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Tag Archives: Passive income

How to Invest to Meet Your Goals

The first step in becoming successful is to define what success means to you. It will take much longer to get to Los Angeles if you have chosen routing to Cleveland.

Some people treat real estate investing as a monolith. They have only one strategy for every deal, which means they often don’t know which deals to pass on. The important thing is to decide what kind of investments you want to make and then pick the right strategy to support your goals, not to force every “good” deal that comes along into your approach and hope for the best. In fact, the most unhappy investors I know take deals without examining whether or not they support their long-term goals.

Other than making money, there are three approaches to satisfying your goals:

  • Passive income investing
  • High-yield investing
  • A blended approach

But the most important thing is to identify what your goals actually are.

  • What are you trying to accomplish?
  • What do you think about debt?
  • How much risk are you willing to take?
  • How quickly do you want to build your wealth?
  • How much capital do you have to start with?
  • How much time do you have and want to contribute?

Once you have decided what you want to accomplish, you can determine which approach best meets your goals. To help with that decision, I’ll talk about the pros and cons of each approach.

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Why Would I Sell?

When you decide to sell or continue holding an investment property, there aren’t any right or wrong decisions—only consequences. It’s important to be mindful of those consequences and make the right decision for the information you have at the time. Then live with the consequences without regrets.

So you have a nice rental property with multiple income streams. Why would you want to sell it?

A lot of reasons may influence your decision.

A Better Life for Everyone
Several of our tenants have fallen in love with their rental and asked us to sell it to them. They get a house they know and love. If they have traditional financing, we get a chunk of cash to reinvest. If we owner-finance, we get a much smaller chunk of cash, but we continue to have passive income without the expenses of renting.

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Exit Strategies and Taxes

A cartoon house with exit strategies: walk away, refer, wholesale, double close, prehab, rehab, hold (rent), owner finance, and homestead

Our eight…er…nine Exit Strategies. When you’re evaluating a house, you must always consider what you’re going to do with it after you have it.

As I’m writing this post, it’s been exactly a year since I posted our eight exit strategies. You may notice there are nine thought balloons around the house in the graphic. I’ll get to that later.

Exit strategies are simply plans to get out of your situation. When I was writing on tax day, I got to thinking about how our tax situation affects which exit strategy on any given deal or series of deals. That’s what caused me to add the ninth strategy to the list.

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Streams of Income from Rental Properties: Equity Growth—Infinity and Beyond

Buzz Lightyear

Buzz Lightyear should be every real estate investor’s hero. He had the right motto.

So far, we’ve talked about the most obvious stream of rental income (cash flow) and the less obvious concept of viewing depreciation as income through tax reduction. Today, I want to talk about equity growth.

As you continue to make monthly mortgage payments, your equity in the property grows.  But remember, you are not making the payments. Your renter is. So that equity growth represents a very real increase in your wealth, and you don’t have to do anything to get it except keep your rental property in rentable condition and rented.

Before we get started today, I want to be clear that I am making some unreasonable assumptions in this discussion. I make these assumptions because I want to talk about making money on borrowed money, and clouding that concept with other issues makes that concept much more difficult to understand. We’ve all been taught for years that debt is bad, but Robert Kiyosaki points out that there is good debt and bad debt. I’m talking about good debt. So here are my assumptions: Continue reading →

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Streams of Income from Rental Properties Part 3: Tax Reduction Through Depreciation

Try to think of depreciation on rental properties as an income stream instead of as your money going up in smoke.

This is the third of the articles I’m writing on the financial advantages of owning rental properties. A couple of recent posts have pointed out some of the hazards of owning rentals, and everything said in those posts is true. Owning rental properties is a business, and there are risks in any business. If you don’t manage your properties well, you could lose money. Let me restate that. If you don’t manage your properties well, you will lose money, sleep, and peace of mind—the last being the most important.

That said, the US tax code is written to encourage people to invest in real estate, from individuals who own only one home to investors who own many. It contains so many tax benefits for rental owners, you’d need to be a real estate tax specialist to understand all of them. And if you’re playing this game, you definitely need a good CPA and a good lawyer. I have them, and so does every professional investor I know. Further, I’m not going to pretend to be an expert in tax law or strategies. I’m writing these articles from my own experience, and your experience will definitely be different. You’ll do somethings better than I did, and you’ll do somethings worse. You’ll make or lose more money that I did, and I’ve done both.

Depreciation

So let’s talk about depreciation. As an investor in rental properties, you are required to depreciate the improvements on your rental properties—just the buildings, not the land. For the sake of argument, let’s assume depreciation on the example house worked out to $5,000 per year. It doesn’t, but that’s an easy number to work with. At this rate, you will have written off your initial $25,000 investment in five years. Continue reading →

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