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)