Can I Still Profit If I Have to Finance my Investment?

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If you have to use some form of financing to acquire a rental property, you might be wondering if it’s worth it to invest at all. We get this question a lot and the truth is, this is something you’ll need to evaluate on a case-by-case basis.

When we purchase a rental property, we focus exclusively on ROI. That’s what we care about above all else—meeting an ROI between 10-12%. The same principle applies when you’re taking out a loan. You still will want to strive for a high ROI, even with your debt in place.

And when it comes to cash flow, it’s very likely that a loan payment would eat up a lot of your monthly income. Personally, I think that’s acceptable if acquiring said property is bringing you closer to your long-term goal—financial freedom. Typically, I would recommend striving to make a minimum profit of $100 per property when you have a debt service.

However, Gary Keller, author of The Millionaire Real Estate Investor posits that if you can make a profit as small as one dollar per month, then your investment is sound. The reasoning there is that over time, you’ll pay off your loan and ultimately have a larger profit margin.

Keller explains if you’re a new investor, you’re in the first stage of investing: “Buy.” In this stage, you shouldn’t be too concerned with making money, which I know seems counterintuitive. This stage is simply about building your net worth, so it’s okay if your rental payments are going toward paying off your loan. Hear more about the Three Stages of Real Estate Investing on episode 15.

You’ll want to run the numbers on your specific rental property and loan, so we’ve put together a free spreadsheet you can use to calculate your profit. Here’s how it works: you’ll enter the total amount of your loan, the monthly rent of your property. This will give you your adjusted monthly rent. Then you’ll input the terms of your loan. If your investment can produce even one dollar more than your monthly loan payments, chances are, it's a good idea to move forward with a loan on your rental property. 

Why Don't More People Invest in Real Estate?

I love talking to investors and prospective investors about the merits of rental real estate. But one questions I hear on a regular basis is, "If real estate investing is so easy, why isn’t everyone doing it?” Obviously every person has their own unique circumstances, but for the most part I've found that there are two big reasons why people don’t invest in real estate.

The first reason why buy and hold investing isn’t more popular is simply a lack of education. Many people are not aware of the benefits of purchasing buy and hold real estate, and they certainly don’t realize how much they could be earning.

That's why I'm so passionate about sharing what I know about real estate investing! There is so much potential for people to build wealth for their family. Unfortunately, most people simply don't know. Big retirement planning companies advertise so they can make a commission, but you don't see commercials for real estate investing, because it doesn't benefit anyone but the investor.

Also, I find that many people are held back by fear. They don’t consider the potential of what could go right, because they’re too focused on their own hesitations and anxieties. I've heard from a lot of people who have considered investing, but they're too fearful about losing their money. 

If you’re ready to transform the way you think about money and release your fears, the first thing you should do is find your Financial Freedom Number. When you download the free worksheet, you’ll be better able to understand exactly what financial freedom looks like for you, and how many rental properties you’ll need to acquire. You can overcome your fear about money, but you have to begin working toward it.

there are two big reasons why people don’t invest in real estate.

Choosing Bank Accounts for Real Estate Investing

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If you run your real estate venture like a business, you’ll want to utilize a business bank account. But not all business bank accounts are created equal! It’s important to not only find the most cost effective solution, but also the account that fits your specific business’ needs.

Admittedly, we’ve opened a lot of different business bank accounts throughout our real estate career. If you aren’t used to running a business, this is an expertise that must be learned. It’s important to choose a specific business account, and not one that is intended for personal use.

When we opened our very first business account, we went to a big name bank, simply because that’s where we already banked. However, at that time, they charged $35 every month for a checking account. Remember, every single expense in your business comes out of your ROI, so we had to shop around.

Eventually, we found a no fee business checking account with a local bank. We have found that more often than not, you will have better options with a local bank or credit union. We always suggest shopping around, and the site Bankrate can help you find what meets your needs.

It's important to assess a few different things when you're shopping around. You'll want to determine whether your account has a minimum balance or a monthly fee. You should also have an understanding what your bank will charge for different transactions, such as wire transfers. Make sure you do your due diligence and find a bank account that meets your business' needs! 

As a real estate investor, you’ll want to utilize a business bank account. But not all business bank accounts are created equal! Here's how to find a cost effective solution and the account that fits your specific business’ needs.

Developing a Strong Money Mindset

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I’ve made it my mission to help others reach financial freedom, and part of that job entails listening to the backgrounds and stories of people who want to build wealth. I can’t help but notice that there are two distinct mindsets when it comes to real estate investing: one is based out of fear, and the other is centered on abundance.

Something interesting I’ve noticed is that building wealth is not just about numbers on a spreadsheet, calculating ROI, or planning appropriately for taxes. It's deeper than that. True wealth building is cultivation, and it’s something that’s rooted deeply in your mindset.

The truth is, our reality is filtered through our perception. Too many people think they don’t deserve wealth, and they live in constant fear about money. By doing so, they attract negativity into their lives. They invite unfavorable situations into existence by focusing on lack. 

It’s the classic story of a person who wins the lottery, and then quickly squanders all of their earnings away. Why does this happen? Because they aren’t in an abundance mindset.

But those who are creating true legacy wealth and are expanding their real estate portfolios don’t live in that same place. Instead, they focus on peace and abundance. They feel connected to wealth, and they feel worthy of wealth.

I know this is true, because I've experienced it first-hand. I grew up with hearing limiting beliefs that influenced my reality. My parents repeated phrases like, "money doesn't grow on trees," and I believed them. I eventually found myself in dire financial decisions because I lived with this fear of money. It wasn't until I began to change my thoughts and my mindset that things improved for me. 

In order to begin changing your circumstances and creating wealth, you have to start changing your thoughts. Believe that you deserve wealth, know that you can have financial freedom, and start envisioning it.

If you need a jumping off point, start by downloading my Freedom Cheat Sheet.  It's a free PDF I've designed to help you take a realistic look at your finances, and how rental real estate can help you reach your goals. Once you've calculated your Freedom Number, I want you to envision yourself reaching that goal. 

I can’t help but notice that there are two distinct mindsets when it comes to real estate investing: one is based out of fear, and the other is centered on abundance.

Should You Work with a Property Manager

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When you purchase your first rental property, there are many decisions you’ll need to make. But there is one decision that can entirely dictate your experience in real estate investing: should you manage your property yourself, or hire an experienced property management team?

Many new investors think they’ll save a few bucks and take on this duty alone. After all, what could be so difficult about collecting rent checks? If you decide to take on the responsibility, I think you’ll quickly learn that it is extremely difficult.

Will you be prepared to field phone calls at 2am when a toilet overflows? Are you able to properly market the property to prospective tenants? And when you find a tenant, how will you know if they are qualified? Will you check their eviction record and conduct a criminal background check? Do you know how to handle a tenant turnover quickly? Do you know what the right rental price should be, and when it should rise? Are you prepared to deal with the Board of Health?

That doesn’t sound like passive income to me. I think you will find that it makes much more sense to hire a property management team. They’re trained, experienced, and effective at handling all of those responsibilities.

And maybe you still think you can handle this responsibility. Sure, maybe you can handle it for one or two properties, but I like to tell investors to think ahead. I assume you plan to grow your portfolio. Imagine you have ten or twenty properties, or whatever your Freedom Number is. The responsibility of managing tenants would become overwhelming quickly.

I like to work the cost of hiring a property manager directly into my ROI formula. Then property management is covered, I don’t have to worry about it! I can sit back, and watch the rent checks come in without any of the headaches. A property management team will make your experience simple, and most of all, passive!

Ready to hire your property manager? Here’s how to ensure you’ve got the right team for the job.

There is one decision that can entirely dictate your experience in real estate investing: should you manage your property yourself, or hire an experienced property management team?

What You Need to Know About 1031 Exchanges

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A 1031 exchange is an incredibly powerful tool that allows an individual to save on taxes after the sale of a piece of real estate. This tax deferral program permits the investor to sell a real estate property and then reinvest the funds in a property of equal or greater value. Doing so allows the investor to keep more money in their pocket, and defer all capital gains taxes. 

However, the IRS' guidelines on conducting a 1031 exchange are stringent. Here are six rules that an investor must follow:

  1. In a 1031 exchange, the properties involved must be held for either business or investment purchases. You cannot conduct a 1031 exchange on your primary residence.
  2. The IRS requires that the investor identify their purchasing plans on day 45. The investor must describe the property or properties they are planning to use as the replacement in the exchange.
  3. The IRS also has a strict timeline that the investor must uphold. The investor has 180 days to complete the exchange. This begins on the day escrow closes on the sale. 
  4. The investor must also work with a qualified intermediary. This is a third party that holds the money for the exchange in escrow.
  5. The title on the new purchase must be identical to the old property. For example, if first property was held in an individual’s name, that person cannot put the new purchase in their LLC.
  6. A 1031 exchange permits the investor to sell a real estate property and then reinvest the funds in a property of equal or greater value. The investor cannot make a purchase for less than the original property. This would defeat the purpose of deferring taxes on a gain.

To learn more about 1031 exchanges, check out our interviews with experts Lance Growth and Leonard Spoto

A 1031 exchange is an incredibly powerful tool that allows an individual to save on taxes after the sale of a piece of real estate. Here's how it works.

Understanding Depreciation for Real Estate Investing

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Depreciation is defined as the reduction in the value of an asset over time. Depreciation is one of the most powerful tax benefits of real estate investing! Our favorite CPA Tom Wheelwright calls depreciation “the magical deduction.”

Depreciation is important because it helps you keep more money in your pocket, instead of sending it off to the federal government at tax time. This is a fantastic method used to mitigate your overall tax burden, so you’ll want to know exactly how it works. 

Per the federal government, every year for 27.5 years you can claim depreciation on a property to offset rental income. This is because the government recognizes that things fall apart over time.

Let's say you own a rental property valued at $50,000. Here's how you would calculate depreciation on that investment: 

$50,000 / 27.5 years = $1818

That's $1818 you can claim on your taxes every single year for 27.5 years to offset your overall tax burden! In this scenario, let's say your property brings in $5000 every year in rental income. Instead of paying taxes on the full $5000, you get to subtract your depreciation!

$5000 annual rental income - $1818 in depreciation = $3182 

Wouldn't you rather pay taxes on $3182 than $5000? It's a no-brainer! That money adds up every year, for 27.5 years! That's why depreciation has incredible implications in real estate investing. 

To learn more about maximizing depreciation, check out this podcast episode where I interviewed tax genius, Tom Wheelwright. We spoke extensively on cost segregations, deductions, 1031 exchanges, and more. 

If you want to learn more about how rental real estate can help you create passive income and offset your taxes, let's talk! Click the button below to schedule a free 30-minute call with my team. We'd love to discuss your real estate goals. 

Depreciation is important because it helps you keep more money in your pocket, instead of sending it off to the federal government at tax time. This is a fantastic method used to mitigate your overall tax burden, so you’ll want to know exactly how it works.