The Ultimate Guide to 1031 Exchanges

Let’s be honest: the US tax code is lengthy, complex, and overwhelming. Unless you’re a CPA or some kind of superhuman tax guru, there are probably a lot of opportunities to save on taxes that you’re overlooking. One of these amazing money-saving possibilities lies in Section 1031 of the Internal Revenue Code.  

Under typical circumstances, any time you sell a piece of property, you are required to pay taxes on your profits. That’s unless you take advantage of the tax deferral program: a 1031 exchange! This powerful tool permits an investor to sell a real estate property and then reinvest the funds in another investment. This means more money in your pocket, deferred capital gains taxes, and additional purchasing power on your next transaction. 

In this post, you’ll learn everything you need to know about conducting a successful 1031 exchange. You’ll gain an understanding of the rules, guidelines, and time limits, and discover whether or not this tool is a fit for your personal investment strategy. You’ll learn more about the step-by-step exchange process, the importance of having the right team on your side, and how to save tens of thousands of dollars in taxes. If you want to keep more money in your pocket, keep reading The Ultimate Guide to 1031 Exchanges! 

What Are Capital Gains Taxes? 

When you sell an asset for more than you spent to purchase it, it’s called a capital gain. The government collects a tax on capital gains. This can be the result of the sale of any type of asset, from stocks to vehicles to real estate. As a real estate investor, anytime you sell a property, the income that you receive is taxable. Depending on the real estate market, your tax bracket, and the cost of the asset, capital gains taxes can be incredibly sizable. 

Luckily, there’s one loophole in the tax code that allows you to forgo that tax bill and keep your profits flowing seamlessly! If you’re thinking about selling a piece of real estate, you need to consider taking advantage of a 1031 exchange to avoid the tax hit from capital gains.  

The Basic Structure of a 1031 Exchange

A 1031 exchange is a powerful tool that allows an individual or business 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 another property (or multiple properties). Doing so allows the investor to keep more money in their pocket, and defer all capital gains taxes.

In order to qualify for a 1031 exchange, the properties involved in the exchange must be held for either business or investment purposes. You cannot conduct a 1031 exchange on your primary residence. The IRS will request that you prove that your property is an investment via tax returns, records of rental income, depreciation records, and sometimes a statement of intent. It’s important to have this documentation in place in case of an audit.

There are also regulations in place for the new purchase (also known as the replacement property). The replacement property must meet the reinvestment requirements during a 1031 exchange. This means if you want to defer all taxes, the new property must be of equal or greater value than the property that was sold. The IRS deems that the property exchanged must be like-kind (more on that later).

It’s All About Timing

If you want to save thousands on taxes, you’re going to need to be proactive. A 1031 exchange cannot be conducted in a leisurely manner or at your own discretion. The IRS has set forth a strict timeline that you must uphold during a 1031 exchange. There are two important numbers to remember in order to have a successful transaction: 45 & 180. 

The IRS requires that the investor identify their purchasing plans on day 45 of the exchange. The investor must describe the property or properties they are planning to use as the replacement in the exchange. These properties must be identified in writing on an official letter. This list cannot be changed after day 45, and the investor must ultimately purchase their replacement from that list. 

The investor has 180 days to complete the exchange and close on the replacement property. The 45 day timeline and the 180 timeline run simultaneously, and the clock starts on the day escrow closes on the sale of the first property (also known as the relinquished property). 

These are strict guidelines, and the investor must meet both time limits. If you fail to identify replacement properties by day 45, or do not purchase your replacement within 180 days, you can expect to be taxed on the sale of your property. There are no exceptions or extensions to these timelines. 

Finding Your Replacement Property

How do you ensure a replacement property qualifies for a 1031 exchange? There are a few things to consider before pulling the trigger. 

Cost: The point of the exchange is to defer taxes, so you’ll likely want to purchase a property (or properties) of equal or greater value. If you choose a replacement property that costs less than your original investment, you will be required to pay taxes on the difference. 

Like-kind: The IRS requires that the replacement property must be like-kind. This term causes a lot of confusion and misunderstanding for investors. However, this is a broad guideline that refers more to the nature of the investment than the actual type or quality. For the most part, any piece of real estate will qualify as like-kind. For instance, if you sell a single-family home, you don’t necessarily have to purchase another single family. You could exchange for a multi-family investment, a warehouse, an office space, etc. The exception would be anything that isn’t a long term investment, such as inventory or properties used for flipping. 

Use: The replacement property must also be used for business or investment purposes. You cannot sell an investment, and then purchase a primary residence or vacation home. 

Location: The replacement property must be located in the US. It doesn’t have to be in the same state, but it must be in the US as the 1031 exchange is a US tax program. 

Identifying Your Replacement Property

By day 45 of the exchange, you are required to submit your purchasing plans to the IRS. There are two rules you can follow during this process. 

3-property rule: If you choose to follow the three property rule, you can identify three properties of any value. You must then purchase your replacement property from that list by the end of the exchange. 

200% rule: This rule does not set a limit on the number of properties that you can identify, but the total value cannot exceed 200% of the property that you sold.  

Don’t Do It Alone

A 1031 exchange is not a DIY strategy; it’s necessary to hire a professional to assist you during this time. First, you’ll want to enlist the help of a qualified intermediary while conducting a 1031 exchange. Also referred to as an accommodator or facilitator, the qualified intermediary plays a critical role in the process of 1031 exchanges—they facilitate the entire transaction. The qualified intermediary acts as a neutral third party that holds the money for the exchange in escrow. This is important because you as the investor are not to touch the funds from the sale of your property during a 1031 exchange. If you happen to be in receipt of payment, you are then subject to capital gains taxes. 

The qualified intermediary prepares all of the legal documents, and provides guidelines to all parties involved in the exchange. The qualified intermediary works to ensure that everyone is in compliance with the IRS in order to guarantee a successful exchange.

If you’re looking for a recommendation, we refer all of our investors to Asset Exchange Company. Asset Exchange Company prides themselves on their attorney guarantee, funds security, integrity and experience, and fair pricing guidelines. Leonard Spoto is the principal at Asset Exchange Company, and also one of our favorite podcast guests! Hear his expertise on 1031 exchanges on episode 350 of the Investing in Real Estate Podcast!

What’s the Point?

In real estate investing, most investors utilize a 1031 exchange when they want to diversify their portfolio. In our business, we most commonly work with investors who are seeking a higher return on investment. In the same realm, a 1031 exchange is also an effective way to grow your portfolio, trading one high value piece of real estate for multiple lower cost properties.

Because of the tax implications of selling a property, the 1031 exchange has the potential to save you tens of thousands of dollars. Different states have different tax rates, but in general you can expect to pay somewhere around 33% in taxes on the sale of a piece of real estate. Depending on the cost of your property, you could forego the tax bill with a 1031 exchange and instead purchase an additional property (or properties) with the money you’ve saved! 

Long-Term Deferral 

A 1031 exchange can be conducted again and again, deferring taxes indefinitely. Although we typically advise holding your properties long-term, in theory, you could conduct a series of exchanges. It’s important to note, if and when you do cash out, you would be responsible for paying the totality of all deferred taxes. 

Often, it is helpful to compare a 1031 exchange to a retirement plan such as a 401k or traditional IRA. If you roll over your account into a new one, taxes are deferred; when you cash out, you are responsible for paying taxes. 

However, in a 1031 exchange, the tax bill expires upon your death. In the world of 1031 exchanges, it’s common to hear mantras like “defer, defer, die,” and “swap until you drop.” Smart investors know that a 1031 exchange is an incredible long-term strategy! 

Building a Dynasty

The beauty of the 1031 exchange is that its benefits are incredibly long-lasting, even beyond our lifetime. A tax-deferred exchange is actually an incredible tool for estate planning. Not to be morbid, but after your death, your heirs will reap the rewards of your financial intelligence.

In our personal real estate business, our main purpose is to build legacy wealth for our family. As we purchase cash-flowing rental properties, we intend to pass them to our children when they become adults. If you conduct a 1031 exchange and then choose to pass your rental properties to your heirs, they will inherit those assets without capital gains tax liability.

An Important Note on Titles 

When conducting a 1031 exchange, it’s vital to ensure you get everything right with the title. The title on the new purchase must be identical to the old property; the IRS wants to see the exact taxpayer on each title. For example, if you owned the first property in your own personal name, the replacement property must also be purchased that way. You cannot put the replacement property in an LLC, trust, retirement account, or someone else’s name; the titles must be identical to ensure a successful transaction. 

If you need to change the title later (for example, transfer the property from your personal name into your LLC), you can always complete a quit claim deed after the 1031 exchange has occurred. 

More On Taxes

The 1031 exchange is an advanced tax strategy for real estate investors. If you haven’t yet started thinking about how to take advantage of the many tax benefits available to real estate investors, you must! The absolute best place to start is to read Tax-Free Wealth by Tom Wheelwright. Tom Wheelwright is a Rich Dad Advisor, and an incredibly knowledgeable tax accountant. Tax-Free Wealth is full of amazing strategies for creating wealth by minimizing your taxes. Additionally, we’ve put together a playlist on YouTube to help you learn more about real estate taxes. 

How to Get Started with a 1031 Exchange 

If you’ve identified a weak link your existing real estate portfolio and are interested in moving forward with a 1031 exchange, the first step is to get in touch with a qualified intermediary. This contact should be made before the sale of the first property. It is not recommended to wait until last minute, you should prepare ahead of time if you plan to engage in a 1031 exchange. If you have already sold your property, unfortunately it is too late to participate in this tax-deferral program. This is because the qualified intermediary will need to set up an escrow account for the funds received. If you want to defer capital gains taxes, you cannot personally receive the funds from the sale—this is a taxable event. 

Additionally, you should seek the counsel of your real estate savvy CPA during this time. If you’re looking to exchange a property for higher ROI real estate investments, we’d love to help! Book a call with our team, let us know about your plans to participate in a 1031 exchange, and we will match you with high return-on-investment properties that meet your needs! 

A Disclaimer 

We would like to note that at Morris Invest, we are not tax professionals or lawyers. As always, seek the counsel of your law and tax teams. This post is not intended as advice, but rather a cumulation of experience. 

America Is Becoming a Rental Nation

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Today's housing market isn't kind to aspiring homeowners. So much so that the stereotype of the hopeful-yet-hopeless millennial is engrained in the public consciousness, a reminder that fewer young people have the means to purchase a property.

And who can rightfully blame them? Many postpone this important life decision to save enough money for mortgage payments, much of which they spend on rent. All the while, house prices rise as economic uncertainty casts further doubt on the American Dream.

It's not only the millennial demographic that struggles with homeownership. The country is beginning to see an increased rate of those who rent. What are the contributors behind this transition, and in what direction is America heading?

Low Salaries and Debt

The leap from renting to homeownership is sometimes precarious. Those who aren't accustomed to all the additional expenses will have difficulty as they adjust. Without a considerable increase in salary, many low-income Americans can't justify a larger living space and all that it implies.

More than the basic stressors of upkeep and maintenance, many young people in the workforce have a considerable amount of student loan debt that dictates their purchasing decisions. Taking on the extra cost of mortgage payments is unlikely to alleviate their financial stress.

Less Confident Overall

Homeownership itself is a risky proposition for some. The amount of money a homeowner has to invest to keep their property maintained and properly insured can tie up all of their assets in a single location, and if something were to happen to it — such as a natural disaster — they could lose everything.

In addition to the potential perils of homeownership, renting allows for a greater degree of flexibility for those who aren't ready to make a long-term commitment. Renters are only responsible for the guidelines of their lease and can choose to leave at expiration, as opposed to the far more difficult task of selling a home.

Lastly, in an increasingly uncertain political environment, some potential homebuyers are less confident in the way that they spend their money — especially when faced with a sizable investment like homeownership. 

Where Is America Going?

The primary contributors that affect the percentage of renters in an area are local housing prices and home affordability. As long as these two factors continue to trend upward, landlords will enjoy the benefit of an increased interest in their properties. And there are ways that an investor might capitalize.

Testing the temperature of the waters, real estate investors who purchase rental properties in communities with rising house prices might benefit from offering those in the area lower cost substitutes to permanent housing — a win-win situation for everyone involved. 

Americans may once dreamed of a suburban neighborhood with a trimmed lawn and a white picket fence, but rentals offer the flexibility and mobility that modern workers need. This isn’t to be overly dramatic, of course — property ownership is still an aspiration for many.

Continuing to Dream

Americans are still interested in homeownership, regardless of their current living situation. A nationwide survey revealed that over 80 percent of Millennial renters born between 1982 and 2004 want to purchase a home for themselves, but are unable to due to their financial situation and other barriers to entry.

Despite their interest, those in large metros will need at least a decade at their current rate of savings to accumulate enough money for a 20 percent down payment on a condo. Some will have to wait an estimated 24 years, a grim prospect for young Americans intent on starting a family.

What to Expect

Unless the country sees a dramatic shift in affordability or an increase in the average income, the public will struggle to meet the high demands of the housing market. This current reality is an asset to landlords and represents an excellent opportunity for real estate investors, however.

Rental properties will become even more important than they are today as rising interest rates and uncertainty make tenants more reluctant to dive on a home. Property investors can create the flexible living situation Americans are currently in great need of while growing their own wealth for years to come.

Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes.

The #1 Book for Wealth Building

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Building wealth typically entails undergoing a huge mindset shift. More than anything, creating financial freedom means thinking of money as a manifestation. It also means unlearning and reevaluating all of the widely-held beliefs about what it means to save for retirement.

 Did you know that the average 401k at retirement is only around $90,000? I don’t know about you, but that doesn’t sound like enough to sustain my lifestyle for multiple years. Do you plan to radically minimize your expenses at retirement? Not I. 

At this point, I hope you’re thinking, “there has to be a better way.” I have good news for you, friend: there is. It entails purchasing performing assets that deposit recurring cash flow into your bank account on a monthly basis.  

Ask anyone who has built lasting wealth through real estate, there’s one book you need to read in order to grow your portfolio and become financially free: Rich Dad Poor Dad by Robert Kiyosaki. If you’ve read the book, this should come as no surprise. In fact, Rich Dad Poor Dad is often publicized as the #1 personal finance book of all time.

As a quick overview, Kiyosaki was raised by two very different fathers—one rich, and one poor. Because of this, he grew up seeing differing viewpoints about money and wealth building. He then gained an interesting and thoughtful perspective about how to make your money work for you, how to wisely invest, and the significance of gaining control of your finances. In Rich Dad Poor Dad, there are six major principles that you need to understand in order to build wealth. 

The rich don’t work for money. Have you ever noticed that many wealthy people don’t actually have jobs? The story you’ve been told about saving a little money from your paycheck isn’t doing you any favors. Your 9-5 isn’t going to make you wealthy. Truly successful people understand how to make their money work for them, and not the other way around. Say hello to the power of passive income! Rich people buy performing assets that build wealth.  

Why teach financial literacy? Many of us are not taught about how to make and manage money. We don’t learn financial skills in school, and many parents pass down their own limiting beliefs and fear-based ideals about money. Most of us simply don’t know any better. It is our duty to teach ourselves financial literacy, and then relay the message to our children. In our family, don’t just want our children to think of money as something that mommy and daddy have. We want them to be empowered in their wealth building and think of money as something that they have the ability to create.

Mind your own business. In this particular section of the book, Kiyosaki writes about the importance of building your assets, and emphasizes that you should own businesses. That’s exactly what we do with rental real estate; it’s our business that allows us to build our net worth. And even if real estate is not your thing, there are plenty of ways you can build assets. For instance, you could invest in a small business, precious metals, buy a business, or use your funds in private notes. This is a fundamental paradigm shift you have to understand if you want to build wealth. 

 The history of taxes and the power of corporations. The majority of people hate taxes. Why is that? Because they don’t understand how the tax law works, or how to make it work in their favor. Tax time doesn’t have to be dreadful if you Wealthy and successful people take the time to gain an understanding of the tax law, and then reap the benefits. The US Tax Code favors entrepreneurs and real estate investors. There are incredible tax implications for owning rental real estate. Want to start learning more about how you can legally benefit from the 2018 tax code? Check out Rich Dad CPA., Tom Wheelwright’s, book Tax-Free Wealth. 

The rich invent money. Most people are of the mindset that they should work hard at their paycheck-based job, and try to save a little bit every month. The problem with this is that it takes forever, and the return on investment is low. But rich people build their financial intelligence, and gain a deep understanding of investments in order to create more money. That’s why at Morris Invest we’re all about ROI!

Work to learn—don’t work for money. For most people, job security is everything. I too have been in this boat. I was devastated when I lost my job, but this experience actually inspired me to ensure that I would never solely rely on an employer again. When you own performing assets (like cash-flowing rental real estate properties), you don’t necessarily need your job to pay your bills. 

The point of Rich Dad Poor Dad is that if you want to build wealth, you must unlearn some of the ideals you’ve been taught. Forget about the nest egg. Your 401k is likely not doing you any favors (unless you’re using it to buy performing assets). Quit working for money. 

Changing the way you think can be uncomfortable. It’s disheartening to think that everything you’ve been led to believe is untrue. You probably thought that everything would be fine if you squirreled funds away into traditional retirement accounts. The reality is, that doesn’t work out for most people. 

Do your due diligence. Be your own wealth building advocate. And if you haven’t yet, read Rich Dad Poor Dad! 

How to Use Private Money to Build Wealth

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If you want to build wealth, but you keep hitting dead ends when it comes to financing, it might be time to consider how private money can help you reach your goals. If you’re unfamiliar, this might sound bizarre, but the private money world is huge!

What exactly is private money? Private money refers to any money that you borrow from a non-bank. The source could be a relative, friend, or another real estate professional. The beauty of private money is that it’s not regulated by the government. This means you get to write your own rules, and set up a note that works for you!

However, this is not a free-for-all. It has to be a win-win scenario for you and your private money partner. Just because there are no rules doesn’t mean you can make a selfish deal. Especially if this is your first private money deal, you’re going to have to make it appealing for the lender.

When it comes to private financing, there is a whole world of money out there just waiting to be invested! If you go to a local real estate meetup you will meet lots of investors looking for partners. They may want to finance deals, or they may want help on existing deals. This is a great way to get started and find some private money partners.

To get started, you’ll need to work up the courage to walk into a meetup and start to befriend strangers. Yes, that is hard to do. I've done it. It takes courage to say that you're a real estate investor, especially when you're just getting started. The same can be said of any career. You have to start somewhere! Check meetup.com to find local real estate meetings.

If private money sounds like the right fit for you, there are some incredible resources you can use to learn more and land your first deal. First of all, you must check out Susan Lassiter Lyons! She has written an incredible book and course that contain tons of great strategies for securing private lending, getting in the right headspace, and so much more. Needless to say, we are huge fans of her philosophy and method.

Susan believes that all roads lead to private money, and her mission in life is to teach others about the power of private money. She posits it’s not a requirement to begin real estate investing with your own funds, and in fact, it’s absolutely appropriate to use other people’s investment capital for 100% of your investment.

She strives to teach others how simple private money can be, and the first step is overcoming fear. She explains that in order to achieve any caliber of success, it’s imperative to get in the right mindset. Many of us have negative feelings tied to the concept of money specifically.  

That’s why Susan doesn’t like to use the word “borrow;” it conjures feelings of vulnerability and neediness. She also doesn’t use the term “private lender,” but instead, “private money partner.” By changing the dialogue, it puts the two parties on an equal playing field, as partners. Incredible way to change your mindset.

We’re so excited to share that Susan has so graciously decided to give you a free copy of her book! All you need to do is pay shipping. You can grab your copy (and check out her amazing course) here.

Additionally, on our YouTube channel we have an entire Private Money Series! I've created an entire playlist dedicated to finding private money. You'll learn how to create a credibility one sheet, how to decide how to compensate your lender, and you'll even see me set up a lunch meeting with a private lender. 

As you begin to make your way through the Private Money Series, leave us some comments on those videos! I’d love to hear about your experience with private money, and how you plan to move forward on your wealth-building journey!

How 2018 Capital Gains Taxes Could Affect Real Estate Investors

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How the new tax changes impact you as a real estate investor depends upon where your income falls. Short-term and long-term capital gains are taxed at different levels. This means you can sell your primary residence and pay less in capital gains than if you buy an investment home and flip it in a few months. Here are a few things to keep in mind as a real estate investor:

1. Track Maintenance Costs

Even though you'll pay taxes on capital gains when you sell an investment property, you can offset some of these costs by keeping track of maintenance and repair expenses. Another idea if you sell one property is to invest in another. Check with your CPA first, as the rules on this vary depending upon profit, the cost of another property and many other factors.

2. Renting Out a Home You Own

Some people choose to rent out their existing home and move to another location. With the tiny house movement in full swing, people choose to rent out their larger homes and move into a small one they can pay off in full. They may not realize that as soon as they rent out their home, their primary residence becomes an investment property. When it's time to sell that property, you'll have to pay capital gains. The interest paid on these investment profits will be higher than your primary mortgage rate, but any improvements are deductible.

3. Buy in an Opportunity Zone

There are specific low-income neighborhoods that qualify for a deferral of capital gains when held for up to 10 years. The IRS announces where the zones are located. If you haven't yet bought an investment property, purchasing a home in one of these zones, perhaps one that is in the process of being gentrified, allows you to defer capital gains and build wealth.

4. Plan Sales Strategically

If you own more than a single investment property, you can plan how you sell your short-term investments — long-term capital gains are taxed differently —so you don't hit the higher tax brackets. For example, a married couple filing jointly who makes under $77,200 is at a zero-percent capital gains rate, while a couple making under $479,000 pays 15 percent on capital gains.

5. Remember to Plan for State Taxes

On top of what you owe the federal government on capital gains, you'll also owe your state government taxes. Each state has different tax brackets, so research what yours charges and where the caps are to protect your investment as much as possible. One way to offset the taxes you'll pay is by selling off losing investments in the same year you sell winning investments. 

For example, the market shifted and you can no longer get the rent needed to make a property profitable. You sell at a loss of $10,000. At the same time, you sell off a property you bought and flipped and profit by $15,000. Your net profit is now only $5,000 instead of $15,000.

Traditional Methods Still Work

Even though there are changes to capital gains rules under new tax laws, some tactics remain the same and still work. Hold your investments longer, use tax-advantaged accounts such as IRAs and 529s to defer gains, or carry losses over from one year to the next. With a little planning and strategy, you can pay your fair share of taxes while still minimizing the impact on your pocketbook. 

Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes.

9 Simple Steps to Creating Passive Income

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If you’re looking to build a passive income through real estate investing, this post was written for you. You’ll learn nine simple steps you can use to purchase your first rental property and begin creating cash flow! This is the EXACT strategy that I, along with countless  other investors, have implemented in order to reach financial freedom through real estate investing. 

There are plenty of other strategies out there, but this method is for you if you’re looking for a proven method to get your feet wet in the investing world. If you put in the work, this strategy has the potential to absolutely change your life.  

Just  to be clear: I am not a genius or guru. I’m exactly like you. I can clearly remember a time when I was frustrated with my finances. It felt like I worked so hard every day, but for what? At the end of the month I had nothing to show for it. I was barely making my ends meet. I sold old possessions on Craigslist in order to pay my mortgage. I scraped by month-after-month, and I was fed up. From that struggle, I created the Freedom Cheat Sheet. It’s a totally free PDF designed to help you determine how many rental properties you’ll need to become financially free.

I haven’t anything special; I’ve simply followed a path laid out by real estate investors before me. If I can follow this strategy, I know you can do it too. Think about this: all successful real estate investors started with just ONE property. You have to start somewhere! Sometimes the starting is the hardest part. And if you can begin, I know you can explode your portfolio and attain financial freedom for you and your family.

But how can you get started without any money? I know you’re thinking this, because I’ve been there too. In fact, when I began my real estate career, I was going through a foreclosure and all my assets were frozen. I hit rock bottom financially, and climbed my way up. No excuses. No fears. No objections. Money is NOT an obstacle.

Let’s get into it, here are the nine steps to creating passive income through real estate investing:

Find a rental property! How do you go about this? There are a multitude of ways. You can utilize the services of a realtor who understands your goals, work with a turnkey provider, look for homes on sites like Craigslist, or search for seller-financed deals. HOW you find your rental is not important, but there is one key detail you need to know: the best properties are typically not in your backyard. For most of us, our hometowns are not excellent rental markets. The chances are high that the best investments will not be located anywhere close to where you live. You’re looking to get the most value, and the highest ROI, so don't be surprised if the best investments are not located in your neighborhood, or even your state. 

Hire a contractor! Since you probably won’t be living near your property, you’ll need to  find a skilled and trustworthy contractor to help you get the job done. Here’s a quick tip: if this is your first time hiring a contractor, don’t just pay the first company you find. Here’s what you can do: look up a job board like Craigslist in your rental market. Find three contractors who offer free estimates, and utilize their services. However, don’t take advantage of people. Please value their time, be respectful, and go in with full intentions of working with one of these professionals. Simply tell them you’re buying a rental property, and what your expectations are. Since this property won’t be your residence, you don’t need everything to be high tech and expensive. Your investment properties should be safe and stable homes for your tenants. But that doesn’t mean you need to install granite countertops and extraneous bells and whistles. Be clear with the contractors; let them know they have competition! This will ensure you’ll receive a fair and honest estimate. Also let them know you’re looking to establish a long-term working relationship. Evaluate your three estimates, and choose a contractor! Typically, I would work with the contractor who has provided a middle-of-the-road estimate. You don’t want cheap work, but you do want to pay a fair wage.  

Get an inspection. Let’s be honest: it is an inspector’s job to be thorough. They get paid to nitpick the property and find every little detail, so don’t be intimidated when you receive an inspection that is pages and pages long. This is the industry standard, don’t let it derail you! After you receive the inspection, you should compare it with the estimate from your contractor. You won’t necessarily need to repair every single item on the inspection report. Identify the items that are structural issues or safety concerns. Take those tasks very seriously. Some things on the inspection might be small, cosmetic faults. You’ll have to decide if those are worth the time and money. Your main mission in a rehab is to create a solid home that won’t need much maintenance in the following years. Sometimes you can let the little things go. Personally, I always replace things that support the integrity of the home. Think old windows, electrical wiring, and outdated plumbing. The majority of my rental properties receive new furnaces and water heaters during the rehab. You will most likely want to install new carpet and get a fresh paint job.

Make the numbers work. Calculate your return on investment, and see if the numbers make sense! Add up the totality of your repairs and purchase, you want to make sure you come out below the market value. This allows you to have equity in the property. Everything you do in real estate from this point forward should be based on returns. If the ROI doesn’t make sense, this is not the right rental property. I always say: don’t fall in love with the house; fall in love with ROI. High returns are what will bring you cash flow every month and allow you to reach financial freedom.

Buy the property! As long as the numbers make sense, go for it! There are many ways to purchase a rental house. If you’ve got cash on hand, that’s a great way to start. You could look into using a private lender, or utilizing a traditional mortgage. Other strategies include borrowing from your 401k, using an IRA, HELOC, or business credit cards! There are so many ways to be creative. Again, don’t let a perceived lack of money get in your way. 

Find a reputable property management company. This is an indispensable part of running a real estate business! Having a reliable, effective property management team is critical to your success as a property owner. Here’s why you need to hire a property management team, and here’s how to do it properly

Rent it out! Since your goal is to earn an income, you’ll want to place a tenant in the property ASAP! This should not take long as long as you’re in the right market. As long as you followed the last step,, this part should be pretty passive for you. The right property management team will quickly fill your rental with a reliable tenant. Say hello to your first month’s rent, you’re on your way!

Pull out your equity. This is where things get really exciting! Leveraging equity is how high level investors go from one property to 100 quickly. Again, there are multiple ways to pull this off. Most banks will be happy to do a cash out refinance. You could also work with a private lender or get a home equity line of credit.

Start over again! Keep this snowball strategy going, and pick up additional properties until you finally hit your Freedom Number! I think you’ll really be amazed: the first deal is usually the hardest, and after that you become a pro! Now relax, enjoy your passive income, and spend your time the way you want.

Relocation Trends Offer Insight Into Growing Markets

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They say a man's home is his castle, but it can be hard to maintain a castle with a slowing economy, rising interest rates and growing rent prices. It isn't all bad, though — relocation trends suggest the housing market might be growing rather than shrinking as it has in recent years. Let's take a closer look at these relocation trends and what they might mean for the housing market in the coming years.

Fewer and Shorter Moves

Americans simply aren't moving as far or as often as they used to. Between 2015 and 2016, barely over 10 percent relocated— nearly half of what the mobility rate was back in 1948. The distance of these moves has also dropped. In the same time period, only 6.9 percent of United States residents made short moves — again, nearly half of what it was in 1948.

Part of this is because many current homeowners are locked into their mortgages. Many were offered fixed interest rates during the Great Recession in 2008 in an effort to help them keep their homes, and interest rates have climbed again in the intervening decade.

Homeowners aren't the only ones affected by this lack of mobility, either — it has affected renters as well. Renters are moving less often, choosing instead to stay in their rental homes. This could be economic — moving is clearly expensive — but the result remains the same.

Older Americans Consider Renting

Age is also a variable that needs to be considered when looking at relocation statistics. Senior citizens, those over the age of 65, will make up a full 20 percent of the population by 2030 when the youngest of the Baby Boomer generation reaches retirement age. This generation is less likely to move — for work or otherwise — because they have sunk so much into their home, their neighborhood and the relationships they have built while living there. 

On the other hand, some studies have indicated that boomers are renting more frequently to enjoy a more urban lifestyle in their retirement. Investors are likely to see an uptick in senior tenants in markets that are more attractive for those seeking community activities and entertainment. 

No Need to Relocate

Between 2015 and 2016, only one out of every five moves was due to a work opportunity. This is because, thanks to the advent of the technological revolution known as the 4th Industrial Revolution, many people don't need to move for work — they can simply telecommute and work from home. This enables the worker to save money on things like their residence and their commute. It also enables them to live in areas where the cost of living is lower, so each paycheck stretches a little further.

Of course, this isn't practical for every field, but many companies that can offer work-from-home opportunities are starting to do so. It's good for the companies, too — it widens the potential talent pool they can pull from, and it means they don't have to pass up on potentially good additions to their team simply because of the individual's geographic location.

Why should a property investor worry about relocation trends? They can indicate where your market is headed. Just because people aren't moving as much as they used to doesn't mean markets are ceasing to grow. As the housing market starts to shift again, we could find ourselves looking at more moves in the future. Furthermore, rental markets are bustling as a result of younger workers’ reliance on flexibility and older Americans’ changing lifestyles.

 

Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes.