Not So Random Observations - Or Just Payin' Attention

Though I’m writing at length on this subject elsewhere soon, I thought at least a mention here was warranted, given the audience. If you have $12-20,000 +/-, 20-30-something, wondering how to get started in real estate, and make $6,000 a month or more, listen up. Your future rocks.

Find a 2-4 unit property in which you’re willing to live. Buy it using FHA financing. If possible, given your financial circumstances, go the 15 year, 4% interest route. The MIP (mortgage insurance) isn’t .9% it’s just .25%, which is sweet. I’ve got several folks in the above mentioned age/income group who’re gonna absolutely crush it in the next 10 years. If you need any help, gimme a call/email me and I’ll for sure hook you up with a solid loan guy, and maybe even a worthwhile agent in your area. I sure won’t be able to help in most cases. Good luck.

To those with handsome portfolios

I speak as a fellow sinner — don’t become too satisfied with your accomplishments. My mistake, back in the day, was comparing what I’d done with those who hadn’t invested in real estate at all. Most any real estate investor who’d not lost money, will look good in that scenario. Instead, compare what your portfolio is yielding vs other similar properties in other regions.

Recently spoke with a very experienced, wicked smart investor, whose best property would blush compared to what he could’ve had — in the same state — just a few hours up the freeway. The difference? Huge. Think in terms of both time and cash flow. If he chooses to make the switch to the superior performing market, in 10 years, probably far less, his subsequent annual income will have easily increased $50-100,000 a year. And no, I’m not makin’ this stuff up as I go. Imagine the impact of moving seven figures of net equity from under-performing properties to a buncha studs. Make sense now?

A reminder of what you may have forgotten on the shelf

There are some brilliant investors on BP who’ve amassed, in some cases, 2-3 dozen rental homes. They’re building equity slowly, while gettin’ maybe $0-300 monthly from each one. Let’s pull a number outa da hat and say they’re payin’ about $150,000 per home. If they own 25 of ’em, that’s an annual depreciation of roughly $100-150,000. If the aggregate annual cash flow comes to around $50,000 yearly, that leaves $50-100,000 leftover depreciation. If they make under $100,000 at their day job, IRS let’s ’em apply the maximum $25,000 against that income. That still leaves $25-75,000 of leftover, unused depreciation — every year, year in, year out.

Wanna get rid of a subpar property that’s been disappointing as of late, but don’t feel like payin’ the cap gains tax? Sell it, then apply your awesome stash of stealth depreciation to the gain/depreciation recapture and grab the cash sans taxes. I do it for clients many times a year, and it always puts a smile on my face. Bet it’ll do the same for you.

Understand the benefit of using real pros before learning the hard way

Hey! I saw those rolled eyes, and heard that sarcastic ‘Duh!’ too. Here’s the rub though. It’s the age-old paradox. Some folks know many answers, oftentimes impressively so. That is, until they run into the buzz saw consequences of the answer to the question they never knew to ask. ‘Course, a seasoned pro would’ve easily provide those answers before they had time to break a kneecap or three. Grandma was right when she said it’s impossible to know exactly what you don’t know. We think things are going according to our stellar plans, but think about it seriously — what answer to a question you didn’t know to ask is out there waiting for the best (worst) time to ambush you? A sobering thought, isn’t it?

A second example is the use of CPAs and/or tax attorneys to prepare your various tax returns. Yeah, I know, they’re not cheap. In point of fact I’m here to tell ya they’re dirt cheap for those who’re successful now, and rightly expect to be far more successful down the road. Can’t tell ya how many times I’ve seen new clients get a bit red-faced when admitting to me the new CPA they agreed to hire saved them 50-1,000% of his fee via the government checks they received cuz he amended the last three years’ returns. Oops.

Hire the experienced pro. They’ll answer all those questions you wouldn’t of asked in a million years, saving you money and heartache you’ll thankfully never endure. They’re the cheapest thing you’ll ever buy — value for value.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.