Rental-Property Profits

Michael Thomsett

• Publisher: AMACOM
• Year: 2017
• ISBN:
  9780814438541
• Edition: 2
• Topic: Business
• Subtopic: Real Estate
• Index: Business

This book walks you through every important step, from spotting smart investments to taking advantage of tax breaks and loopholes.

With rental prices climbing, vacancy rates low, and property values rising, real estate investing has become a tempting option for achieving financial security. The fixer upper shows today that make it look so easy—simply buy a property, fix it up, and then rent it until you're ready to sell for a profit—has the number of real estate investors is growing, but the same can't be said for all their bank accounts. The reality is that real estate can be confusing, requiring in-depth financial and tax knowledge that most newcomers lack

With clear language and updated forms, worksheets, checklists, and formulas, Rental-Property Profits explains how to:

• Evaluate risks and opportunities in a post-recession market
• Determine if you qualify for an investor loa
• Calculate cash flow and maintain healthy levels
• Establish sound bookkeeping and accounting systems
• Handle rental property depreciation

Real estate investing is not as easy as it looks on TV, but it also doesn't have to be risky. With this self-guided manual by your side, avoid the costly mistakes that many before you didn't see coming, and build the nest egg you deserve!

1.

THE NATURE OF REAL ESTATE INVESTING

Real estate, over time, has been the most consistently profitable investment choice you can make. As long as you research ahead of time, know your market, and pick specific properties carefully, your investment should grow over time. This is true even in light of the depressed market since 2008. This period of time has been among the worst markets for real estate in many years. However, the market inevitably recovers from its negative cycles and comes back as strongly as ever.

This is why right now is a great time for investors to look seriously at the possibility of becoming a real estate investor. For most investors, the first question to ask is how much risk is appropriate. The answer to this question will help in the decision as to whether to proceed as a real estate investor or to look elsewhere.

Most people start out investing in residential property. A single-family house or small multiunit property (two to four units) is manageable and affordable, and you can always step up from there to buy additional properties or exchange your initial investment for larger ones. To get started, you want to define what you hope to achieve by purchasing real estate. Property is far more expensive than most other investments, so you will be making a commitment in most cases to a mortgage. The majority of investment value will consist of borrowed money, so you will depend on rental income to make your investment affordable. Given the potential affordability of real estate (with tenants essentially covering your mortgage payment for you), the consistent historical growth of real estate values, and the exceptionally good tax advantages, the benefits of real estate investing are significant. However, “affordable” is not restricted to net profits but, much more significantly, extends to the cash flow generated by the investment—that is, the comparison between money coming in and money going out. You need positive cash flow or, at worst, a breakeven form of cash flow in a majority of cases. Most investors cannot—and should not—afford to carry negative cash flow from their investments.

AN OVERVIEW OF THE MARKET

Since residential property is, by far, the most common real estate investment, examples in this book focus on single-family housing. Other choices (such as raw land speculation, commercial, and industrial properties) are much more advanced and beyond the interest of most investors.

The residential housing market can be easily studied in any given area. You can readily find information about the local population, employment, rental occupancy and vacancy rates, and the level of new construction under way. These factors add up to the supply and demand for real estate in your city or town. This, then, is the logical starting point if you are thinking of investing in real estate.

KEY POINT Information about local supply and demand for rental property can be found through local real estate brokers, appraisers, and bankers. Multiple Listing Service (MLS) publications also provide detailed information about property pricing and trends.

VALUABLE RESOURCE To locate Multiple Listing Service (MLS) in your city or town, go to http://www.mls.com.

To find specific properties for sale in your area and to judge the market prices in great detail, even down to neighborhood or zip code, check the many online sources for current listings as well as for recent sales of homes similar to those you are targeting as potential investments.

VALUABLE RESOURCE For a local listing of real estate in your town, check these sites:

www.homefinder.com

www.homes.com

www.realtor.com

www.trulia.com

www.zillow.com

SUPPLY AND DEMAND

The supply and demand for residential property involves three distinct and separate markets. First is the market price trend of housing, the best known and understood market. In this market, buyers want to know, first and foremost, what a house will cost. The second market focuses on supply and demand for rental units. Third is the market for available sources of mortgage financing.

The first market can be evaluated in terms of how prices change over time. Are houses selling for more this year than last year? What is the percentage of growth? Housing prices have beaten inflation over many years, with the recent exception in this market beginning in late 2008. The longer-term trend places housing among the strongest of growth investments. Assuming, of course, that you’ve selected property on the basis of good research and sound market analysis, you can expect real estate to be less volatile than the stock market, consistent in its growth rate over time, and safer by far than other alternatives. In many regions, prices have remained flat or have declined, so using national averages is not a safe way to pick a market. You need to check the regional trend to ensure that real estate in your town represents a viable investment. In areas where employment is strong and the population is growing, real estate values tend to grow as well. The market value of property is only the first of three important “markets” in real estate.

The second market involves demand for rentals. What is the average vacancy level? A very low vacancy rate is a positive sign, but a fluctuating or high vacancy indicates that there is more supply than demand. If that is the case, then the timing would not be good for investment, at least not right in your city. The trend between 2008 and 2016 has been for housing prices to decline (over most regions), leading to more people renting than buying. This increased rental level has driven market rentals upward. So as housing costs fall and market rents rise, the market for real estate investors is ideal, consisting of low investment prices along with higher rents.

The third market is that for mortgage money. In 2016, rates were lower than they had been for many years, in the range of 3 percent. This is an extraordinary opportunity for investors, with the cost of borrowed money lower than it has been for many years. However, the rate is not the entire story. Qualifying for a mortgage involves a combination of lending rules and standards, your personal credit history, and the level of equity (your down payment) versus the percentage you would like to borrow. If you do not have money for a down payment or if your credit score is poor, you will face difficulties in getting a mortgage at a desirable rate.

KEY POINT The combined supply and demand features of the three forms of real estate markets are going to vary from one location to the next, often drastically. The next town over may have vastly different real estate features, and even within one city, the supply and demand can (and does) vary from one area to the next. It is essential to understand the population, employment, market value, and vacancy trends—in advance of committing money.

THE BASIC EQUATION

More details on these essential ideas are covered in later chapters. As an overview, however, a basic equation is an important starting point. The short-term market attributes of rental property are going to affect how well you can afford to invest money now. The whole market is likely to look different in a few years, but you want to make sure you have a reasonable expectation of keeping tenants in the property each month. The equation worth keeping in mind is a balance between how much money you receive (in rent) and how much you have to pay out (in mortgage payments and expenses). For that equation to work, you want to keep the property occupied as consistently as possible. Any time the property is vacant represents lost income, but your mortgage payment continues from month to month.

AN INVESTOR’S POINT OF VIEW

The market for residential real estate is not difficult for most people to understand. If you own a home, you know all about mortgage payments and the importance of being able to afford the payment each month. Anyone who has not yet bought a home knows that landlords expect rent to be paid on time. So the basic economics of real estate are familiar to everyone and are not as mysterious as the market forces at work in other markets, such as the stock market.

In evaluating investments, though, you need to look at properties from a different perspective. When you shop for your primary residence, you are interested in the comfort features, condition, and size of the property. As a real estate investor, you might be willing to buy property that would not interest you as a primary residence but that is ideally suited for rental purposes.

EXAMPLE: You have a growing family and need a house with several bedrooms for your own use. However, you have discovered that relatively small houses make excellent rentals. A two-bedroom house in modest condition is relatively inexpensive compared to other types of properties and is easy to keep occupied. A married couple or single person is drawn to such rentals and can afford what you will need to ask in rent, so such properties are easier to keep occupied than more expensive, larger homes would be.

In this example, your revaluation of the market would be made with rental income and payments in mind, rather than from the point of view of a homeowner. The investment attributes of your decision are going to be far different from your personal requirements.

KEY POINT When you search for investment properties, your criteria are far different than what they are for your primary residence—a primary distinction to keep in mind.

The real estate market has grown in value over time, even though recent trends have been negative. This is a national average, of course, and all real estate is local. This means that it is essential to understand the local features of supply and demand before investing. You cannot depend on national averages or even on local trends for the long term. If local property grows in value over fifteen or twenty years in the future, that is a promising feature. At the same time, you need to ensure that rental demand is strong right now, in order to cover your mortgage payments. As you look for potential rental investments, try to locate properties that are affordable, most likely to maintain value (and grow in value), and appealing to likely tenants.

REASONS TO INVEST IN REAL ESTATE

There are many good reasons to buy real estate. Among the most important reasons—assuming the local market conditions make it a viable choice—are the following:

Diversification and Asset Allocation. Sound investment requires spreading capital over dissimilar investments. You would not want to put all of your capital into a low-yielding savings account, or into a single stock, or into real estate. You are better off diversifying your capital. You may wonder: If real estate is sure to grow over time, why not put all of your money into rentals? Diversification is important because different investments have different attributes. The stock market is volatile and you can make or lose money quickly; however, your money can be invested or taken out quickly. Savings accounts are safe but yield very little. Well-selected real estate is going to increase in value over time, but it is very difficult to get your money out if you need it for an emergency. You need ...

Table of contents

• Cover
• Half title
• Title
• Contents
• Figures
• Tables
• Introduction: What This Book Will Do for You
• 1. The Nature of Real Estate Investing
• 2. Getting Started in Rental Property Investing
• 3. Cash Flow: The Essence of Rental Real Estate
• 4. Picking the Best Investment for You
• 5. Bookkeeping Basics for Rental Property
• 6. Keeping Track of Real Estate Transactions
• 7. Creating a Timely and Efficient Accounting System
• 8. Handling Depreciation for Rental Properties
• 9. Understanding the Tax Rules for Real Estate
• 10. Tax Reporting for Annual Income and Expense
• 11. Including Real Estate in Your Portfolio
• Glossary
• Notes
• Index
• Author Bio
• Sample Chapter from Money Machine
• About AMACOM
• Copyright