Rachel M Vann - GET THE MOST MONEY FOR YOUR REAL ESTATE INVESTMENT

GET THE MOST MONEY FOR YOUR REAL ESTATE INVESTMENT

Rachel M Vann

Table Of Contents

1.

Introduction

1

2.

Thinking About Investing?

3

3.

Financing Your Investments

7

4.

Homes To Invest In

27

5.

A Guide To Flipping Houses

39

6.

Making Money On Flipped Houses

51

7.

Home Renovation ROI

57

8.

Protect Yourself From Flops

73

9.

A Guide To Investing In Rentals

77

10. Property Management 101

91

11. How To Sell Or Rent Your Investments For The Most Money

127

12. Why Staging Makes All The Difference

133

13. Why Curb Appeal Matters

149

14. Why You Can’t Afford To Invest Alone

153

15. How Agents Help Investors

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Foreword When I first ventured into the real estate industry years ago, I did so with the hopes creating a stream of passive income to help free up my time. After grinding, making mistakes, learning, and growing, I decided I wanted to help people like you avoid the headaches that are often associated with the beginner stages of real estate investing. In my years of experience, not only have I helped alleviate the stress of selling and buying real estate for numerous clients, but I’ve also accumulated years of knowledge to help you begin to grow your very own real estate portfolio!! I decided to share all of my expertise in one place with potential clients - and that’s why you’re receiving this book. I want to help you have the best possible Real Estate Investing experience. And by that, I mean I want you to 1. Get EDUCATED on the process BEFORE you begin 2. Make as few mistakes as possible along the way, and 3. Avoid the headaches most commonly associated with renting out your property so that you can truly SCALE to financial freedom! Think of this book as my gift to you. It contains insider advice on the real estate investing process to help you achieve your ultimate real estate investing goals, including:

• Financing Your Investments • Types of Homes to Invest In • A guide to Flipping Houses • A guide to Investing in Rentals • Property Management 101 • And much, much more

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If, after reading through it, you want to hire me to help you invest in real estate, buy a home, or sell your home, I’d be more than happy to meet with you one-on-one to discuss a specific plan to help you reach your goal.

Happy reading! -Rachel Vann

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About Rachel Vann

Rachel was raised in Central Arkansas her entire life. As a child, Rachel had aspirations of being a teacher. Never in a million years did she think she’d stumble into the real estate industry, but you can’t always predict where or when you’ll discover what you’re meant to do in life. Rachel was taught at a young age that if you want something in life, you have to work for it. So that’s what she did. And she worked hard...but that’s not to say she didn’t have fun along the way. :) After graduating college, Rachel started her first job and realized very quickly she was not made to sit behind a desk. Due to life circumstances of her father being diagnosed with Stage 4 Cancer, Rachel had a newfound desire to own her own company. She wanted to be able to create a lifestyle that would allow her to help her family and serve her community as well. Rachel had a strong desire to become the best version of herself so that she could help support her family and change lives. Rachel got into the real estate industry 6+ years ago at only 23 years of age, while her father was battling cancer. He was her biggest motivator. She saw how important it is for people to have a place they can call home, and also have a stream of passive income coming in for when life gets tough. Rachel also realized that by buying Real Estate, people can start to carve out a path towards creating a better financial future for them and their families. She set out to start her career and to build a team of people around her that she could help to change their lives, as well as each of her clients' lives.

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As her career advanced, Rachel found her stride working with both Buyers and Sellers in Central Arkansas. However, she was intrigued with Investment Properties and has a passion for teaching her clients and others how to grow their very own investment portfolio to create Passive Income for their family! She shows her clients how to make their money work for them, instead of trading their TIME for Money. She’s an expert in Investment Real Estate and a strong negotiator. Since she knows both sides (Retail purchasing and Investment strategies) she has an in-depth knowledge of her market and will be sure to help you find the right property for you, or sell at the highest value possible when the time comes. Throughout her career, Rachel has earned numerous accolades, including: • Becoming an Executive Broker in December of 2019. • Building a portfolio of single family homes and soon to be owner of a self-storage facility before 30 years of age. • Played a role in over 200+ transactions since 2016 • Became financially free through Real Estate before age 30 . Rachel still lives in Central Arkansas with her husband and sweet dog, Nash. In her free time, she enjoys being with family and friends, spending her summers on the lake, and traveling. Rachel aims to provide the highest level of service to her clients and takes deep pride in helping them achieve their real estate goals.

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Testimonials & Reviews for Rachel Vann Here’s a list of people whom I have helped buy or sell a home, and what they said about working with me: "I'm an investor and Rachel sent me a great property. She was instrumental in negotiating, getting it under contract, and advising who else I needed from renovation to banks, to property managers. Truly five-star service! We ended up renovating and renting out for more than we estimated - a fantastic result. Thank you Rachel, I can't wait to buy more houses from you!" "Rachel & her team have been phenomenal in helping me buy numerous homes. She listened to what I was looking for & then helped me buy great houses & avoid ones that weren’t a good fit. It’s obvious she loves what she’s doing and will go the extra mile before, during & after close to make sure everything goes smoothly. I’m so happy to have the honor to work with her & can’t wait for the next time I’m buying or selling so I can use her team again. Definitely a rockstar team." "Rachel sold my elderly mother's house so we could move her to Springfield to live with us. Rachel did a fantastic job with the transaction and really took care of my mom. She was a great communicator and handled everything very professionally. I highly recommend Rachel and her team with any of your real estate needs." "Rachel was very professional and helpful from the beginning to the end of my home buying process. She was very informative and helped guide me in every step of the process. She worked diligently until I found my home. A great realtor who puts the needs of her clients first. I would recommend her to anyone I know looking to purchase a home. Thanks Rachel!" ix

"Rachel is very professional and kind. She works very hard to help her clients sell their home or to find their dream home! I highly recommend her!!!" "Rachel always so friendly and never made us feel like we were annoying. (We had not a clue what we were doing) She always responds quickly and actually listened to what we were looking for in a house. She always has a sense of urgency, which you want in this crazy market! She explained the process so well I always knew what to expect next. She’s someone you can trust and cares more about her client being happy than a big check. We will definitely use her again if we decide to list the dream home she got us!" "I just closed on a deal with Rachel and couldn’t be happier. Her professionalism and communication was excellent. Any questions that I had she responded to very quickly. I would definitely do business with her again." "Rachel is excellent. She made the home buying process so smooth. She is honest, openly communicates, and explains every step. It was wonderful having her as a part of this journey!" "Rachel is very good at educating her clients and the realtors she works with." "If you’re looking to buy or sell a house, you need to call Rachel!! She goes above and beyond for her clients! My husband and I were first time home buyers and didn’t know the first thing about the home buying process. I was super picky with not a super high budget. At one point I almost settled for a “it’ll do” home. Rachel said, “no way, we are finding you guys a perfect home.” She went door to door asking if anyone was interesting in selling. Turns out... they were! Rachel walked us through EVERYTHING step by step so we could understand. She had extensive knowledge

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about the (many) questions I asked. My husband is a football coach so naturally we were buying a house in football season. She made is easy for our crazy schedule to get what we needed done in a timely manner. Rachel was our advocate, voice of reason, negotiator, and anything else we needed her to be! We will never be able to thank Rachel enough for the time and effort she put into making our home buying experience the absolute BEST!!" "Rachel is amazing! She worked quickly to find the perfect house for us in the area we wanted!! She also helped us through the home buying process and made everything flow so smoothly. Recommend her 110%!!"

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CHAPTER 1 Introduction

Have you ever watched one of those house-flipping or income property T.V. shows? They seem to just update what needs to be updated, then sell or rent it — and quickly — at a profit. Sure, there are always unexpected expenses, but it seems to always work out in the end for them. And it’s exactly that portrayal of real estate investing that draws people in. Who wouldn’t want to do a little work to make a place look more attractive and walk away with thousands (or tens of thousands) of extra bucks in their pocket? I’m guessing you, since you’re reading this book, and I don’t blame you one bit!! The problem is that there is SO MUCH MORE that goes on in real estate investment than television can show you in 30-60 minutes of heavily edited content. That doesn’t mean there isn’t potential to earn money this way — there definitely is. It’s just that there’s a lot you need to know in order to actually make this happen. This book will help someone exactly like you: hardworking, intelligent, realistic, and ready to change your financial situation — and your life — through investing in real estate. Investing in Real Estate can set you up for a successful financial future OR allow you to retire earlier than originally planned! Maybe both!! In the following pages, you’ll learn about how to get started in real estate investment, including what types of properties to invest in and how to finance your purchases. (Note: If you’re already an investor, I suggest reading through this section anyway, just in case there are strategies you haven’t tried yet that 1

could enhance your ability to make more money.)

I’ll also teach you the different types of real estate investing, which includes resources and tips to succeed in each arena, how to calculate the real ROI (return on investment) for home projects (i.e., how to spend your money the right way, and plan for expenses), marketing techniques that will make you and your properties stand out, how to build your investing team, and the benefits of working with an agent.

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CHAPTER 2 Thinking About Investing?

Before we begin, I want to point out that this section is geared more toward people who are interested in becoming a real estate investor but want to know more. If you’ve already started down this path, you could theoretically skip this section; however, if you flip through the pages of this section as you move to the next, you might find some new information or gain a new insight that you didn't have before. Maybe you’ll learn some strategies you haven’t tried yet, or weren’t even aware of. Or maybe you’ll just find validation you’re on the right track and a reminder of you why you got into investing in the first place… What I’m saying is that there’s a lot of good information here, and it can’t hurt to give it at least a quick glance. As for those of you who are looking to get into the real estate investment game, my goal here is to give you all the information you need to decide whether investing in real estate is right for you, and then teach you how to jump in. So let’s get started!

THE STATS

According to a 2019 article on Investopedia.com, the average commercial real estate investment returns over 20 years are around 9.5%. Diversified and residential investments average around 10.6%. Both of these are higher than the S&P 500 Index, which has an average annual return of about 8.6% over the last 20 years. By the way, all these figures include the housing price burst in the 2008 recession, during which time real estate investment still did 3

better than the housing market as a whole.

These stats alone obviously show a great reason to buy real estate. But what do investors hope to get when they’re buying property? According to the 2017 National Association of REALTORS® (NAR) Investment & Vacation Home Buyers Survey, 37% plan to rent it for income, 16% for the possibility that the price will appreciate, and 15% because it was a good deal. This all sounds great, but I’m guessing the main stat you’re interested in is how much you can make. (Am I right?) Well, here’s the answer you’ve been waiting for: According to a survey of real estate investors done by ZipRecruiter.com in spring 2019, investors make an average of $123,937 per year, with the low end at $47,000 per year and the high at $261,500. Most make within the range of $100,000 to 150,000 per year. ...Of course your personal income with real estate will depend on several things, including but not limited to your location, previous experience, current connections, and strategies that you use to build your own business!! It's different for everyone! For example, if you plan to flip numerous properties a year, your income will probably be higher each year at first than the person who is looking to build a portfolio of passive income through buying and holding real estate as residential rental properties. I like to think of flips as "quick cash" and rentals as a longer term, but more steady, play.

WHY REAL ESTATE?

You may still be wondering what it is about Real Estate that makes it such a great investment and why so many people are drawn to it. I attended a seminar shortly after I started investing in Real Estate and the content I learned there has stuck with me ever since. Below is a short summary of each benefit, but I continue to elaborate further throughout the book.

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Here are some of the reasons why people choose to invest in real estate:

• Income/Inflation • Depreciation/Deductions • Equity • Appreciation • Leverage

Income The income that comes from investing in real estate can be two fold. You can receive active income (from flipping a property) or passive income (from renting a property out). Both types can be very beneficial and crucial to the longevity and success of your business. I suggest talking to a CPA or tax attorney to really understand how each type of income is taxed (because they are taxed differently) and to make sure you structure your business in the best way to maximize this benefit! Lastly, the fact that home values tend to keep up with inflation over the years is a huge plus to many! Tax Deductions This will be discussed further in the next chapters, but I wanted to just mention it shortly here. There are many ways one can realize the tax benefits of starting a real estate investment business depending on which side of the table you are on. For one, there are many deductions one can take when you own a company. And second, when you own a long-term rental, depreciation is a beautiful thing!! Stay tuned to learn more..we will go into further detail in the coming chapters. Equity Equity can come in a few different ways. One, you can automatically have it when you buy a property. For example, If

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you find an outdated property that's a "good deal" for $70,000 and put $10,000 worth of updates into the home such as: fresh paint throughout and update the flooring and light fixtures, the home might now be worth $100,000. Therefore, you would have $20,000 of equity month 1 of owning the property. Another way equity comes is through renting a property long term. Each rental check a tenant pays you, you pay your mortgage down, therefore, creating equity in the property month over month...a longer play than the first scenario above, but still, one of my favorites!! Appreciation Depending on which state/city/neighborhoods you choose to buy and invest in, appreciation (the increase in the value of the property over time) can be a huge play for you! In my experience and market that I personally invest in, I do not make appreciation a factor in my buying decision, but when it occurs, it is the "cherry on top" so to speak! This strategy will also be discussed in further chapters, so stay tuned to learn more about this real estate benefit. Leverage There are many ways one can leverage their investment in real estate. For example, you can buy a property using other peoples money, meaning your return can be, well, infinite! There are also ways you can leverage your equity in your personal home to get started investing in real estate through a HELOC (home equity line of credit). This will be discussed in more detail later on as well.

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CHAPTER 3 Financing Your Investments

Now that you know why real estate investment is a good idea, it’s time to learn how to do it. But before we get into the nitty- gritty details of each investing method, let’s address the elephant in the room: To make money, you need to have money to invest, right? Well, yes and no. To be completely honest, I got started in real estate with VERY LITTLE money to my name, and living paycheck to paycheck (right after graduating college). If I can do it...You can do it if you put the effort in and work towards a goal! While you do need money to invest, it doesn’t necessarily need to be your own. If your only reference for real estate information is house-flipping T.V. shows, you might assume real estate investing is ALL about cash buying. However, there are many investment deals that transpire throughout the real estate market on an annual basis, and they are not ALL cash deals. The majority are achieved through traditional lenders and institutions such as banks, but some are accomplished through less traditional means. In most cases, it’s because the investor couldn’t raise the capital or didn’t have the credit score to do so. According to the 2017 NAR® Investment & Vacation Home Buyers Survey, 47% of investors financed less than 70%. And more than half — 64% — used a mortgage. So, whether you’re reading this as a newbie or a seasoned pro, you shouldn’t feel bad — not even for a minute — if you don’t have the cash to use. (This is where the benefit of "Leverage" comes into play.) Like state above, when I got started investing, I barely had $1,000 to my name and bought my first house using NONE of my own money. In fact, sometimes it seems to me that the ultimate goal 7

for real estate investor is to not use any of their own money at all! The seasoned investors tend to pride themselves on this strategy at times! This works to every investor’s advantage — those without the funds can still get in the game, (like I did) and people who’ve been playing for a while can use other people’s money as a way to invest more, which leads to increased income and scaled portfolios! Leverage baby!! It can be a beautiful thing!

Does Credit Score Matter?

Yes, and No...It’s to your advantage to have a high credit score, but is it 100% necessary to get started?? No. So, why does credit score matter in this business? First, you’ll get more access to working capital with a higher score. You’ll also be able to qualify for lower interest rates if you do take out mortgages or loans from a bank, which can lead to significant savings versus people with “so-so” or low scores. If you are sitting there thinking "I don't have a high credit score..." that's okay! Reach out to me and let me introduce you to someone who can help. Working with the right mortgage lender is key in my opinion. Sometimes all you need to do is pay off a small credit card, or pay it down to a certain utilization rate in order to raise your score! Don't get discouraged here, instead, reach out to someone who can give you some guidance and help you make a plan to get your credit score where it needs to be. I can point you in the right direction here!!

WHERE TO GET MONEY

Investing without Your Own Money

The first and most common option is hard (i.e., private) money lenders. In this case, individual people or businesses loan you money as an investment for themselves. They make money

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through fees (sometimes, such as origination fees) and interest rates, both of which tend to be higher than other types of loans. One way you can try and make sure you still come out ahead in these types of deals is to use these loans when you are buying homes at 50 cents on the dollar and going to be able to do a "quick turn around" with a fast exit strategy on the property. Side Note: Obviously, there isn’t a bunch of people out there willing to just "hand over" their cash to you so you can invest it. You’ve got to be clear on whom you access for help and how to best use the help they give you. This is why having a solid network is important. A private lender, as I call them, doesn't "just appear" and magically trust you to make a smart investment. In my experience, these connections come from immersing yourself in your local real estate investment community, as well as from relationships that develop with seasoned real estate investor over a period of time. Partnerships are another popular way to get funding. These can work in a variety of ways, but you want to make sure that you balance each other out well. For example, if you have a less- than-stellar credit score, make sure your partner has a great one. Perhaps you can be the one to find the ideal properties and your partner can get the financing, which will come with lower fees and rates thanks to that higher score. Maybe a partnership can come from a long-term investor you connect with who just doesn't want to put in the extra time into another flip. You can do the grunt work, and learn from them at the same time! Keep in mind that you don’t want to partner with someone just because you already have a good relationship with them, or just because they have access to money. Partnerships can be great, but they can also turn sour quickly!! Tips on how to avoid a negative or sour partnership: In my opinion, a key to a fantastic partnership is being in sync,

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such as agreeing on what kind of risks you’re willing to take, determining what short- and long-term goals you each have, figuring out who will do what, and deciding what kind of return you’d both like (and expect). Make sure that you over-analyze "who will do what" and write everything down. You want to make sure all roles are laid out clearly so there will be less misunderstandings throughout the process. I suggest hiring an attorney to draw up all documents and agreements here to make sure all of your bases are covered! A partnership gone bad can end up costing you a lot of money, stress, and time!

Investing with Your Own Money

If you don’t have access to private lenders, hard money lenders, or partners, you can still start your investing career without having all the money on hand. If you don't have a lot of extra cash in the savings account, there is still a few possible ways you can get started! 1: HELOC One way to you could get started is through utilizing your homes equity. You can do this by taking out a Home Equity Line of Credit (HELOC), which leaves your current mortgage as-is, and puts a second lien against your house. Think of the HELOC as a revolving line of credit tied to your home as its collateral that you can borrow against. Interest rates and terms are typically very low and the HELOC is generally very inexpensive to get started (usually a couple hundred dollars and the cost of an appraisal). I suggest talking to MULTIPLE local lenders to find the best terms available to you if you decide to go this route. Different banks have different criteria and different payback terms for HELOC's such as length of the loan, amount you can pull, and interest rates available. Do your research! You can also talk to a local lender about rewriting your existing mortgage and doing what's called a "cash-out refinance". This second example is not

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the same as a HELOC, but can be beneficial in certain circumstances! Talking to your local lenders and learning more about each option (a HELOC and Cash-Out Refinance) will help you understand the differences in each process and decided which type of loan could be best for you and your exact scenario. Of course, these two options work only if a) you currently own your primary residence (for HELOC or Cash-Out) or a rental property (Cash-Out option only) ; and b) there’s capital (equity) in the property. For example: if your primary residence (house) is worth $200,000 and you only owe $100,000 on it, you could apply for a HELOC and take out a $50,000 loan against your equity. 2: Lease-Option Another route is a lease-option, also known as option to buy. In this situation, you would rent the property, but sign an “option to buy” at a later date for an agreed-upon price. This legally binding path to property ownership might take a little longer, but is still a viable option if you have a small amount of funds. 3: Seller Financing If your credit is lower, but you have access to some cash, seller financing could be a great option for you. Seller financing is similar to getting a loan through a bank — except you agree to the payback and terms directly with the seller of the property you are trying to buy. This type of loan should still include a repayment schedule, interest rate, and consequences, should either party default on their agreement. Since you are communicating and negotiating the terms of the loan with the seller, you can often negotiate a better interest rate and/or better terms than you might be able to get with a traditional bank loan (especially if your credit is lower). Often, these agreements include a medium to significant down payment (sometimes higher than traditional mortgages) to show the seller you are serious and have "skin in the game". Many of these agreements also involve the seller holding on to the deed until the buyer has

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completed all the payments. I strongly recommended that you consult with a CPA/tax attorney and real estate attorney before beginning or entering any real estate contract to buy via seller financing. I suggest having your attorney draw up the paperwork for you to ensure all bases are covered. Side Note: this is a strategy that I personally used to purchase a multifamily property. You can structure seller financing transactions in a way that makes them a win-win for both buyer and seller! Whether it's a residential purchase or a larger multi- family purchase, you can structure a seller financing offer. 4: House Hacking "House Hacking" is another great way to get started when using your own money to begin your real estate portfolio! Essentially house hacking is where a buyer purchases a property with the intent to reside there as their primary residence, but rents out a portion of the property to help cover the mortgage. One example would be to buy a larger home than you need, like buying a 4 bedroom/2 bath house, and then renting out one of the bedrooms to a long term tenant. You could also rent out a bedroom as a shared space for a nightly rental to bring in extra income each month, but not have a steady, full-time tenant. I have personally done this strategy! It can be a great way to reduce your monthly mortgage expense, or eliminate it altogether. Another way to do this strategy is to buy a duplex (or up to a four-plex): you live in one side of the duplex (or in one of the four units) and rent out the other unit(s)! This scenario would provide you with more privacy as you would be renting out an entirely separate unit (not sharing your current living space). Be sure to consult your CPA and attorney before "house hacking" to make sure you have everything in place that's needed to protect yourself legally in these situations and the proper insurance as well. Educate yourself on the pros and cons of this strategy before jumping into it!

Investing Your Retirement Funds

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An option that may or may not work for you is investing some of your retirement funds. Be cautious of your age, and amount of funds you have. The closer you are to retirement, the harder this strategy may be to implement because there might not be enough time for the rental income to pay off the mortgages. The younger you are, you may not have enough funds put back into your retirement funds to take advantage of. They say that the so-called “sweet spot,” age-wise, to execute this strategy is beginning around age 35 to 40. This is because people this age have theoretically been paying into a retirement account for about a decade and might have a fair amount to spend. Also, there’s time to get a good return. Perhaps the mortgage will be paid off in 10 years; after that, the net income after operating costs is all yours. Your retirement account can be used for purchasing and maintaining properties as well as collecting rent. However, none of that money can go directly to you until you’ve reached the age when you can start withdrawing money out of the account. (Well, you technically can withdraw in many cases, but if you’re younger than the legally allowed age for withdrawal, there might be a significant penalty. This could mean losing thousands of dollars, depending on how much you take out.) This is definitely a long- term play and investment strategy you should consider. Self-Directed IRAs (SDIRA) are traditional or Roth IRAs (individual retirement accounts) that allow you to invest beyond the usual mutual funds, stocks, etc. With a SDIRA, you can invest in precious metals, tax lien certificates, and — most importantly, for our purposes here — real estate. When you use your IRA to buy real estate, there are some important things to keep in mind. First, you’re required to report the value of your investment to your IRA custodian every year. Also, the fee structure can be complicated, so you need to

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understand what you’ll owe and how that relates to your overall profit. Also, your investment needs to bring in enough money to pay for both regular maintenance on the property and any expenses that come up with the property without you having to add cash to "float" it. The major benefit of using an SDIRA for your real estate investments comes down to taxes. With a traditional IRA, it’s tax-deferred income, but with a Roth IRA, your gains are tax- free, and the money will also be tax-free when you ultimately withdraw it. If you go this route, you can move funds around from multiple projects without affecting your taxes. ( Keep in mind that tax and another financial laws can change at any time, so make sure you keep on top of any changes, and make any adjustments, as needed. As always, consult your local CPA and tax attorney! ) One tax downside is that if your property has a net loss, you don’t get the tax breaks other investors get. You also can’t claim depreciation. Another advantage of real estate here over traditional retirement accounts is the return. Real estate can net you perhaps an 18-20% return over 30 years, whereas the more common accounts, IRAs, 401(k)s, etc., might only get you 3-6%. Not only that, but you can use compounding to your advantage. If you keep investing your money for the first 20 years, you can leave it for the last 10 and just let it grow. Doesn’t doing almost nothing while still making plenty of money sound great? As with any investment, there are risks to using an SDIRA. You might make a bad decision or get scammed, which is so common the SEC has an investor alert about the scamming risk for SD- IRAs.

Other risks include not having enough diversity in your

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investments (it’s hard when you have limited funds) and potentially not being able to access the money — even once you’re retired, due to liquidity issues. This means you might not be able to take out the required minimum distributions. Again, this is why diversification is important; you need to have enough cash to meet all the requirements. Speaking of “following the rules,” it’s vital you know them all. If you do something wrong, you might accidentally disqualify the IRA, which means you’d owe taxes. This includes not purchasing property for yourself your immediate family members. (You can’t buy property from them or sell property to them, either), but there are many other more nuanced rules, as well. Be sure to consult your CPA and SDIRA Custodian to stay up to date on all laws, rules, and guidelines.

TAX BENEFITS FOR REAL ESTATES INVESTORS

Because both federal change and state local taxes can vary, there’s no specific guidance I can give about that here. However, please understand that the tax ramifications of any kind of real estate investing will depend on your particular location and circumstances as well as annual changes in the tax code. I strongly recommended that you consult with a CPA or tax attorney before beginning any real estate transaction or investment. With that said, at the time that I write this book, there are some general tax-related benefits for real estate investors that I want you to know about. The first benefit has to do with all the deductions real estate investors can get: mortgage interest; business expenses, such as property management, office, mileage, travel, educational events, etc.; repairs; and improvements made that increase your property’s value. All of these can be immediately deducted, with

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the exception of improvements, which are depreciated over time.

Depreciation of the property itself, regardless of any work done, is also a tax deduction, and it’s done over the course of time. Both commercial and residential properties can be depreciated. Commercial properties depreciate over a longer time than residential properties (currently 39 years for commercial versus 27.5 years for residential). Something to take note of, the land on which the property resides never depreciates. If you rent out a property, sometimes depreciation can get you a phantom gain. Here, on paper, the numbers look like a loss; however, because of the depreciation amount, you actually come out ahead. A tax attorney or CPA can help you figure out exact numbers for your situation and can explain in further detail how depreciation can help you in your real estate investing endeavors.

1031 Exchange

Another tax benefit is the 1031 exchange, which allows you to put off paying capital gains taxes if you use your profit from a real estate sale to buy another property. This makes your income essentially tax-free, and you can put all your profits toward the next property, which is called trading up. A 1031 exchange covers only business or investment properties. In general, vacation or second homes don’t qualify, but you should check with a tax expert to see if there are any exceptions, especially when it comes to the usage test. There are three specific requirements to qualify for a 1031 exchange, and you must meet all of them: • The like-kind exchange. The property you buy must be similar to the one you sold. The purchase price of the new property must be the same as, or more than, the one you

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sold. There’s no switching from commercial to residential or vice versa; however, you can often exchange property and land. • Time restrictions. You must officially record identifying a new property within 45 days of selling your old one. There are different ways to identify replacement properties: 1. Find three properties, not worrying about their fair market value. 2. Identify as many properties as you can, as long as their aggregate fair market value is less than 200% that of the sold property on the date of the transfer. 3. If the above two rules are exceeded, you can buy 95% of the aggregate fair market value of the identified properties. You also have to close on the new property within 180 days of the previous property’s sale. • A qualified intermediary. Not only can you not be directly responsible for the transactions or money, your intermediary must be someone with whom you haven’t worked for at least two years. Let’s use this example from a March 2019 interview that “The Motley Fool” conducted with Thomas Castelli: Let’s say you have a property you bought for $100,000. Ten years pass, and now it’s worth $150,000. You have a $50,000 capital gain. Break it up in between capital gain and depreciation recapture however you want. You’re still going to have to pay tax on that $50,000. So, when you pay tax on that $50,000 of capital

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gains, you’re going to have less money you can reinvest. What a 1031 allows you to do is invest that entire amount so you’re not paying the taxes today, and you can purchase a larger property. You could continually purchase larger and larger properties and continue to use the 1031 exchange pretty much forever. And if you really wanted to — I’m just going to be honest, as it’s easier said than done — you can eventually leave the property to your heirs and they’ll receive that property at the fair market value on the date of your death by eliminating all of this capital gains depreciation recapture that you should have paid during your lifetime. In theory, you can just keep purchasing larger and larger properties, making more and more cashflow, but never actually paying any taxes on that property. In the interview, Castelli also talked about opportunity funds, a new way to possibly put off or completely eliminate capital gains taxes. Opportunity funds are a way to invest in opportunity zones, which low-income communities’ governors have identified, and the Treasury has approved. The funds come with tax incentives, including the ability to defer capital gains on a variety of capital assets. These include not just real estate, but also stocks, bonds, and more. A CPA can give you all the specifics. The timeline has the same 180 rollover as the 1031 exchange, but you’re only required to roll over the capital gain, which means you’re free to do what you want with the money you invested.

Castelli gave this rundown of the numbers:

If you hold that capital gain in the fund for five years, you’re going to receive a 10% stepped-up basis in that gain. Let’s just say you have a $100,000 capital gain, and in five years, you receive the 10% step-up; you’re only going to pay tax on $90,000 of that

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capital gain. If you hold it for another two years for a total of seven years, it’s going to step up [an additional] 5% for a total of 15%, and you only pay tax on $85,000 of that gain. Now, if you hold that investment in the fund for 10 years, your investment in the actual fund itself will be tax-exempt. Just, say, that $100,000 you put into the fund; 10 years from now, it’s worth $150,000. That $50,000 capital gain is completely exempt from tax. Now, this is a little longer-term play. You have to keep your money in there for at least five years to see any benefit from it. I think there’s over $7 trillion or some crazy number of appreciated gains in the United States. So all of those appreciated gains are technically eligible for opportunity funds, and I think the background behind this is they want to take those appreciated assets and move them into low-income communities that need renovation and raise the status of those communities and opportunity zones. Opportunity funds are the way to do that. Castelli pointed out one important aspect of opportunity funds for investors to keep in mind: Because of the requirements to have an opportunity fund… You have to substantially improve these assets, which means doubling the property’s basis. Essentially, it’s the building’s basis, but just think about it, I guess for this purpose, as the purchase price. You have to add as much as the purchase price basically in capital improvements, so it’s substantial. Or you have to develop the property from the ground up and you have to hold it for 10 years.

RENTAL TAX SPECIFICS

Rental property owners are open to a variety of benefits, which I’ve listed below. You’ll notice that several are the same as for other real estate investments.

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Also, as with all properties, if you sell within a year of buying, you’ll be taxed at your income rate. If you hold on to a property for a year or more, as is usually the case for rental properties, you’ll deal with capital gains tax, which is a lower rate. Your overall tax deductions can depend on what type of investment business you have (sole proprietorship, partnership, or corporate entity). And, as always, do your research to make sure you’re up-to-date on all the latest tax laws, as these can, and do, change. Consult with your tax attorney and CPA!

Rental property tax benefits:

• home office, office supplies, computer software • mileage • travel • meals (50%, as long as you’re having a business meeting while eating) • mortgage, unsecured loan, and credit card interest • loan origination fees or points (they’re considered kinds of interest) • utilities, trash, and recycling

• property taxes • licensing fees • occupancy taxes

• insurance, including liability, hazard, fire, sewer backup, flood, and loss of income (talk to a tax professional if you have an umbrella liability policy or a landlord liability policy) • maintenance, repairs, improvements, and cleaning • advertising • commissions to real estate agents or property managers who find tenants and renew leases (this is considered part

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of marketing, not property management) • property management fees, salaries, and benefits (if you manage yourself and your business is an LLC or corporation, you may be able to be employed and have your salary be deductible) • homeowners’ association fees (HOAs), as well as whatever HOA requires, such as specific “For Rent” signs • professional and legal fees, including bookkeeping, filing taxes, and all legal work • any losses incurred up to $25,000 per year; anything over that can be carried over to the next year. Note that your tax savings will be less than you lost • Social Security (FICA) or self-employment taxes (the benefits vary, but can range from about 7.5% to 15.3% of your profit) • second/vacation homes rented out for at least two weeks per year might allow you to write off advertising and rental commission and prorate other expenses • some states have historic tax credits that include both the rental operation and/or any renovations • incentives from your state or locality to invest in lower- income areas You’re also required to take a deduction for depreciation. Just know that when you sell a rental property, you’re subject to depreciation recapture. Any gain that has to do with depreciation is taxed at 25% (as opposed to 20% for regular capital gain). The depreciation-related gain is also called unrecaptured section 1250 gain. One way to mitigate this is to always keep track of passive activity losses. While they may not be deductible while you own the property, they are when you sell it, which means the amount 21

you’ll owe will be less.

By the way, if you’re thinking, “Well, I just won’t claim depreciation, then,” I’m sorry to tell you that this simply won’t work. The IRS states that the recapture’s calculation is based on “allowed or allowable” depreciation, meaning that even if you didn’t claim it, you’ll still have to pay it. You might as well get the deduction while you can, and perhaps consider setting it aside for when you do end up selling the property.

ALL ABOUT CREDIT SCORES

As I briefly mentioned above, credit scores can play an important role in getting financing and the rates you’ll need/want to pay. I want to talk in detail about what makes up a credit score so you’ll understand more about what you need to do, should you want to improve it. First, your score is a number that tells lenders how likely you are to pay back the money. When you have a higher score, you get better rates, which leads to long-term savings and more money in your pocket. Credit scores are often based on the FICO scoring model. They can range from 300 to 850:

• Bad credit: 300-600 • Poor credit: 600-649 • Fair credit: 650-699 • Good credit: 700-749 • Excellent credit: 750-850

The determining factors and how much weight they carry vary between credit agencies (TransUnion, Experian, and Equifax). However, the following five are the major contributors to your

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score:

• Payment history: 35% • Outstanding balances: 30% • Length of credit history: 15%

• Types of accounts: 10% • Credit inquiries: 10%

By knowing your credit score, you’ll have a clearer picture of your investment strategy. If your score is high enough, you might be able to get a traditional loan and help with down payments. If your score is lower than you’d like, take a look at the determining factors and see where you can improve — making on-time payments should clearly be a priority. You can also consider paying down balances as you’re able, and not opening up a bunch of new credit cards. As mentioned above, I suggest talking to a local mortgage lender and have them analyze your credit score. They may have easy and simple suggestions to help you boost your score quickly!!

BEWARE OF SCAMS

With so many people out there looking to make money in real estate, it’s pretty much expected that there will be people out there ready to take advantage. The two main types of scams to watch out for are seminar scams and lending scams. Seminar scams can give some truly helpful tips, but it’s always used as a way to gain people’s trust. Once they have grabbed your attention and have the trust, they’ll offer “limited-time” investment properties or expensive classes. When people fall for the trick and buy a property too quickly, they often find that it’s got a lot of issues and is quite likely a money pit. To make things even worse, people who get taken

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in by scammers often sign agreements without reading them through. These documents often include a section that keeps the scammed people from taking legal action against the scammers. Signing up for classes can be negative, too. Why? Because people often end up spending thousands of dollars for little to no new information, when that money (and their time) could’ve gone toward their future investments. So how do you find genuinely helpful seminars? (Yes, they do exist.) Do your research! Look up the organization, the presenter, the properties, and the courses. You can also start by looking up certified experts and see if they offer any educational opportunities. There are also a lot of free and low cost coaching programs that teach you what you need to know to get started! Lending scams are another common scam in real estate. It’s a fairly easy type of scam for real estate investors to fall into because often they’re looking for alternative financing (i.e., private lenders) that doesn’t have the same qualifications required by traditional mortgages. I personally know someone who was scammed. Take it from me, these scammers DO exist! This kind of financing often has a requirement to pay back the money more quickly and tends to have higher interest rates than mortgages. Those things alone don’t mean they’re a scam, though. The problem is that lenders don’t have to be licensed to hand out money, so it can be a bit tricky to make sure the lender’s legit. So, how do you make sure the lender you’re working for is on the up-and-up? First, you find the lender through one of the following ways: • Through a certified real estate investing website • Through referrals from people in your network who’ve 24

personally worked with the lender

Second, you should ask the following questions (and if the answer to any is “yes,” it’s probably a red flag, pointing to a scam): • Does the lender seem to know details about investing and lending, including the correct jargon? • Is there a major upfront fee? • Does the lender seem a little too eager to give you the money? In other words, do they skip asking you essential questions and get right down to the “money talk?” Be aware and talk to local investors/mentors before applying for a loan with a company you have never heard of before! This can help you lower (but not eliminate) your risk of being scammed. HOMEWORK: **Take a few minutes to write down your favorite three financing options from above. Which 3 strategies do you think will work best for you?

1. ___________________ 2. ___________________ 3. ___________________

Now, take some time to re-read those three sections and take the necessary steps to learn more about the 3 strategies you have chosen. YouTube.com is a great, free tool that has a lot of educational videos made by successful Real Estate investors. I suggest you watch a few videos on the strategies you have chosen to continue to learn more about the financing option(s) you want to embark on! **Do you know what your credit score is?? If not, this is the next step to take!

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1. Talk with a local lender (preferably one that comes recommended from a local real estate investor or Realtor®) and figure out what your score is and ways to improve it quickly! **Do you have a good CPA that specialized in Real Estate? If not, start doing your research TODAY and find one who you like and trust! Make a list of local CPA's (preferably ones that come recommended from a local real estate investor or Realtor®) and reach out to each of them to learn more about their experience as a CPA and their knowledge of investing in Real Estate.

1. ___________________ 2. ___________________ 3. ___________________

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