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Parts Of A Real Estate Investing Deal

Parts of a Real Estate Investing Deal

When we first started investing in real estate, Kim and I thought of a deal as a single thing - one big block. Thanks to great teachers like Pete Fortunato, we've since learned different.

When putting together a real estate investing deal, it's critical to look at the deal's different components.

The components are: income, profit, growth, amortization, management, tax benefits and use. Here's an explanation of each component:

Income: What you earn when the property is rented.

Profit: What you make when the property is sold.

NOTE: Real estate investors are more attracted to income - this is why they hold (rent) property. Flippers - folks who buy and sell real estate - ARE NOT investors. They are businessmen and women. To them, a house is nothing more than a product that is bought and sold - like a grocer buys and sells a can of beans.

Growth: Growth happens as a property appreciates. As it appreciates, your net worth increases.

Amortization: As you make your monthly mortgage payments, the loan's balance decreases. Because you owe the lender less, your net worth increases.

Management: Rental (investment) property needs to be managed. This is done by either the owner or a management company hired by the owner.

Tax Benefits: Talk about the goose that lays golden eggs - rental property is that goose! Rental property can drastically cut the amount of taxes you pay to the state and federal government. WARNING - if you LIKE paying taxes, you SHOULDN'T own rental property!

Use: This is the person who lives in the house. It can be the homeowner or a tenant.

Now comes the fun part - deal-structuring. The different parts of a deal can be broken up and passed around. Here is an example.

Recently, we found a nice three-bedroom, two-bath house in Cartersville, Georgia that the owner wanted to sell immediately. The house was worth about $115,000. The owner said he would let it go for $70,000 if we could close quickly.

Only one small problem - we were $70,000 light of having the $70,000 we needed to do this deal.

We turned to one of our money partners - a doctor in town. He is a high-income earner which means he pays a lot of taxes.

Here's how we structured the deal: The doctor bought the property. This gave him the tax benefits. We got an option for half of the upside when the property sells. We agreed to manage the property for 15% of the rents collected - which means the doctor doesn't have to deal with the thrill of property management.

Bottom line: The doctor got the income, tax and amortization benefits. We got the management benefit. We split the growth and profit benefits. The tenant got the use benefit.

Hope this makes you think of different ways a win-win deal can be structured.

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