Special Feature: The Physician’s Financial Health Series (As Published in the Southwest Edition 2015 Q1)
By Ivan Oberon: Coast 2 Coast Investing Solutions/Bloomberg Radio
There appears to be so many different types of investments these days and I believe that when determining what to invest your hard earned money into, everyone should consider those investments secured by real estate. An array of reasons have led me to this conclusion, more specifically that you can profit greatly in this investment by deferring, and potentially even eliminating, taxable gains through a self directed IRA or 401-K.
Investing in Cashflow Real Estate has probably contributed more to building financial security, wealth and comfortable retirement than any other investment vehicle. However, there are many challenges and mistakes that can be made, especially if you go at it alone.
Here are 5 things to avoid when buying Cashflow Real Estate:
1. Not factoring in all of the costs
I see many people use the basic formula of Rent – PITI, to calculate positive cash flow. This is a mistake. Especially when you consider many cashflow investment buyers out there are purchasing their properties cash in the better cash flowing markets. Both you, and especially the team you may work, with must also factor in the following: Property Management Fee, Vacancy and Maintenance. The percentages one uses to calculate these expenses can vary based on location and the type of real estate you are considering.
2. Self-Managing or Hiring The Wrong Management
A number of investors decide that they will self manage their properties in order to save a buck, either locally or even remotely. The problem is that most investors are running full time businesses or have full time employment and simply do not have the time or expertise to properly manage their own portfolio of properties. Let the professionals handle this for you and don’t be afraid to make sure they are paid what is fair. A good property manager will make you much more profitable long term and will enable you to scale your investments far beyond what you could ever accomplish on your own.
3. Over Renovating The Property
Do not over spend on upgrades for rentals. You are not living in the home or flipping the home to a retail owner occupant. Choose upgrades that will help increase rent and/or improve leasing time. When you look to buy a turn-key rental property, you want to know the person you are working with understands this, otherwise you may end up significantly overpaying. Basic rule of thumb on a rental property is that is needs to be safe, clean and functional.
4. Only Buy Something “I Would Want to Live In”
This is another big mistake. Think about it. The types of properties many of us would want to live in could not possibly be a good investment. A large number of my clients live in million dollar plus homes and in MOST cases; those are not the types of investments or tenants we are all looking for. If you say you like it, you better be talking about the numbers that make up the deal.
5. Getting the Wrong Insurance
As a result of my background in insurance and experience with real estate investing, I am particularly passionate about this point. I have seen so many investors make this mistake and in most cases it’s actually not primarily their fault. The main problem is that there is not enough accurate education being propagated from our industry. That is why one of my missions is to travel and educate everyone on the right coverage at the right time, and make those coverages available to my fellow investors.
Now that you know some key things to avoid, let’s go over why Cashflow Real Estate is the I.D.E.A.L. investment.
Income (Cash Flow)
Real estate properties create income, which will improve your cash flow now. When you purchase a property, such as a home or apartment building, you will collect a predetermined amount of money each month. This kind of cash flow can be generated from any kind of real investment that can be leased by a tenant for a specific period of time. Office buildings, apartments, rental houses, and even storage units make great investments that create cash flow. Our preferred investment is in single family residential homes.
Depreciation (Tax Advantages)
Even though that may sound like a bad thing, it is actually a very powerful tool to reduce your overall tax burden on your taxable income.
Whether you are using financing to purchase your investments, or like many out there you are paying cash. Every month you receive that cash flow, your overall equity position continues to grow.
When purchasing investment properties, it is my position that you must purchase based on cashflow and not based on potential appreciation. Like anything else, real estate is susceptible to fluctuations due to market trends. Housing prices go up and down depending on economic and social factors. Appreciation refers to the value of a property as it increases over time. That being said, since we want to be in the real estate game long term, we can pretty much count on benefiting from appreciation. How would you like to buy your parents original house for the price they paid for it, now? We all would.
One of the beautiful things about investing in real estate is that over time, and in some cases, even right away, it can be leveraged to purchase more real estate. The larger your portfolio grows the more leverage you have, and the greater your ability to grow it at an increasingly faster pace. Furthermore, if you are purchasing using bank financing, you are then leveraging your tenant’s income to pay that mortgage, not your own.