On the other hand, active real estate investing means the purchaser is actually actively involved in the management, tenant search, maintenance and rent collection.  This method is generally more time consuming, but can have major tax advantage compared to passive investing.

Passive property investors can mainly deduct expenses such as mortgage interest, home insurance, maintenance repairs and depreciation against the earned income from their properties.  On the other hand, active property investors can deduct similar expenses against their property income as well as other means of income.  This means if the active investor has other income streams from other jobs or investments, the deductions from real estate are first taken against the real estate income, and then taken against any other income assuming there is still a deduction remaining.

There is a fine line between hiring a property management company to manage a property and still being considered an active investor.  Most people do this by documenting any time spent preparing or maintaining the investment property by themselves, recording milage driven to the property for any services or repairs done or rent collection, and documenting any decisions made by you which were requested by the management company.  By doing these simple things, you can still be partially considered an active investor, and reap some of the tax benefits.  Be warned however that the deduction limit is only up to $25,000 total from all properties that can be used against other streams of income in this scenario.  The deduction limit is much higher if you are truly considered an active investor where you manage your properties and spend the IRS required amount of time per year dealing with investment properties or real estate.

As you can see, active investing or hiring a management company and being involved to get partial active investing tax benefits is well worth the time.  This is the case especially if multiple properties are considered resulting in large depreciation deductions each year.

Tax laws change yearly, please consult your tax expert for the latest details and changes to investment property and real estate tax scenarios and laws.

Other Articles:

Residential Hard Money Loans
Property for Investment
Investment Property Tax Deductions
HUD Foreclosure Homes

1. Hard money lenders usually can close much quicker than bank lenders
2. Hard money loans are mostly shorter term loans 1 month to 10 years, and have roughly double the annual % rate interest compared to bank loans.
3. Hard money loans are based on the collateral (property) being purchased rather than the credit scores and financial status of the buyer.
4. Hard money loans are great for bridging investment property purchases that need rehab.  Once the rehab is complete, a typical bank mortgage can be obtained to pay off the hard money loan.
5. Hard money loans are for the borrower that needs to resolve a problem quickly.  For example, purchasing a foreclosure for investment, flipping a home, or rehabbing an investment home.

Next time you need money quick for a real estate transaction, why not check out hard money lenders in your area.  They provide a quick means for closure, enabling investors to potentially beat out other bidders on investment property.

• REO (Real Estate Owned) properties are bank owned properties which have gone through the foreclosure process without successfully finding a buyer.  There is no longer mortgage debt on the property, and the bank is just looking to recover its costs and loan payment.  These are great opportunities as the banks usually will list the properties at below market values to spur multiple bids.  Ask your Real Estate agent for details on identifying REO properties and creating a search list for you on REO properties.
• HUD Foreclosures are FHA backed mortgage loans that have gone into the foreclosure process.  There are many sites that auction off these foreclosed homes with priority going to owner occupied bidders, and second priority going to investment bidders.  Search for HUD foreclosures in google to find the closest company offering HUD foreclosure auctions in your state.  Generally you can get a HUD foreclosure home for 70% of the value or lower, depending on the aggressiveness of other bidders.
• Basic Foreclosures are Non FHA backed mortgages that have gone into foreclosure.  Check with your local real estate agent, bank or even other property investors to find out when potential investment properties can be found through the foreclosure process.
• Distressed sellers are usually sellers who are trying to avoid the foreclosure process.  Usually they will sell at a price just above their current mortgage payoff price so that they do not have to enter into the foreclosure process, and can fulfill their debt payment to the bank.  Look for ads in the newspaper or ask around the real estate agent community for distressed sellers.

As you can see, property for investment can be found all over if you look for the right criteria, especially in hard economic times.  Remember that the majority of profit is made at purchase time, by securing a solid investment property at a good price, and acquiring an investment property loan at a reasonable interest rate.

Other Articles:

• Getting the best investment property loan rate
• Investment Property Tax Deductions
• HUD Foreclosures

Have you ever thought outside of the box however, and investigated how investment properties could potentially fund your child’s higher education costs?  Let’s looks at a simplified example.

Say you purchase an investment property for $150,000 with 10% down on the home in the year your child was born.  You rent out the property for a measly $100 positive cash flow after all expenses are paid to maintain and manage the home.  Then you sell the home on your child’s 18th birthday just in time to start funding college education expenses.  If we assume a very conservative 4% growth rate, here is how the situation looks.

• Initial money invested $15,000 (10% of $155,000 purchase price)
• 18 years of 5% annual growth rate results in a home price of $305,000, this is a $155,000 gain ($305,000 – $150,000).
• Rental cash flow (at $100 per month) income over the 18 years results in $21,600
• Net Gain after home is sold: $155,000 + $21,600 – $15,000 = $161,600

So, the question now becomes, do you think you can fund your child’s college education with $161,600?  Actually, you would have quite a bit more funds available since you would also have to include the principal amount paid into the loan over the 18 year span, as well as the initial $15,000 invested in the home for purchase.  On the flip side, you would have to deduct real estate sales commission, and other closing costs fees as well as taxes on the capital gains.  As mentioned earlier, this is a simplified example, but it does make the point that it’s feasible to fund a college education through investment properties.

Other Articles:

• Get the Best Rates on Investment Property Loans
• Understanding Capitalization Rate for comparing Investment Properties
• Cash Flow vs Capital Appreciation

Purchasing bank owned real estate or REO’s is a great way to get a discounted price on a property.  Banks usually aggressively price the homes or properties in the MLS at a deep discounted price compared to the market price for a similar type of home.  Once buyers place purchase offers with the real estate agent, all offers are presented to the bank and the bank selects what they believe is the best offer with the lowest risk level.

So how can you find out or start putting in offers on REO properties?  Below are a few suggestions to get ahead of the competition.

• Ask your real estate agent to create a search in their MLS for REO property, and to have the system automatically email you or call you when one is listed.
• When you are notified that an REO property has been listed, review the specification quickly, ask your real estate agent to show you the home the same day, and if you are interested, put in a purchase offer immediately.  Banks put priority on the order the offers come in on the homes.  So being amoung the top one or two offers puts you in a significant advantage.
• Put in an offer slightly higher than what the banks asking price is.  Again, banks list REO properties at deep discounts, so even bidding higher than the asking price will get you a great deal.  Also, if previous offers come in at the asking price, your offer will most likely be chosen.
• Build a professional relationship with your real estate agent.  Ask him or her to ask around about potential REO properties.  You may get lucky and actually get notified of properties before they are even listed on the MLS.  If this is the case, you may have no competition, and can work directly with the bank to close the deal.

REO properties are a great way to find homes at lower than market prices.  Whether you are purchasing a primary residence or investment property, there are not many better deals out there compared to purchasing foreclosure and REO properties.

Other articles on Investment Property can be seen in our Investment Property section.

See our popular article on HUD foreclosures.

Many web sites claim to be the key source to foreclosures, but when looking for foreclosures close to your home, simply search on google for “HUD Homes <put your state here>”.  For example, to find HUD homes in Texas, simply search google for “HUD Homes Texas”.  The first few listing will direct you to local agents or real estate companies offering HUD homes.

Purchasing a HUD home occurs through a sealed bid auction.  The auction is online, and initially only open to owner occupied bidders.  This means you can only bid if you plan to live in the home as your primary residence.  If no bids are received after a few days, bidding opens to investors.  An agent experienced in selling and purchasing HUD homes is required to place the bid, and most sites allow you to search for these types of real estate agents by location.

Keep in mind HUD homes are sold AS-IS, meaning HUD will not repair any damages.  Many HUD homes require major work.  Be sure to review the home inspection report, and to hire your home inspector to thoroughly check out the home.

Purchasing HUD homes for investment property is a great way to expand any property portfolio, and there are exceptional deals to be had resulting in great cash flow and appreciation opportunities.

Other Articles

Cash Flow vs Capital Appreciation from Investment Property
Investment Property Loans – Getting the best rates
REO Properties

Cash Flow in its simplest form is the gross amount received minus any expenses to maintain the asset.  For example, if you lease a property for $1000 per month, and your mortgage, taxes, repairs and management fees to maintain the property are $700, then your cash flow would be $300 per month, or $3600 a year.  In this situation, you would be cash flow positive or positively geared.  If your expenses were $1100 to maintain this property, then you would be loosing $100 per month, and would be in a negative cash flow situation, otherwise known as negatively geared.

Appreciation is the increase in value of the investment property over time.  For example, if you purchased the investment property for $150,000, and ten years later the property value of the home was $245,000, your asset appreciated $95,000, or an annual appreciation rate of 5%.

Now let’s dissect the cash flow verse appreciation situation above.  Let’s assume we held the property for the full ten years and then sold off the property for the appraised amount of $245,000.  A $3600 cash flow over ten years would of gained you $36,000.   The $96,000 appreciation gain however is almost three times the amount gained from cash flow alone.  In this example, appreciation should clearly be the focus, with trying to maintain positive cash flow if possible.

If the area you are purchasing investment properties in does not appreciate between 5% – 8% a year, then cash flow is most likely the better answer.  Just remember that there is really only one way to increase cash flow, and that is to raise rent.  It is very difficult to cut net operating costs on investment properties in order to increase cash flow.  This is important to keep in mind when searching for an purchasing investment properties.

Other Articles

Understanding Capitalization Rate

Getting the Best Rate on Investment Property Loans

Property for Investment

• Carefully screen tenants by collecting detailed employment history and previous rental contacts.  Get in touch with the previous landlord and find out if rent payments were made on time, and if the tenants took care of their the property.
• Check the prospective tenants credit history.  If a management company is leasing out the property, they will already have access to credit check resources.  If you are leasing and managing the property yourself, then it is best to pay the up front fee to get a credit report.  Verify outstanding debt from the credit report and ensure the credit score is between an average to high rating.
• Interview the prospective tenants in person.  Whether this is during the property walk through, or a separate prearranged meeting, this encounter will provide you the most insight into if the tenants are the right choice for you.  Observe their behavior, how they answer or dodge your questions.  Also take notice of how they dress and carry themselves, as well as the condition of the vehicle they drive.  People that take care of themselves and possessions are more prone to taking care of things other people own.
• Spruce up your investment property before showing potential tenants the property.  Make sure the property is immaculately clean, neatly painted, and the outside is well manicured.  This will show the tenants how much you care about the condition of the property.  Bad tenants are generally attracted to dirty and unmaintained property conditions.  On the other hand good tenants seem to gravitate towards nicely maintained  properties.

Following the few simple tips above can help to identify high quality tenants.  The extra effort will pay off greatly by having less repairs and maintenance costs over the long run.

Related Articles:

Get the Best Investment Property Rate
Learn how to compare investment properties by using Cap Rate

Recommended Reading:

Every Landlord’s Tax Deduction Guide
Every Landlord’s Legal Guide

Cap Rate = NOI/Purchase Price
NOI = Expenses required to maintain the property per year (excluding debt)

To calculate your NOI, you add up all expenses needed to maintain the home for one year.  This does not include debt payments, such as a mortgage payment.  The reason is that the comparison between properties needs to be a like comparison, so the cap rate is calculated as if the home was purchased with cash to understand the rate of return the property provides.

Notice something else interesting about the Cap Rate formula.  By using the inverse of the Cap Rate formula, you can calculate what the purchase price is for a home in the same area as other homes that you have a cap rate for.

Purchase Price = NOI/Cap Rate

For example, if you found the cap rate of surrounding homes which sold already to be around 6%, you would just calculate the estimated amount of yearly NOI required to maintain the property you are interested in, and then divide the NOI by the 6%.  This will give you the value of what you should pay to purchase the investment property.

As you can see, by simply using a Cap Rate equation, it is simple to compare investment property options.  Generally you want to look for investment properties that produce a 5% – 8% Cap Rate.  Whether you are close to the 5% point or 8% point depends on the geographic location of the property.

Be sure to check out the article on Investment Property Loans and how to get the best rate.

So how can lenders offer such low rates for investment properties? Lenders can wrap up the 1.25% into closing costs, and some even reduce their fees by this amount to win over borrowers so they do not go with other lenders. So it is very wise for those seeking investment property loans to shop around, as there are very competitive rates out there.

Learn how to compare investment properties through Cap Rate or Capitalization Rate analysis.