April 10, 2019
How Do I Know If I’ve Found a Good Deal?
We speak with investors of all kinds from all over the world on a fairly regular basis. One of the most basic principles of our company is that we don’t tell investors what a “good deal” looks like. There are many reasons for that, the most obvious is that you are investing YOUR money, so you, ultimately, decide what a good deal is. Some of our clients are looking to ditch their day jobs and need monthly income. We work with those investors to identify buying criteria that will move them closer to their goals. Some investors just want to park some cash in a property that they think will increase in value over a specific length of time- we direct those investors to different types of property in different parts of the valley. Finally, we work with some investors that have a great deal more experience and resources than we do, and with those investors, we simply go out and find what they are looking for and manage it appropriately.
Our job is to educate you about the dozens, if not hundreds, of ways you can make money investing in real estate. From there, you find where your comfort level is, and we start looking for a property that matches, that will help you achieve your goals. Some investors come to us having already done thorough market research and we get right to work. Others need a bit of help learning about investing, our local market and what kinds of returns to expect. This is where we can really help someone start to make progress in their investing future. Essentially, there are two types of returns investors look for; cash flow and appreciation.
Cash flow is simply the amount of money left over every month after all of your bills are paid for each property. Many investors swear by cash flow- it’s an immediate and noticeable increase in your income when you invest. There are infinite ways to measure cash flow, but here are a few, simple examples:
- Raw Cash Flow: “I want at least $200 per month in cash flow for each property I purchase.”
- The X% Rule: A property that has a monthly rent of a specific X% of the purchase price, assuming it will produce good, positive cash flow. It’s simply a quick way to analyze a property, but many people feel that If you pay $100k for a house and rent it for $1,000 per month, you are almost guaranteed to have a solid investment, at least from a cash flow perspective.
- Cash on Cash Return: This measurement takes the down payment on a property and creates a % as an annual return you get via cash flow. For instance, if you put 25% down on a $200k property, you’ve spent $50k in cash. If your annual positive cash flow on that property is $5k, you have a 10% cash on cash return.
Appreciation is a simple one- it’s how much the property has increased in value in the time you’ve owned it. Appreciation can come in a two different ways: forced and passive. Forced appreciation is when you fix up a house to make it worth more- it’s exactly what flippers do; buy a property under market value, fix it up in order to quickly force appreciation and sell it for the increased value. Many investors do this exact same thing, but rent the property out when they are done, which is commonly referred to as the BRRRR method, blog post coming on that topic in the near future.
Passive appreciation is the increase in value of a property due to market conditions. Supply and demand has a positive effect on appreciation; more buyers than sellers make your property more valuable. Properties can appreciate If the city purchases the trailer park next door and creates a beautiful park, that cause your property to appreciate. Readers who are natives of the Boise area have watched what has happened in the Waterfront District in Garden City and the West End, and have a front row seat to watching neighborhoods go from being undesirable to suddenly being the most popular place in town. See the West End link in the previous sentence for an article from 2008 proving your window for that neighborhood has likely closed, but there’s always another opportunity around each corner.
In 2018, the average appreciation in the Boise metro area last year were nearly 16%. That’s average- some areas were higher. That means if you bought a rental property in January of 2018 and had cash flow of $200 per month and did nothing to improve the property, you made nearly $35,000.
For reasons we will explain in future blogs, for investors who are looking for advice on how to start, we usually recommend a reasonable blend of cash flow AND appreciation, which is actually pretty easy to find in the Boise area.
So- what kind of returns are you looking for? How would an extra $35,000 (spending little to no time to make it) per year change your life?
March 11th, 2019
How Does Owning Investment Real Estate Effect My Taxes?
Taxes. That big elephant in the room. Most people don’t really know exactly how their taxes are calculated, what is taken out of their checks and exactly where that money goes. It’s fair to say, every American has basically the same goal with their taxes; how can I pay the least amount of tax possible without spending the rest of my life in prison? Well, I have a solution for you- and it’s a simple one. Become a real estate investor.
What’s that? You don’t think that’s possible? I beg to differ- read last week’s blog entry!
While there are many ins and out of how your taxes are calculated and what can and cannot claim as credits or write offs, there is one concept that investors know inside out. Depreciation. It’s the secret to keeping your taxes reasonable and being able to hold on to properties over the long term while they appreciate and you scale your portfolio. Depreciation.
As an investor or homeowner, you know that over a period of time, your property will be worth more money than it is today. The IRS knows that too, but they also know that a property needs love and attention to be inhabitable, to appreciate. If you don’t give your rental property love and attention, it will fall apart. The paint will chip off, the gutters will fail, carpet will be worn and destroyed, the roof will leak and eventually cave in. If investors aren’t providing and maintaining housing for renters, who will? Probably HUD, taxpayers, the government. The reality is, the government wants private landlords to provide and maintain housing for the people so that they don’t have to, and they motivate many an investor through depreciation.
What exactly is depreciation? Depreciation is a credit investors are able to claim against investment properties and improvements associated with those assets. I’ve included a table below to give you an idea of how long it will take an investor to fully depreciate certain improvements, and keep in mind, “improvements” means anything in addition to the dirt under your building.
Here’s a simple example, let’s say you bought a duplex for $275,000. If you look at the table below, the IRS says all residential rental buildings can be depreciated in equal installments over 27.5 years, so that means you get a $10,000 write of EVERY SINGLE YEAR for the next 27.5 years ($275k/27.5years=$10k/year). Now, keep in mind, that is only the depreciation, and that’s just the beginning of the tax benefits. Use a cell phone to communicate with your tenants or property manager? That’s a business expense. Do you drive by your property to make sure it’s being maintained? That mileage is a business expense. Pay your property taxes? Mortgage insurance? Bought a computer to help you manage your business? Those are all business expenses as well. The list goes on and on.
Now, you have a tenant in your property. They are paying you rent, which is more than your mortgage, so you are making at least a few bucks a month while your tenant is paying your principle, interest, taxes and insurance. When you add in your business expenses and depreciation, at least on paper, your property will often be “LOSING” money. You aren’t taxed on income you don’t have- the depreciation is pushing your income from this particular property into the red.
In reality, you are making some money month to month and your property is appreciating, but the cost of you running your business and maintaining the property will bring your taxable income in to the negative. In a nutshell, this is how people make money on rental property that they have a mortgage on, it’s pretty simple once you get the hang of it.
Keep in mind, the above is a simplified version of reality. Boise TurnKey is not an accounting firm, and we encourage you to speak with your accountant before you make the jump in to investing. If you do not have one, we can refer you to someone who has a great deal of experience in residential investment property. If you have general questions about how a scenario like the one above could work for you, click the “contact us” link above and we’ll happily give you a more detailed and personal explanation.
March 4th, 2019
What Do People Mean When They Invest With “No Money Down?”
We hear this all of the time. Don’t you need to have $100k saved up before you can start investing in real estate? The simple answer is, well, “no.” The fact of the matter is that my wife and I were both teachers when we started this journey, and as we all know, teachers aren’t exactly huge wage earners. So- how on earth does someone with a teacher’s salary acquire multiple rental properties? We know exactly how- we have first hand experience and a big part of what Boise Turnkey offers our clients is that experience. We don’t just talk the talk, and as a matter of fact, we don’t charge a penny to show others how to replicate this process. It’s not complicated, after all, we are just lowly teachers!
We could head down a rabbit hole and discuss any number of ways to invest in real estate without cash, but there are a couple very simple and straightforward ways to get the ball rolling. You’ll hear real estate investment gurus and people selling investment courses about all of the ways you can invest with “little or no money down,” which is a bit disingenuous. Can you buy a property with no money down? Sure, it’s possible, but it’s not easy. Can you purchase a rental property without using any of your own cash? Absolutely, and most of the people reading this article already have the means to do so. In this article, we will discuss how no money down deals work and one of the simple ways you can purchase a property with none of your own cash.
None of your own cash: If you own your own home now, it’s likely you could buy a rental property with none of your own money. Many investors use HELOCs (Home Equity Lines of Credit) to leverage the equity they have in to a down payment on an investment property. HELOCs are cheap, flexible funding that allow homeowners to move their equity from their personal home to an investment property that produces income, essentially doubles their equity growth and reduces their tax liability. Boise TurnKey has assisted many novice investors (several teachers included) in making great use of this strategy and putting the equity in their home to work for them instead of either sitting untapped or buying them a vacation or hot tub.
In short- if you have some equity in your home, it’s possible that you could transfer that equity in to a rental property. That rental property would produce monthly income for you, the equity would grow tax free, AND reduce your tax liability. That means that come April 15th, it is much more likely that you’d be cashing a check rather than writing one. This about this- a rental property produces monthly income, increases in value over time and gets you a hefty tax deduction. And if you are using this method to acquire a rental, that can cost you literally not one red cent.
The best benefit of all? The above method can be repeated over and over.
No money down acquisitions: Another term often used for these types of deals is “owner finance” or “owner carry.” This simple means that instead of using a bank, you make payments to the party that owns the property. Think of it like buying a car from a neighbor- they give you the car today, you make monthly payments for a couple years while you drive the car around. Real estate transactions can work the same way, the kicker is you have to find someone with a problem you can solve through this method, which is where the real work starts. In almost any case, a seller will make more money through a traditional sale than they will through an owner finance deal, so you need to find creative win-win solutions for a seller’s specific scenario.
In a seller finance situation, if the seller has no time, it’s likely that a buyer can solve that problem. Maybe they are going to be foreclosed on in two weeks and lose their home and all of their equity. That is simply not enough time to sell a house on the open market. A buyer could come in and purchase that property at a discount by bringing the mortgage current and assuming payments on the mortgage in exchange for the owner transferring the deed to them. Boise TurnKey never advocates for taking advantage of a seller’s situation, but deals can be struck that benefit all. As a buyer, you can offer enough cash and assistance to the seller for them to get back on their feet; find a place to rent, avoid foreclosure, bankruptcy and homelessness. A fresh start. One of the best things about this method is, due to the fact that you aren’t including a bank, which is heavily regulated, nearly any terms you can imagine are on the table, you don’t have to think inside the conventional mortgage box.
There are many other ways to invest and leverage, these are just two ways to get your portfolio started when you don’t have a stockpile of cash, like nearly everyone else!
Contact us for a free consultation if you are interested in learning more about the strategies mentioned above or anything related to residential real estate investing.
February 15, 2019
What Does a Good Deal Look Like?
Investing in real estate seems exciting and lucrative- and it can be. The problem is there are infinite ways to go about it; single family rentals, multifamiliy rentals, apartment buildings, commercial, mobile home parks, storage units, wholesale, flipping, buy and hold, etc. I could go on and on. It’s confusing and intimidating as you begin to learn and explore options.
In our opinion, the best way to start is by defining what your long term goal is and working backwards. Are you investing to supplement your income or replace your job? Do you love your day job, but think investing would be a fun hobby that happens to supplement your income? Do you want to retire 10 years earlier? The answer to those questions will help you define your long term goals, and you can work backwards to identify the short term goals that will help you get there.
Ultimately, every investor’s goal is to have cash flowing, buy and hold rental property. In order to get there, you may have to build capital, which is where flipping or wholesaling might come in to play. Flipping and wholesaling are work. Real work. Hard work. Once you learn your market and understand how to identify and negotiate a wholesale or flipping opportunity, you can start to build some capital.
So- your first deal. What do you need? Does it need to produce capital? If so, how much capital in how much time? How will you measure your return? If you plan to buy and hold, how will you measure your return on that investment? There are many ways to calculate a return, and in future blog posts, we will explore different ways to calculate returns using different metrics.
At Boise TurnKey, we have worked with investors from all over the world, each of them in unique financial situations with a different idea of what is an acceptable return. One of the services we offer is analyzing each individual’s goal and financial situation, helping them focus on an acceptable return to help them achieve their goals.
What are your long term goals? Why do YOU want to invest in real estate?
January 11, 2019
315 20th Ave S., Nampa
Newly listed property- for a link to the full MLS listing and all details, click HERE!!!
This was quite the undertaking! Check out the before-after: