My 3 Favorite Real Estate Investing Strategies (and a Plug for Old-Fashioned Discipline)
Recently someone asked me, “What is the one thing you attribute your success to?”
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This was a tough question to answer, especially since I don’t see myself as any kind of overnight success. Many decisions and many people helped me get to where I am today. If I had to choose just one thing, though, I’d have to say discipline.
Most of that would be owed to my mom. She made us be punctual and prepared. She taught us to manage our time and to be organized. She told us to get ready the night before for work or school and to save money, work hard, and see things through. All of these habits could be considered forms of discipline.
I’ve employed many investing strategies over the years, but I believe that being disciplined is the biggest reason that any of them worked at all.
That said, in the last 30 years investing in real estate, I have developed some preferred strategies.
Here are my top three.
My 3 Favorite Real Estate Investing Strategies
1. Saving on Taxes
My first strategy started at a pretty early age when I was in college as an accounting major. At that time, much of the money I earned was paid out in taxes. In fact, most of us had to work several months into the year just to pay our taxes for that year. Still, I thought, wouldn’t it be nice to have all the money we pay in taxes to go towards a nest egg to invest with?
After college, I realized that the government rewarded members of society with tax breaks if they did certain things, such as creating jobs, providing housing, and offering charity. I quickly realized that if I just learned the rules of taxation, I could play a better game and win by utilizing legal deductions. This has served me very well over the years as a service provider and employer, as well as with all the charities I get to be involved with.
Real estate also has been a phenomenal way for me as a real estate agent to take advantage of unlimited passive losses, as well as the normal mortgage interest and tax deductions, along with things like depreciation and componentizing. And let’s not forget other strategies like 1031 exchanges, getting a break on capital gains when selling one’s primary residence, or better yet, owning or flipping real estate in our self-directed IRAs and other custodial types of accounts and then passing real state to our heirs who get to enjoy a stepped-up basis. I could go on and on with all kinds of deductions for repairs, too.
2. Investing Intentionally
Besides saving money on taxes, my second favorite strategy is to invest intentionally with purposeful planning. The overarching goal would be to create as much cash flow as we can, as soon as we can, and to have it be as tax-free as possible.
One of my favorite examples of this that dramatically increased my net worth over the years was first by watching my housing expenses. By the way, housing is usually everyone’s biggest expense when they’re just starting out. Personally, I lived at home right after college to save money to get my first modest apartment, which enabled me to save for my first owner-occupied duplex, which I bought in 1989, and I still own it today.
My point is that buying and living in your first couple properties with the intent to keep them as future rentals will dramatically change your future net worth.
Not only are you getting better mortgage terms (lower rates and lower down payment), but you’re also eating away at your 30-year mortgage while living there, and you’re not losing out on all the settlement cost that you’ve already paid, let alone all the deductions you just picked up by keeping the properties. It may take you a little longer to save up for that next place, but usually it’s well worth it. I managed to keep all four properties that were each at one time my primary residence. Today, I still own three of them that cash flow out the wazoo!
3. Utilizing Leverage
My third strategy is focused on the proper use of leverage (notice that I said proper).
What I’m referring to here is understanding the difference between good and bad debt, as well as having sufficient reserves set aside to weather most storms.
A lot of my wealth was created by first using the bank’s money with traditional financing, commercial financing, and lines of credit—and then later using private debt. Today, I even raise private equity to purchase the banks’ bad debt. Talk about a complete 360-degree turn around.
Understanding the correct use of leverage along with ideas of how to use arbitrage, compound interest, and how to play the float like the bank does has been instrumental in much of my financial growth.
That said, the biggest factor for me, by far, was the use of OPM (other people’s money). The ability to raise capital and to properly deploy it has been game changing for me.
We have a saying in my company that “your success is our success,” and frankly, I really mean it. There’s nothing more rewarding than to share an idea or strategy that someone else can employ to their benefit and have great success with.
I don’t mind admitting that I haven’t had too many ideas that were really all mine. Most of my strategies were learned from others, so I have those folks to thank too.
So, what are your favorite real estate investing strategies? If you’re on your way to building wealth through real estate, what are the top factors that contributed to your success so far?
Please share below!