Book of the Week: The Wall Street Journal Complete Real-estate Investing Guidebook

15 May 2016

the_wall_street_journal_complete_real-estate_investing_guidebook This week I read The Wall Street Journal Complete Real-estate Investing Guidebook by David Crook after I was unsatisfied with The Ultimate Beginner’s Guide to Real Estate Investing. These books have long titles. It is hard to find a good real-estate investing book, because seems everyone is trying to cheat you out of your money like Donald Trump. The Wall Street Journal is reputable, even though the author’s last name is Crook. This book was published in 2006, before the housing crash, which makes some of the sections of the book interesting. Like how you can get a mortgage with no money down or even get a mortgage for 125% of the value of the property. I found the tax laws I was looking for in this book, but I still want more detailed cash flow analysis to see which real estate projects will be profitable. Real Estate Secrets Making money in real estate comes down to four secrets.

These aren’t really secrets. Anybody who does real estate knows how to follow them. With the way things are now, you’ll need 20-25% of the property value for a down payment. You can do cash flow analysis to see if the property will pay for itself by looking at the prices in the rental market as compared to the value of the property. You have to work hard to find properties for less than you can sell it. You either need to look at foreclosures or be able to upgrade a property cheaply. Before you buy an investment property, you should always ask yourself these three questions.

Tax Laws This is where the money is made in real estate. Everyone knows about the mortgage interest and property tax deduction, but there is much more. One can exclude $500,000 for married ($250,000 for singles) of the home-sale capital gains every 2 years if you have there two of the previous five years. That time does not have to be continuous. This information can be found in IRS Publication 523. That’s $500,000 in tax free capital gains. You can depreciate improvements to the home, but not the land. You can depreciate the building itself over 27.5 years. More information can be found in IRS Publication 527. This is free money the government is giving you. You can also use a 1031 exchange. I first learned about this in Rich Dad, Poor Dad. This lets you sell a property to trade up to a more expensive one without having to pay capital gains tax on it. You can keep doing this indefinitely, going bigger and better each time. This lets your money grow tax free. Real Estate Professionals as defined by IRS Publication 925 are allowed almost unlimited write-offs. You need to spend more than half your personal services on real estate and materially participate and spend more than 750 hours of service during the year. So one spouse is a real estate professional, while other works a normal job and they file taxes jointly to benefit from the write-offs. The home office deduction is not worth it. The amount is too small and the risk of audit is too high. Alternative Minimum Tax You can get screwed by Alternative Minimum Tax (AMT) if you have both real estate and execute options from working at a startup. They both get included in AMT calculations. I know people who have to pay AMT. Ownership Structure The book goes over the differences between sole proprietorship, general partnership, limited partnership, C corporation, S corporation, and limited liability company (LLC). It doesn’t mention umbrella insurance. S corps are preferred by real estate investors over C corps. LLCs are popular with real estate investors. Other Tidbits You can pay the sheriffs’ office to serve papers. Insurance should cost 2 to 2.5%. As you approach 100 units, 10 to 15% of gross rental revenues will go to employee costs. Try to get real estate owned (REOs) at 30 to 40% below value. One week of vacation home in popular spot should equal about one month of expenses Resources

Purchase The Wall Street Journal Complete Real-estate Investing Guidebook on Amazon.com or check it out from your local library.