Reasons NOT to invest in Real Estate

From a good friend, Dolf deRoos says,

"As the holiday season rounds the corner and you think about all the money you’ve spent on gifts this year, the last thing on your mind is spending even MORE money on an investment property. (If you did find one now, however, maybe next year for the holidays you could buy that sporty little BMW you had your eye on - as a gift for your significant other, of course!).
There are plenty of reasons not to invest, and we've heard them all, from "it’s the holidays" to "I’ll never find the great deals Dolf finds." But these are not valid reasons; they are just excuses. Dolf’s colleague, John Baen has provided us with some excuses why people do not invest. Here are the top five:

5. My Rich Aunt Gertrude is bound to leave me something in her will.

4. I can cash in those Coca-Cola collector’s bottles when it’s time to retire.

3. I am going to marry rich, so why make my own money?

2. I am bound to win the lottery someday, as I play every week!

We are not saying that these things won't happen, but your chances are only about .005%. If you think you are part of the .005%, stop reading this email and please buy US a lottery ticket.

And the number one reason not to invest in real estate is:

1. The interest rates are rising and the bubble is going to burst

Now, even though you’ve been hearing about the rising interest rates and the cooling market, this is actually beneficial in many ways to real estate investors, as explained in our recent report "How to Bubble Proof your RE Investments". Rising interest rates are useful to you as an investor because rising interest rates go hand-in-hand with inflation and appreciation. In other words, it helps to raise the value of a property. The amount you owe on the property will stay the same but the value of the property will have risen, resulting in an increase in equity.

That's all for tonight - gotta go check under the bushes for some presents.

Smokey

Fix and Flip

Well, here goes. As opposed to "buy and hold" rental properties, "fix and flips" need a different strategy.

Why? Rental generates passive income (no 15.3% self-employment taxes), while the short term capital gains that result from a flip can be termed earned or active income by the IRS. That adds the 15.3% employment taxes (ouch!) on top of the ordinary income taxes that you will pay.

Our alternative strategy focuses on reducing that 15.3% bite.

Definition:
1. A General Partner earns active income and holds all of the liability for a transaction.
2. A Limited Partner earns passive income and has no control or liability for a transaction (think shareholders)

Creative use of these facts provide the basis for a great strategy, and also let you selectively embrace the much maligned "Dealer Status".

Bye for now - more holiday shopping to do,

Smokey

What's a Professional?

Occasionally, the IRS uses phrases that have meanings that can be confused with popular usage. This is one of them.

A Real Estate Professional would be a Broker or a Realtor®, correct? Well, no.

It turns out that you don't need to be a Realtor® or anything like it. All you need to do is spend more time in real estate related activities than any other job, and at least 750 hours / year. So the real question is "What are real estate related activities?"

According to the IRS, a qualified real estate activity is any activity in which you “develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease or sell” real estate.

Details of these kinds of activities are illustrated in many places including Smokey's place.

This status has some incredible tax advantages, the most important of which is the ability to take unlimited paper losses on your real estate investments.

People who not meet the definition of a Real Estate Professional (according to the IRS rule) are limited to claiming a maximum of $25,000 losses per year and only if they make less than $100,000 per year. If you qualify, then you may be in a position to dramatically lower the amount of your taxes.

Some people can legally reduce their taxes all the way to ZERO!

LLCs and Rental Properties

Setting up an LLC (or other entity) provides you with the liability protection afforded by the law. Great!

But you bought the house in your own name, so you are still liable!!!

All you have to do is transfer the title from your own name into that of your LLC. Sounds simple doesn't it. In practice, it's not that complicated either. Take your deed or title that you got from the lawyer or title company at closing, and take your corporate minutes book to the county recorder's office and ask the clerk to help you transfer the title from your name(s) into the name of your LLC (or whatever). There is usually a fee involved (typically less than $30.00) for the paperwork.

And yes, before you ask, you need to go to the county where your property is located. If your LLC was established before you purchased the property, you should ask the lawyer or title company if they will do an "accomodation" at closing and do that transfer for you. If not, some people do offer a service so that you don't have to travel from your home to some far away place just to transfer the property (unless of course it happens to be somewhere warm in the winter).

Hope that helps. Now it's time to see how many ornaments I can knock off of the tree - yipee!

Smokey