Progressive Real Estate Investing
Many people are growing weary of the stock market and are looking to shift their investments into something a little more stable with good long term growth potential. Real Estate is one category that has been garnering more attention lately.
This post is about how you can progressively invest in real estate for long term income and capital appreciation.
Step 1 - Own a home
You may already be a real estate investor if you own your own home
If that's the case, good job you are on the right track
If not, that's okay too, because there are plenty of other ways to invest in real estate
Step 2 - Invest in Real Estate Investment Trusts (REITs)
Focused on particular areas of the real estate market like residential (apartments, single family home rental, student housing, manufactured housing), office buildings, retail centers, self-storage, hospitality, medical buildings, etc.
It makes sense to allocate your investment across several sectors for diversification
Residential is a popular sector because it tends to weather the business cycles well (people will always need a place to live); see link to a post I previously wrote on advantages of residential real estate investments
Publicly traded and are very easy to buy and sell; highly liquid, unlike direct investments in real estate
Typically distribute most of their earnings out annually
They usually have a high dividend yield, but these dividends may not be as tax beneficial as "qualified dividends" from a non-REIT, so need to bear that in mind when investing and check with your tax adviser
Step 3 - Buy a small residential investment property
Buy a small investment property, maybe a house or a 1 or 2 bedroom condo near where you live (depending on how expensive your housing market is)
When possible, I like to invest close to where I live to be able to keep an eye on the property, but if you live in a high cost of living area that may be difficult - there are options to invest long distance which I have written about (see link)
There are few other investments where you can get a bank to loan you 80% of the cost of an asset and you only have to put 20% down, with a fixed interest rate for 30 years
Additionally, over time as the rent rises, the fixed loan payment will become less and less of the total income and the cash flow will continue to grow
You can refinance the property in a few years and either lower the payment to get more cash flow (since the new loan will carry a new 30 year amortization) or you may even be able to take cash out of the property and keep the payment the same, which allows you to invest the proceeds in a new property and grow your portfolio
Finally, the tax benefits of owning a property can be terrific - losses up to $25,000 (mostly caused by non-cash depreciation deductions) can offset your ordinary income and reduce your taxes, depending on whether you "actively participate," how much you make and whether you are a "Real Estate Professional." Always discuss with your tax adviser since these rules can be complex.
If you're interested, I wrote a book on getting started in investing in real estate by buying small condos; it's short, concise and to the point.
Step 4 - Sell small residential investment property and trade-up to a residential duplex or four-plex
Once your initial investment has appreciated sufficiently, you may be able to sell it using a 1031 exchange and buy a larger property
A 1031 exchange allows you to take all of the proceeds of the sale (tax free) and roll into the purchase of another property, thereby deferring payment of taxes until you later sell the replacement property
Most savvy real estate agents who are used to dealing with real estate investors know about this and can help you find companies that will facilitate the exchange and make sure you meet all the rules, which can be complex; it's also good to talk to your tax adviser about it first
For the next property you buy, a four plex is a great option because you will have multiple units, which lowers your risk if a unit is vacant for a period of time and not earning rent
Also, four unit properties or less still qualify for 30 year fixed financing, which is a key advantage; larger properties require "commercial loans" which have higher interest rates, shorter repayment terms and can be more difficult to obtain
Some investors may choose to live in one of the units and rent out the other three, or you can just hire a property manager to manage the building
I prefer using a property manager so I can focus more on investing and less on fixing toilets
Step 5 - Branching out
Once you have a good portfolio of residential properties that are operating smoothly, appreciating and generating positive cash flow, you may want to look at taking some of that positive cash flow and directly investing in other sectors
Commercial property investment used to be the domain of large institutional investors, but now there are some crowdfunding options that allow small, accredited investors to invest in commercial projects (see link for a post I previously wrote on this topic); these can include office buildings, large apartment buildings, retail projects, etc.
If you have enough capital to buy one, a self storage facility is a really intriguing business; many people, especially in affluent areas, have too much "stuff" to put in their house or garage and need a place to store it; self storage requires very little in the way of manpower to operate and management can even be outsourced if desired; the model relies on people dropping off their stuff and paying the monthly rent for many years; if people don't pay their rent, the contents are auctioned off to pay the rent and penalties (maybe you have seen the show Storage Wars); definitely worth looking into
I hope this post helps you organize your own plan for progressive real estate investing.
For more investing ideas, click here.
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