Real Estate investing here refers to purchasing a home and leasing it out as rental property.  There are multiple benefits to investing in properties this way including cash flow from tenants, appreciation on the home over time, depreciation deductions, and tax benefits.  Also, it is always advisable to purchase investment properites with as minimal down payment as possible in order to maximize leverage.  This is where making your first million dollars comes in.  Leverage is essentially using other peoples money to purchase real estate, allowing the little money you put to grow exponentially.  For example, say you put a 10% down payment on a $150,000  investment home, and mortgages 90% of the value.  You would be putting $15,000 of your own money into the investment.  Now say you hold the home for 10 years, with average appreciation of 5% annually on the home price.  The gross profit in appreciation alone would be $95,000.  So essentially, you would of turned $15,000 into $95,000 over 10 years, but it gets even better.  Your tenants would of paid down your mortgage substantially over those 10 years as well.  This also doesn’t include any cash flow received from tenants over the 10 years, depreciation deductions, and tax benefits either.  So this begs the question again, how do you make your first million in real estate?  How about borrowing a million dollars and having someone else pay off your debt!

In this scenario, the “someone else” is the tenant or tenants, and you are the one borrowing the million dollars.  For example, you could purchase one home each years over a ten year period in the $150,000 price range.  With each mortgage you would be borrowing greater than $100,000 of the purchase price.   By the 10th year, you would be have borrowed over a million dollars, and your tenants from your first few homes would of paid off a big chunk of those home’s mortgages already.  Taking into account appreciation, cash flow, and tax benefits, you will actually reach a million dollars quicker than you might think.

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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.

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HUD Foreclosure Homes

• 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.

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