The Accidental Real Estate Investor- A Great Place to Be!

Reblogger Wallace S. Gibson, CPM
Real Estate Broker/Owner with Gibson Management Group, Ltd.

 

Excellent post on how would-be sellers can keep their homes and have their carrying costs covered. 

 

Original content by George Belleville

Many people dream of becoming a real estate investor, but few actually do.  It is a big step with great rewards, but it is a leap for many people.  Twice this week I have had conversations with friends who find themselves in the position of being unintentional, if not accidentally, in the real estate investingReal Estate Investing business.

Sometimes this occurs because you bought a new house and did not need to sell your current house, sometimes you find yourself with some “found” money that presents the option to you, or perhaps you inherited a property.  Many times, the discussion comes up when people realize that they would like to convert a second or investment home to their primary residence when they retire.

Based upon their questions, here are a few things to consider if you find yourself at our near the point of being an investor.

  1. Investment properties have tax advantages-  You can depreciate the property, write off expenses and lower your cost of ownership.  You can borrow against the value of your investment property for other purposes (conservatively of course).
  2. Investment properties have tax implications in the future-  Once you have depreciated the home some, if you sell it, you could be required to pay back (they call it recapture) the tax benefit you received.
  3. If you sell your investment property via a “Like-Kind Exchange”  you can defer paying back that re-captured depreciation, and roll it into the next house.  This process is referred to a 1031 exchange, for the section of the IRS code that allows the exchange.  It is a fairly easy process, but you need to have a plan up front.

So, how does this affect the accidental investor?  You have just bought, inherited, or somehow own a house that is not your primary residence.  If it is not a vacation home, then it must be treated as an investment property.  Once you treat it as an investment property, it will be depreciated, and you will have some great tax deductions. 

However, at some point you will need to sell or dispose of that property.  You can sell the house and pay the taxes, or you can do a 1031 exchange and defer the taxes to the next property.  One popular tactic that people use is to buy an investment property in an area that they wish to retire, then eventually move in and convert the property to their primary residence.  Others just keep deferring and moving up in property value until they die, and leave it to their heirs (which has tax benefits as well).

One aspect of real estate ownership that is often overlooked, and is especially important for seniors, is the issue of asset allocation.  You probably know that you don’t want to have all your assets in one stock.  But you should also be concerned about having too much of your assets in a single property, or in real estate as a portion of your portfolio. 

The problem with real estate is that it is not a liquid asset.  If you need your money quickly, it will not be available.  What I recommend to my clients who own real estate but need liquidity, is:

  1. Put enough money down on the property that the rent will easily cover the actual costs (not the tax-advantaged costs).
  2. Obtain a home equity line of credit.
  3. Keep any monthly profit from the property in your cash account as a cushion up to the recommended amount (some say 6 months, some say 12, depends upon where you are along life’s road).

There is a whole world of real estate investing models.  Some argue for maximum leverage, and continuously buying up to increase your return on equity.  You can certainly make a fortune that way, but there is an element of risk as well.  And, you really need to run an investment portfolio like that as a job.

Would You Like to End Up Like This?

Real Estate InvestingYou own a home outright, say for $225,000.  You have a home equity line of credit (HELOC) to cover you if you have any unexpected expenses.  You receive $1,700 per month in rental income, and if you buy the correct property, your asset will appreciate over time.

Some people spend decades trying to get there, and some people end up there accidentally…. either way it is a great place to be! 

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Rainmaker
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Ellen Dittman
Watson Realty Corp. - Middleburg, FL
#1 Stop for NE FLA-JAX/OP 904.535.1199 (TEXT OK) r

Great and informative post, so many out there. In our area many military folks.

Jun 21, 2010 07:23 AM #1
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Rainmaker
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Wallace S. Gibson, CPM

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