Investing can be fun and exciting, other times maybe not so much. Though, luckily the Real Estate market time and time again has showed prices (almost) always go back up. This means if the market suddenly goes down just wait and most likely prices will go back – possibly to even higher prices.
Average returns in the real estate market can be seen around 10% a year. Sometimes, 3x your money can be achieved in a couple years. These are my top 3 Real Estate investing tips that can help you see similar returns.
Get Started with Rental Properties
Summer is usually calm in the markets. Perfect if you want to begin the Real Estate investing process. Rental properties are a great way to start seeing returns even the first month. Here’s how. For example, if a condo is available for rent at $1,700 a year, and you can buy a similar one for $200k, this is the type of returns you can possibly see the first year.
$1,700 (rent) x 12 months = $20,400
Mortgage = ($12,000 a year. )
Expenses (taxes) = ($3,500)
Net Income= $4,900 ($408 a month)
Cash on Cash Returns = $4,900/$40k = 12.25%
So great, we got 10% or more on our money in the first year, now how do we 3x or even 10x our money – or more? Appreciation and leverage.
As the year goes on the price of the property likely will go up. Instead of the property value worth $200k, now at the end of the year it is worth about $230k. Therefore, if you sell you will get $30k in profit (before fees and taxes). This does not include the revenue from the rent you were collecting all year. Here is the final break down if selling after 1 year before taxes and fees.
Original investment at 20% down on $200k = $40,000
Profits from selling (before fees) = $30,000
+ Rent income = $4,900
Net Profits = $34.900.00 in 1 year.
Original investment = $40,000
New balance = $74,900
or 87% profit returns, if selling and appreciation of $30k on this single family condo.
Invest in Multi-Family Real Estate
The above is returns seen with just 1 unit, when dealing with apartment complexes with units of 15 or more, the monthly revenues will be great. Plus, if a unit becomes vacant there is 14 others to help pay for the expenses, compared to having 1 unit.
Also, when holding multifamily real estate investments, most likely in a couple years, appreciation on the property will likely be around 2-10x your money.
You might be wondering, how is that possible? Leverage. Because you don’t need the full amount for a down payment on a large property, by using leverage you can see huge returns for the small down payment as you control a large amount of cash tied up in real estate.
There is some risk, but like I said before, history shows real estate prices will likely go back up and more. It is up to you during the downturn in the economy to keep the property updated and fun which will help keep it at 100% occupied for maximum returns and satisfaction.
Fix and Flip / Hold
Most returns on your money can be made by purchasing a property, throwing a little bit of money at renovations and by that time it will be perfect to sell at a decent profit with appreciation added.
Another strategy similar to this one is purchasing and renovating, but instead of selling it right after renovations are done, you hold it long term 5-30 years. This is a result from having the property be a continuing cycle of cash flow for you every month.
Once small renovations and repairs are done after purchase and its available to rent out, your expenses for the property can be both paid by tenants paying rent addition to appreciation, or simply just holding it as the property sits and appreciates. This is why sometimes you see large plaza’s with empty stores still be profitable. Even if a business sells at a loss, it is tax writable.
These are companies with two or more owners. This route is great in Florida because of asset protection laws. When a tenant slip and falls and there is no insurance, the partnership will be at risk, not personal assets (under most circumstances). Therefore, the maximum up for grabs the tenant can receive is your ownership distribution from the company.
Another great benefit of a Florida Partnership LLC is the capability of legal tax savings. By forming the LLC and having it be elected as a S-Corp, you can receive the same great savings as an S-corp with likely less hassle. More on that later.
My main point in this section is this, for best profits and asset protection, most will form a partnership in Florida, have it purchase a property, and the tenant will pay the LLC monthly for its dues. You will then have the company pay the owners a fair salary and the rest can either be retained or distributed evenly. Consult a tax CPA for more. After all said and done, the money saved from taxes and expenses and protection from your personal assets at risk is worth the investment and will pay for itself ten fold when a situation arises – if ever.
Below is an example.
We own 50% ownership of RentPropLLC taxed as S-Corp.
Let’s see what happens when we have everything in our own name versus a LLC taxed as S-Corp way.
(First, if we own everything in our name)
Tenant Monthly Rent @ $1,700 a month.
Taxes 15% =($431.5)
Net Profits / 2 people= $2,875
And here is what might happen if we owned the property in a partnership taxed as an S-Corp.
Tenant Monthly Rent @ $1,700
Expenses + (Mortage) $14,500
Net Income $2475+800=$3,275
Savings of around $400 or +13%.
That’s decent savings on just a $200k property. As the price of property goes up so does your personal income tax savings
I hope this article has shown you a couple great insights and tips for you and your real estate adventures. It begins with finding properties to rent and own, either fixing and flipping or holding and refinancing. Then keep most of your money through legal tax savings ways.
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