5 Biggest Mistakes People Make When Investing in Real Estate

Would you like to avoid the 5 Biggest Mistakes People Make When Investing in Real Estate?

Well, pay close attention to today’s training and learn what I’ve learned from multiple millionaires who are successful real estate investors, including Tom Wheelwright from his book Tax-Free Wealth, and Robert Kiyosaki from his book Rich Dad Poor Dad.

 

5 Biggest Mistakes:

1) Thinking that buying a home to live in is an investment

-People end up using all of their savings as a down payment

-They stop saving when they realize how big their mortgage is

-end up paying money to the bank in mortgage interest

-they spend all their time improving and maintaining their house

-they don’t get experience as an investor

-Property taxes might increase at any time, causing some home owners to have to sell their homes

– Consolidating debt with home equity loans often causes increased spending, which leads to further debt

2) Not properly looking at the cash flow of an investment property

-Property Taxes

-Insurance (mortgage insurance, hazzard insurance, flood insurance, etc)

-Maintenance (plumbers, handy men, roof repair, leaks, etc)

-Management (handle rental laws, and evictions, filling vacancies, screening renters)

-Tenancy Vacancies

-Cost of down payment

-Cost of mortgage fees, points, interest

-Fixed interest mortgages vs adjustable rate

-Legal fees

-Accounting fees

-Tax prep fees

3) Buying your first rental property out of state, or out of your country

-Paying more for maintenance (not being able to check work)

-Management will be less likely to service you (as you are farther away)

-Cost to visit your property

-Lacking experience to run your own property and not gaining it as the property is out of state or out of the country

4) Not Claiming Depreciation for the building

According to Chapter 7 of Tax-Free Wealth, by Tom Wheelwright, one of the biggest mistakes people make, is that they do not claim depreciation of their real estate investment property.

Why, it’s because they are lazy, or their CPA is lazy, or they are ignorant of this important deduction.

In his example, he shows what would happen if you have an investor who buys an $800,000.00 apartment building that cash flows $12,000/yr, or $1,000/mo.

$800,000 (cost of home)
-$200,000 (cost of land)
$600,000 (cost of building and contents)
-$100,000 (cost of contents)
=$500,000 (cost of building)

$500,000
x 3.6% (depreciation for building)
=$18,000 (depreciation deduction)

Without claiming depreciation for the building, you would have to pay taxes on the $12,000 earned from the rental property.

When you claim the $18,000 in depreciation, the rental income is completely tax free, because your business claims a loss of -$6,000!

Not only that, if you structured it properly, the -$6,000 will pass through to your ordinary income tax, reducing your taxable income by $6,000!

5) Not Claiming Depreciation for the contents of your rental property

Tom Wheelwright points out that separating the contents from the value of the building alone is the proper way to file your taxes.

There must be a study conducted by either a CPA or an engineer to evaluate which parts of the investment property are considered contents, and which parts are considered the building structure.

The good thing for an investor, is that contents depreciate at a much faster rate than the building, which leads to a higher percentage used to calculate the depreciation of contents vs. the building structure.

In his example which I showed above, the contents of the building were valued at $100,000.

$100,000 (contents of the apartment building)
x 20% (depreciation for contents)
=$20,000 (depreciation deduction)

So, with the building depreciation, you can reduce not only the taxes on the rental income (you pay no taxes), you also reduce your personal taxable income even more!

$12,000 (rental income)
-$18,000 (building depreciation)
-$20,000 (contents depreciation)

Conclusion

A Millionaire Real Estate Investor’s Guide To Making a Good Investment

…Mey here blogging on a Thursday evening after enjoying a wonderful glass noodle tofu salad and a Thai curry shrimp (yum), chatting with old and new friends at a Christmas party, and now at home with tonight’s blog A Millionaire Real Estate Investor’s Guide To Making a Good Investment…

…if you are like the many people who want to invest in real estate then this post will help you figure out how to find a good deal…

…my friend who taught me this formula is a millionaire real estate investor…

…he follows this formula when he finds deals in Hawaii…

…so pay attention and use it for yourself!

8% Return Rule

…when the house we are living in went up for sale, I thought it would be a good idea to buy it…

…unfortunately, I didn’t have the capital to buy it (asking was $1,000,000+)…

…so I calculated what the cost would be and profit that would be made through renting and asked him if an investor would want to go in for half…

…he looked at my numbers and said, no, because the return was only 4%, and real estate investors will only put in big bucks if they are getting back at least 8% per year…

…so that’s when I learned the 8% return rule…

Calculate Real Return

…in order to figure out how much we would really make, I had a good grasp of the cost of maintenance and repairs, as well as other costs…

…a lot of investors in real estate start out without calculating all of the costs of owning real estate…

…that included the mortgage, the cost of maintenance and insurances, rental vacancy rates, cleaning up after tenants, eviction costs, etc…

…after calculating the real cost, you can subtract that from the rent, and you get your real return on investment…

…the only reason I could calculate it for the house I lived in was because I lived here so long…

…since it wasn’t a good investment, we didn’t buy it, and someone else did who is renting it to us…

…what can I say, not everyone makes good investments…

Conclusion

…hope you enjoyed this article…

…I’ve read stories of people who are now poor due to their bad real estate investments…

…be a smart real estate investor and work the numbers and do your homework!

…and if you like reading this article, write me a comment below!

…I loved writing it…

…actually, I love blogging about financial freedom…

…it’s a way to make money doing something that I love to do!

…if you want to learn how to make money blogging, then just CLICK HERE, watch the free video and get started =)

3 Most Informative Videos on How To Make Money Renting Real Estate

…some people think that the safest investments are in real estate…

…however, becoming a landlord is a career and it has a lot of issues associated it…

…this post will educate you with the most-informative videos on how to be an effective landlord and make money through rental income…

  1. What Every Landlord Should Know About Property Management

    …this video covers the big key points on how to be successful at renting…

    …he hits key points that are extremely important, including:

    1) what you can use (credit score) and can’t use (sex, race…) to choose your renters
    2) how marketing with give you better tenants
    3) who the best tenants are (nurses) and the worst (self employed)
    4) be prepared in advance with an attorney that does lots of foreclosures
    5) be strict on rent being turned in on time
    6) need cash flow (if you are just breaking even, don’t invest)
    7) reserves (to pay for things when things go wrong)

  2. How to Calculate Numbers on a Rental Property

    …this is a great video that goes through the numbers that you need to look at to figure out if a rental property will be worth investing in…

    …it is key to know these numbers BEFORE you buy!

    …watch this video to understand how to calculate your key numbers…

  3. What to Avoid when buying a Rental Property

    …this video is extremely practical and informative…

    …it talks about everything you want to avoid when buying a rental property such as:

    1) Avoid houses, condos and townhomes
    2) Avoid flat roofs
    3) Don’t pay electricity or gas
    4) Avoid multiple stories
    5) Avoid being next to alleys or being on a main street

    …and more…

    …and the video talks about exactly WHY you should avoid these things…

…do you have experience renting?

…share your tips and advice in the comments below!