woman we knew who wanted to purchase property in Woodland Park and rent out to students. When she bought the property, there was nothing in the bylaws that said she couldn’t do that. However, it changed afterwards. A way you can try to avoid this is to evaluate the attitude of the HOA beforehand and ask questions about rental policy. Or, if you can help it, purchase properties that aren’t bound to an HOA—especially when it comes to vacation rentals.
How much can I expect to pay a property manager?
A standard amount for a buy and hold is 8-10%. Vacation rentals are a completely different story. In some markets, they can charge between 40-60%! However, they cover everything from possibly maintenance to evictions.
Do you have any more real estate investing questions? If so, drop them in the comments and our team will be happy to assist you.