8 Creative Ways to Fund a Real Estate Investing Startup

If you're considering a real estate investing startup, you may be wondering where you can get the capital to fund your first deal. Read below to find out about some of the many options available to you.

1. Conventional Loan

The most frequent type of mortgage is a conventional loan. You make a down payment, and the bank gives you the rest of the money in exchange for a lien on the property secured by a mortgage.

Investors who put down at least a 20% payment are not required to carry private mortgage insurance (PMI). PMI is a form of mortgage insurance that you may be required to pay for if you have a regular loan. PMI protects the lender if you stop making payments on your loan.

Not every real estate investing startup has the capital to go this route for their first deal.

2. Federal Housing Authority Loans

The Federal Housing Authority loan is a government-sponsored loan that encourages individuals to buy houses by allowing borrowers to make a down payment of 3.5%.

Because the FHA assumes some of the financial risks by ensuring the cost of the loan if the borrower fails to make payments, more borrowers can qualify for an FHA loan than a standard loan, and the lender can offer a competitive interest rate.

FHA loans come with some drawbacks for funding your real estate investing startup:

3. Private Lenders

A private lender is a person or entity that uses its own money to finance investments such as real estate and earns interest payments on the loan. Private lenders operate independently of banks or other financial institutions, and they deal directly with the borrower.

Here are some tips for finding private money lenders:

4. Venture Capital

Look for venture capital, aka angel investors. A real estate angel investor may help you finance the purchase of a property.

If an angel investor has faith in the proposed investment property's chances of success, they will supply the money required to finalize the transaction. Sometimes, angel investors will join forces to form angel groups to participate in more significant transactions.

Where can you find real estate angel investors?

Most people who have secured private investor angel capital claim that networking is the most effective method for locating real estate angel investors.

You'll need a polished presentation to approach potential investors. It doesn't matter how excellent you are or how helpful your services are if you can't communicate them effectively through a good pitch. A successful and effective sales pitch demonstrates your enthusiasm, proves that you know what you're doing, and answers questions. Practice your presentation to improve your public speaking and sales skills so that when the opportunity arises, you're prepared.

5. Crowdfunding A Real Estate Investing Startup

Real estate crowdfunding is a relatively new approach to investing in real estate.

Real estate investment platforms (also known as crowdfunding sites) link individual investors with real estate developers and other real estate professionals who want exposure to the sector without dealing with buying, funding, and managing properties.

Here is a list of real estate crowdfunding sites that may be suitable for your needs:

6. Hard Money

Hard money is similar to private capital, but it comes from a hard-money lender instead of a person. The term "hard money" is appropriate because the lenders secure the loan using the hard asset (the property).

Individuals use hard-money, short-term loans to purchase a property they intend on renovating and re-selling.

Typically, you'll get hard money to cover 70–80% of the property's purchase price before rehabilitation. So the lenders must be confident that the property is worth more than the loan and their cost to sell it if you default.

Hard-money lenders usually charge high-interest rates and include other expenses such as loan origination fees.

7. Home Equity Line of Credit (HELOC)

If you already own a house and have some equity tied up in it, you may use a home equity line of credit or HELOC.

Let's assume that you've spent ten years in your primary home paying down the mortgage and reaping the benefits of appreciation.

Your home appraises for $300,000, and your mortgage payoff amount is $150,000. Your equity in the property is $150,00 ($300,00 appraisal - $150,000 mortgage payoff).

You may use a HELOC to borrow against the equity in your home and use the $150,000 to purchase an investment property.

8. Fund Your Real Estate Investing Startup With a Self-Directed IRA

Many of our clients invest in real estate through their Self-Directed IRAs because there are several advantages, tax perks, and little-known secrets that only real estate investors with a Self-Directed IRA can utilize.

Do you want to learn more about Self-Directed IRAs and how they help you earn more from your real estate investment? Read our comprehensive guide on Self-Directed IRAs.

Critical Takeaways For Funding Your Real Estate Investing Startup

Royal Legal Solutions is here to help you along your real estate investing journey.

Real Estate Market Post-Covid Outlook 2022

In this article:

This is a follow-up article to one we published earlier this year: Real Estate Markets & Coronavirus: Construction & Home Buying In a Post-Pandemic World.

The real estate market constantly changes. One factor that exacerbated the volatility of the market was the COVID-19 pandemic. We saw unprecedented changes during the opening month of the pandemic:

The rebound continued, and home sales and prices have hovered around historically high rates.

The trends will not continue in 2022. The world is shifting back to normalcy, and the real estate market has adjusted accordingly. As a real estate investor, your livelihood relies on your foresight and ability to capitalize on the evolving market.

What real estate trends will you expect to see in the final months of 2021 and into 2022? Below we outline what's likely to occur and the influences that lead us to our predictions.

Real Estate Market Influencers

What causes a change in the real estate market?

As a real estate investor, you must know the fundamental principles that drive change in the housing market. Once you understand the principles, you will identify trends and adjust your investment strategy to match those trends.

People have an impact on the real estate market.

The demographic makeup of the United States affects the housing market. You can use demographic data to answer questions like:

For instance, The National Association of Realtors released a trends report that identified Millennials as the largest share of home buyers. Millennials aged 22 to 40 who are in their peak buying years will migrate out of cities in favor of suburban areas. The ability to work from home, growing family sizes, and the desire to have a yard have driven this suburban migration.

Money makes the world go round, and this is true for real estate markets as well.

Housing markets generally reflect the overall health of the economy. Loss of employment displaced people and work from home opportunities contribute to an increasingly mobile population. As a result, short-term rentals exploded in popularity because of their flexibility.

Read more here about how short-term rentals are gaining in popularity and make for excellent real estate investments. If you maximize your profits and cash flow, take a look at our strategy guide for real estate investors.

Interest Rates impact a buyer's ability to purchase a home.

Bankrate's current mortgage interest rates as of October 20, 2021, are:

The increase represents a three-month upward trend from July when rates were 3.04%.

As mortgage interest rates increase, it becomes more expensive to secure a mortgage which lowers demand and prices in the housing market.

On the contrary, it is cheaper to get a mortgage when mortgage rates drop, which increases demand and price in the real estate market.

The Mortgage Bankers Association forecasts a rate increase to 4% for a 30-year fixed mortgage rate in 2022. However, even with a higher interest rate, the MBA predicts the growth of mortgages to buy a home.

Legislation influences the real estate market.

The government enacts policies that have short-term and long-term ripples in the housing market. Either state or federal governments may provide homebuyers with:

Be aware of these mortgage policies to stay up to date with the factors impacting the market.

A central government policy that will affect the housing market in 2022 is the end of the moratorium on evictions. On June 24, the Biden administration extended the moratorium until July 31, 2021.

People had until September 30, 2021, to request a forbearance. For some mortgage holders, there is an additional three months of protection. For now, the only properties moving into foreclosure are vacant or abandoned properties. But that is set to change.

Why Does This Matter To You As A Real Estate Investor?

If a foreclosure started this minute, it would not resolve until mid-2022. There is a backlog of foreclosure homes that needs addressing before a current foreclosure can process.

As a result, there will be a wave of foreclosed single-family homes well into 2022. The foreclosures create a buying opportunity in local housing markets if you can secure funding or have cash on hand to buy once the backlogged inventory enters the market.

Are you ready to take control of your financial future with real estate investing? If so, read our beginner's guide to real estate investing for incredible tips.

Three Real Estate Market Predictions For 2022

  1. Single-family homes will appreciate because of the principle of supply and demand.
    1. There is a shortage of 5.2 million new homes in the US and indicating a low supply.
    2. Homes perform multiple duties: office, home, gym.
    3. There is increased demand as Millennials are in their prime home-buying years.
  2. Buying a home will be difficult.
    1. Construction supply chain issues are contributing to an affordable housing shortage.
    2. New construction homes cost, on average, $298,432.
    3. This price puts new construction homes out of reach for most buyers.
    4. The mortgage rate will increase to 4%, making it more expensive to buy a home.
  3. More people will have to live in rentals.
    1. There is a housing shortage.
    2. Homes are more expensive and unaffordable.
    3. The trend towards renting is growing and will continue to grow.
    4. Rents are increasing and will continue to increase.

Key Takeaways

Although the housing market constantly changes, identifying real estate trends maximizes your investment earning potential. Currently, the market favors sellers--demand is high, and prices for homes are even higher. Millennials are moving out of cities and into suburbs, looking for a house and office combo that suits their remote working needs. Your knowledge of these trends will result in smarter investment decisions and a higher return on investment.

Royal Legal Solutions keeps our clients informed of real estate investing trends. In addition to providing valuable insights for structuring a real estate investing business, we guide clients through the process of growing it in a scalable and easily manageable way. To find out if you could benefit from our services, take our financial freedom quiz. 

Offshore Holdings Ethics Debate Sparked Following Leak of Pandora Papers

Beginning on October 3rd, 2021, a document dump dubbed the Pandora Papers was released involving nearly 12 million pieces of evidence by the International Consortium of Investigative Journalists (ICIJ). More than 600 journalists from 150 news outlets contributed to the investigation. Information contained therein exposed a global network of powerful financial interests and raised questions about the legitimacy of shell companies, offshore holdings, and anonymous ownership. 

While this wasn't exactly a bombshell revelation, it verified what many people had already come to realize. Yet, the Pandora Papers scandal has revealed something more significant than the known corruption happening in our world. It has brought to light the toxic attitude towards the general public held by those in the highest positions of power and influence. The publicity that the story has garnered has many investors wondering how they may be impacted by what could very likely be the criminal dealings of others.

As summarized by the ICIJ, "The Pandora Papers reveal the inner workings of a shadow economy that benefits the wealthy and well-connected at the expense of everyone else."

Highlights of Findings in the Pandora Papers

Records reveal covert dealings that implicate: 

Read the full exposé here.

Offshore Holdings and Their Potential Negative Outcomes

Loopholes in law enable people to legally avoid a portion of their taxes by moving their money, assets, or businesses to tax havens. Using a tax haven brings into question several ethical concerns. 

While it is not illegal to hold assets offshore and anonymously, the risk of abuse is an indication that oversight and regulation are necessary. There have been repeated calls for governments to make it harder to avoid tax or hide assets, particularly following previous leaks such as the Panama Papers from years ago.

It's no surprise that existing legislation has had little impact considering that those prominently taking advantage of offshore holdings are often the very people responsible for oversight.

Whose Names Did the Pandora Papers Reveal?

Among the extensive list of those implicated in the Pandora Papers includes the following political leaders and notable influencers:

View the complete list here.

Legitimate Reasons for Creating Offshore Holdings

It would be foolish to think that anyone who has offshore holdings is involved in nefarious activities. There are several legitimate reasons why a person may want to hold money and assets in different countries.

Scenario #1: Asset Protection Benefits

While you can accomplish asset protection goals with domestic tools, offshore banking offers you the luxury of simply moving your cash from a position of vulnerability and to one of security. In this case, you would be moving money overseas into a different jurisdiction rather than into an entity structure.

Scenario #2: Guarding Against Unstable Governments

Here you would be dealing with a sovereign nation with its laws, each with advantages and drawbacks. Those nations with reputations for being tax havens have implemented legislation to prevent blatant abuse of their banking systems. Such laws are generally designed as a prevention to money laundering and should not pose problems for investors.

The above scenarios illustrate valid reasons for having offshore holdings and should not be considered an exhaustive list. 

What Impact Will the Pandora Papers Have on the Future?

It remains uncertain what significant impact the Pandora Papers will have on those involved. History has shown that political fallout is minimal, if existing at all, and slow to occur. For example, the similar Panama Papers from 2016 only resulted in the conviction of a single US taxpayer so far.

Some news outlets speculate that the US will take a long hard look at its offshore banking regulations to ensure transparency. In turn, new reporting requirements are likely to be imposed on attorneys, financial advisors, and CPAs. 

Pandora Papers aside, we can be sure that changes in reporting are on the horizon. Sweeping tax reforms proposed by the Biden Administration would require all financial institutions to monitor deposits and withdrawals in accounts that have balances above $600 at any given time.

Whether the new tax proposal is adopted or not, we can deduce that tax reforms are a high priority for the current administration. That is why it is more critical than ever to ensure that your assets are protected and that your business structures are legally compliant.

How Are the Structures Used by Royal Legal Solutions Different?

Royal Legal Solutions allows investors to use offshore investing and tax havens to minimize liabilities in such a way that:

We encourage readers to take a closer look at other articles we have posted on this topic, such as:

Our current clients benefit from regular consultations with our legal and tax teams. For anyone else with questions or concerns about your holdings, we invite you to reach out.

Are You Deducting All the Business Travel Expenses You Qualify To?

Business travel expenses add up quickly and negatively impact your cash flow. Losing money to taxes and other unforeseen circumstances makes being a real estate investor demanding sometimes. Safeguarding your venture has to be one of your top priorities. Do you want to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.

For a self-employed real estate investor, tax laws can be confusing. Some IRS tax codes are straightforward; others are a little quirky.

In this article, we'll look at some business travel expenses and allowable deductions.

Opportunities for Useful Travel Tax Deductions

If you are a self-employed taxpayer and meet specific criteria, you can deduct most of your travel costs.

For example, you can deduct business travel expenses away from your home if the trip's primary purpose is business or business-related. Those expenses include, but are not limited to:

Maybe you hate to fly; you can also deduct for travel occurring via:

Even if you mix business with pleasure, you can still deduct the trip's expenses, provided it passes the "primary purpose" criteria.

Shrewd Business Travel Reimbursement Secrets

The "primary purpose" criteria mean that your trip's primary purpose must be business--it cannot be an undercover vacation. To make your case that your trip was a business trip and not for pleasure, you must provide evidence that you spent more time on the business than leisure.

That makes the number of business days as opposed to personal days incredibly important. One of the things in your favor as a self-employed taxpayer is that the days you spend traveling count as business days.

Here is a brief illustration of the "primary purpose" point:

Mr. Johnson is a self-employed taxpayer. He leaves for a business trip on Monday. Johnson inspects properties, draws up contracts, and closes deals on Tuesday, Wednesday, and Thursday.

Mr. Johnson relaxes and enjoys the city on Friday, Saturday, and Sunday before flying back on Monday. In total, Mr. Johnson was on an eight-day business trip.

Based on the illustration, Johnson spent five days on business:

Easy Tax Deductions: Travel Expenses' Surprise Rewards

You can creatively leverage the tax code in your favor. For example, you decided to take a business trip, and your non-employee spouse wants to come along. You cannot deduct the expenses attached to your spouse, but you can subtract the total of what you would have paid alone.

Another thing that the IRS allows exemptions for is meals as long as they are:

The most important thing to consider when deducting meals is a precise documentation of the meals:

Your thorough documentation is the evidence you need to justify a tax deduction.

The Truth About IRS Commuting Rules

You should know about IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits. In the guide, there is a section about working conditions fringe benefits. An applicable tax exemption is the business use of a company vehicle.

Mileage Deductions

You can deduct the total mileage driven in a tax year multiplied by the standard mileage rate of $0.56 (down 1.5 cents from 2020).

Another option is calculating an itemized list for vehicle expense which may include:

Just like for meals, your documentation must be thorough and accurate.

Commuting

Another IRS rule you should know is Topic No. 511 Business Travel Expenses, also called the "away-from-home rule."

Home for tax purposes is the tax home, not your actual home. The tax home for your business is the general area where you (the taxpayer) conducts business.

The IRS uses the term "away-from-home" to describe taxpayers who are not within commuting distance from home. If you work away from home for more than a typical workday and require sleep, the related costs are tax-deductible.

In contrast, if you work within commuting distance from home (and are away from home) but decide to sleep away from home--those costs will not be deductible.

However, if you do not follow the rules, everything is still deductible by you (the employer). The reimbursement will then be added to the employee's taxable wages and subjected to payroll withholdings and FICA.

Keep a Business Travel Expenses Log

An "accountable plan" requires the employee or business partner to provide justification and adequate proof of all expenses during job-related travel. This plan lets you (the employer) properly deduct these expenses (assuming you provided receipts!).

When reimbursements are made from the employer to the employee without an accountable plan, they are taxable. The employee will need to file a miscellaneous itemized deduction (Form 1040). These deductions will need to be made under Schedule A on the form and are subject to a 2% AGI nondeductible threshold.

As a result, the employee will not be able to deduct some or all of the expense. If the employee must file deductions for lodging and meals, they must be away from home for at least one night (per the away-from-home rule). Any travel that lasts longer than a year will likely be unable to be deducted.

As the employer, you can deduct business expenses that are "ordinary and necessary." These expenses include job-related travel and lodging expenses.

The Bottom Line, Simplified and Direct

  1. Keep thorough documentation.
  2. You can deduct business travel expenses from your tax responsibility.
  3. Mixing business and pleasure is fine, but only deduct business expenses.
  4. Traveling is a business expense.
  5. Business meals and staff appreciation meals are deductible
  6. Finally, make sure that you know the IRS rules for fringe benefits and business travel expenses.

Short-Term Rentals Are Gaining Popularity Making Them Excellent Investments

Short-term rentals are experiencing a big boom. Let's explore what's causing this trend, how long it could last, and how it may impact current regulations. Finally, we'll reflect on what this means for your real estate investing business. You might discover that short-term rentals are a lucrative fit for expanding your current real estate portfolio.

Why are tenants and travelers favoring short-term rentals?

It's undeniable that the rise and spread of Covid-19 affected nearly every aspect of life. Parents became home-school teachers overnight. Restaurants and entertainment venues faced restrictions like limitations on the number of guests and social distancing protocols. Businesses scrambled to remain operational while many others were permanently closed. Those that were able made significant adjustments, like transitioning to a work-from-home model for their staff.

The future felt uncertain, so short-term planning became an appropriate response to navigate the challenges we all faced. Long-term leases requiring a commitment often exceeding 24 months did not fit into this new paradigm of the unknown.

Loss of employment caused many people to be displaced and has led to a nomadic shift in the workforce. Further, this has become compounded by an increase in remote work opportunities. Short-term rentals began to gain popularity for the flexibility they offered.

Safety and availability are additional factors adding to the appeal of short-term rentals. They are considered safer than hotels in light of Covid-19. Hotels experience significantly more patrons in comparison, and they have also been used to house travelers during quarantine.

Short-term rentals provide the opportunity for intimate gatherings and help to foster a sense of normalcy in uncertain times when vacation options are limited. Even despite an ongoing pandemic, short-term rentals have continued to enjoy popularity gains.

Will short-term rentals continue to gain popularity?

Some events that occur in history have an effect that permanently reshapes our world, and Covid-19 is no exception.

As Covid-19 lingers on, the expectation is that the workforce will settle into remote positions for the long term. Flexibility remains key.

Also, as businesses realize the benefits of a remote workforce, including lower overhead, increased productivity, and higher morale, employees have been able to experience increased mobility. This freedom of mobility has lead to decentralized lifestyles that make short-term rentals ideal.

Travel may have waned during the pandemic, but industry titan AirBnb anticipates and is preparing for what they have deemed an "unprecedented travel rebound" in leisure, business, and international travel. With reopening efforts underway and Covid-19 restrictions becoming phased out, the future certainly looks bright.

In the meantime, people are more likely to drive than fly, travel more often to less populated areas, and plan for extended stays as businesses delay returning to the office.

The increased popularity of short-term rentals has led to an increase in supply available on the market. Investors are banking on this trend to become the standard. AirDNA presented data in their 2021 U.S. Short-Term Rental Outlook report that highlights increased market demand.

"In Q1 2021, the U.S. hit a record for new bookings each month leading up to April 2021 when demand (nights) surpassed 2019 levels for the first time since February 2020."

And ...

"In April 2021, occupancy for U.S. STRs reached 61.6%, the highest April occupancy level in industry history."

More short-term rentals mean more competition, but rest assured that investors have a range of options for promoting and booking their properties. There are currently over a dozen reputable platforms where you can list properties, including HomeToGo, FlipKey, and VRBO.

It certainly appears as if short-term rental popularity is here to stay.

What's happening with short-term rental regulations?

Local governments and municipalities around the country are reworking their short-term rental regulations to be more favorable for investors. Forecasters predict that these regulatory groups will make it more accessible for homeowners to operate short-term rentals.

Currently, the most stringent regulations are in place in major metropolitan cities. If considering an investment into short-term rentals, be sure to find out what, if any, regulations in your geographic area may apply.

Key takeaways for real estate investors interested in short-term rentals

So now you're wondering if a short-term rental property purchase would be a good opportunity for your real estate investment business.

Royal Legal Solutions will help you stay informed of these types of opportunities. But you must have your legal and financial business structures in place before you make significant investments.

We invite you to learn how to achieve bulletproof asset protection through our FREE, 5-part educational series for real estate investors. Request your access to the Royal Academy Asset Protection Vault today.

asset-protection-vault-access

Minimize Taxes through Cost Segregation

You want to protect your assets, and you want to protect your wealth. Cost segregation is a form of wealth protection, as discussed in the video below.

Cost segregation is a tax strategy available to the following:

This strategy creates an income tax benefit for you and generates increased cash flow.

In this article, we will answer the following questions you might have:

Like you want to protect your wealth, you want to protect your assets. Lawsuits can be catastrophic and painful, and insurance provides insufficient protection to you. Unfortunately, your equity in real estate is a lawsuit magnet--unless you're protected.

Do you want to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.

Your assets generate cash flow and are essential to your financial freedom. That's why understanding how to increase your income through cost segregation is so crucial. Continue reading more and learn about this effective tax strategy.

What is Cost Segregation?

You want to keep more of your money—cost segregation lets you do that. As Yonah Weiss says, "It's not about how much you make; it's about how much you keep."

Cost segregation benefits you by:

Real estate depreciates over time. As a result, the IRS enables owners of real estate investments to deduct an amount from their income every year before taxes are assessed. This deduction is called a depreciation expense.

You don't pay the depreciation expense out of pocket. Instead, you claim the fee and have less of a tax burden on your income. Cost segregation maximizes the amount of depreciation expense by accelerating the decline of your property's value.

How is Depreciation Calculated?

First, there are fundamental rules about calculating depreciation:

For example, you can calculate straight-line depreciation, which means you research and identify how long, in years, your asset will take to crumble completely. The number of years during which your property is in good enough condition to be used is called useful life.

Then, you take the amount you paid for your investment and divide it by the number of useful life years. Finally, you claim that amount ($ amount of investment # of useful life years) each year.

The IRS determines that the useful life for single and multifamily rentals is 27.5 years, and commercial properties last for 39 years.

Generally, when you buy a property, you purchase the building and the land underneath the building. Remember--land does not depreciate--so you can't just take the sales price of your property and divide it by the number of useful life years.

You have to separate your purchase price into two components:

Then you can divide the price of the building by the number of useful life years to determine your annual depreciation expense rate.

What is Accelerated Depreciation?

In general, the interior and exterior components of a building are classified as either commercial or residential. Commercial assets depreciate over 39 years, and residential properties depreciate over 27.5 years.

The IRS gives you different time frames for how long different things last. Just like you split the price of your building and land to calculate your depreciation expense, you can further split up the components of your building to take advantage of the tax code.

Remember that depreciation is calculated by (price useful life years). When the total lifetime of an item decreases, the annual depreciation rate increases. As you reclassify the IRS category in which your property belongs, you have the chance to claim a shorter useful life of the item.

Consequently, you accelerate the amount of expense in the early years of your ownership. In other words, your property is subject to accelerated depreciation. The higher the depreciation expense means that you have less taxable income and a smaller tax bill.

Here are the ways the IRS categorizes property and depreciation:

Key Takeaways about Cost Segregation

  1. Cost segregation saves you money on taxes by increasing the amount of depreciation expense you can claim.
  2. When you pay less to the IRS for taxes, you have an increased cash flow.
  3. That increased cash flow enables you to reinvest in your business and secure your financial future.

Determining which category your property falls into is not easy, and if you make a mistake, you may end up on the IRS' radar. That's why it's a good idea to get a cost segregation study from experienced professionals. Usually, it's a team of accountants, attorneys, and engineers who conduct the survey and determine where your property should be categorized.

Raising Rent without Risking Losing Valuable Tenants

Raising rent is a touchy subject. On July 31st, 2021, the eviction moratorium and rent freeze ended in the United States. The pandemic hurt the economy and made the subject of raising rent uncomfortable.

Good tenants are hard to come by. When we have good tenants, it's tough to raise the rent. After all, you want to keep them happy, and vacancies can be costly. However, if rental market rates increase and you don't raise the rent, you reduce your net income every year.

As real estate investors, we may need to raise rent to:

As the pandemic showed us, unexpected financial trouble can happen to anyone at any time. Want to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.

Rules of Raising Rent

Local landlord-tenant statutes govern the process of raising the rent. In general, you can increase the rent when:

Make sure that you know your state's laws. You can look them up here. Navigating the legalese of the statutes is frustrating.

A qualified real estate attorney understands the nuances of landlord-tenant law and can explain the rules as they apply to your specific investments.

Circumstances When Raising Rent is Not Allowed

The market sets the rent price, and as a savvy investor, you want to manage your investment successfully by keeping up with market trends. In 2021, the national median rent rose by more than 11 percent. However, there are times when you are not allowed to increase rent.

When you CANNOT raise rent:

It might be the case where you are within your rights to raise the rent, but the amount you can increase the lease may be controlled by:

Three Tips for Raising Rent Without Losing Tenants

What follows is good advice for raising rent without losing tenants. After all, a vacancy can be expensive. On average, tenant turnover will cost you $1,750 per month.

Here are the three tips about how to raise rents without losing tenants:

Every year, you should increase the rent a bit.

If you wait too long, you run the risk of letting the rent fall so far behind the market level that a raise to the average market level feels like a punishment or unreasonable. When that happens, the massive jump in price wrecks your tenant's budget.

That's a recipe for an unhappy tenant, and when your renter is sad, they are more likely to leave or enter into an adversarial relationship with you.

A better strategy is to raise the rent by a nominal amount each year. Typically, you can increase the rent from two to four percent per year, and the price will still be reasonable for your renters. Additionally, it will keep your investment property aligned with the market.

Regularly raising the rental price creates an expectation in your tenant. They come to expect the increase and prepare for the added cost of living.

To reiterate, raise rent reasonably.

Your tenants won't abandon you if you annually raise the rent by two to four percent. As you increase the percentage, your renters will start to weigh their options. Anything more than an eight percent increase will all but guarantee that you will lose your renters.

That's not to say that you should lose money on your investments, but a gradual increase in rent will keep your tenants happy and long term.

Soften the pain of a steep rent increase

Let's face it; sometimes, your capital expenditures are eating into your cash flow. Everything from your HVAC system to the roof is wearing out. At a minimum, you should be raising the rent to cover the cost of significant repairs.

Those extensive systems in the house don't cost anything month-to-month, so people sometimes forget about the cost. Then one day, the AC goes out, and you have to pay $3,500 to replace it. If the market is higher than your rent, you are losing money on the current value of your capital expenditures.

You might decide to increase rent to market levels immediately instead of incrementally. On average, people pay about $1400 rent per month in the United States. For illustrative purposes, your tenant pays $1200 in rent.

If they are a good tenant, offer them multiple options when it comes time to renew:

In this scenario, the loss of income offsets the price of lost money to turnover. A long-term tenant drives down your turnover rate, and you get a guaranteed return on investment.

Three Things You Should Know About Raising Rent

#1 The eviction moratorium and associated rent freezes are ending. The market has increased, and it's time to bring rent in level with the market. 

#2 Make sure that you intimately understand landlord-tenant statutes, local, state, and federal. 

#3 Raise rent the right way to avoid losing tenants. 

Openness and communication go a long way with your tenants. Whenever you give notice, remain professional and friendly. You have no reason to argue with your tenants, so stay firm. While a vacancy is time-consuming and costly, so is moving.

A Beginner's Guide to Getting Started with Real Estate Investing

You've decided to take the plunge and invest in real estate. We've put together this overview as a beginner's guide to real estate investing. Your main goal is to make your money work for you today to have increased cash in the future. The money you make in the future is called your profit, or return on investment.

That profit (or return) must be enough to cover the cost of:

Real estate investment is rewarding and can pave the way for your financial independence, but you need to understand the underlying factors that control your experience.

In this article we will cover the following topics:

Beginner's Guide to Real Estate: 4 Reasons to Invest in Real Estate

Real estate is a smart investment to build wealth because of the following factors:

Cash flow

Real estate investing generates consistent cash flow. Cash flow is the net amount of cash moving in and out of an investment. Cash received is inflow, and money spent is outflow.

The ability to generate consistent cash flow is an appealing feature of real estate investing. Some examples that generate positive cash flow:

Real estate investment is versatile and profitable. Are you ready to start your journey to financial independence? If so, check out our "7 Real Estate Investment Strategies" as the first step to establishing your real estate empire.

Long-term appreciation

The investment property makes money for you in two ways: rents from tenants and appreciation.

Appreciation occurs when the price of your property becomes more valuable. In the United States, the national appreciation average is about 3.5 percent per year. When the time comes to sell (also called divesting) the property, you earn a lump sum return on your investment.

The lump-sum payment from the sale coupled with the rental income over the life of your investment makes real estate investing a high-performing asset in your investment portfolio.

Diversification of investment portfolio

Real estate investing is an integral part of a balanced portfolio. The economic forces at play in the stock markets exist in a different market from real estate investing. As a result, the volatility of the stock market does not directly affect real estate investment.

When compared to stocks and bonds, real estate investing is:

The graph highlights the relative stability of real estate investments since the end of WW2.

Real estate is a limited physical asset. As a result, the property holds value by being scarce. As population increases and real estate availability decreases, land's value appreciates. Refer to the S&P/Case-Shiller U.S National Home Price Index to see the rise in the value of median home prices.

As you get ready to dive into the world of real estate investing, you will need to adjust your mindset. Read our "Four Ways To Develop A Real Estate Investing Mindset" as the first step in generating wealth from real estate investment.

Beginner's Guide to Real Estate: Tax Advantages of Real Estate Investing

Real estate investments can create tax advantages for you. The tax amount you pay is impacted by a variety of elements:

Accordingly, it’s important to discuss tax responsibility with your tax advisor for each of your investments.

In general, rental income and capital gains will be taxed eventually. However, you have the following tax benefits available to you as a real estate investor:

Beginner's Guide to Real Estate: Active v. Passive Investing

You have two options when real estate investing: active or passive.

Active real estate investment means that you directly own the real estate. The benefit of being an active investor is that you have more control over the property. The amount of power you wield also opens you up to more responsibility and risk. Active investments require time, effort, and expertise for continued success. Passive real estate investment means providing the capital (cash) and letting professional investors handle the money for you. Investors usually leverage a fund and let you have less responsibility. While passive investors surrender some control, they gain more flexibility via REITs, mutual funds, and various real estate opportunities. In addition, passive real estate investing requires less expertise, effort, and management.

Beginner's Guide to Real Estate: Asset Protection

No matter how you choose to invest in real estate, you will want to mitigate your risk. Are you ready to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.

Things You Should Know About Real Estate Investing

Now that we’ve covered the basics of real estate investing, you’re ready to progress to the next step. To recap, here are the major things to know about real estate investing as a beginner.

#1 Real estate investing is profitable and stable.

#2 There are tons of tax breaks for real estate investors.

#3 Active and Passive real estate investments are both viable options.

Real estate investing is hot right now. It might be the right time for you to jump in on the market. If so, read our guide, “How To Start Real Estate Investing in Your 30s”.

How to Avoid Getting Sued When You’re a Real Estate Investor

Getting sued is every real estate investor’s worst nightmare.

Running your own real estate business can be rewarding, but it’s also inherently risky. You put your money, time, and dreams on the line to make it a success, but sometimes things don’t go as planned.

Any number of things can happen, and it’s nearly impossible to prepare for all of them. Still, if your portfolio isn’t protected from some of the most common pitfalls, everything from your real estate assets to your personal belongings could be on the line. 

Getting sued can wipe out everything you’ve worked hard to create. So what can you do to protect your business from the inevitable lawsuit?

In this article, we lay out some basic asset protection tips: from getting flood insurance to setting up Series LLCs to more advanced incorporation strategies. It’s important to plan for the worst before it happens because almost every experienced real estate investor will -- at some point in their careers -- deal with some sort of legal issue.

Key Points About Basic Asset Protection

In this podcast with BiggerPockets, Royal Legal Solutions’ own Scott Smith outlined some of the most important steps you need to take in order to avoid getting sued.

Talk to Your Lawyer

This one may seem obvious, but one of the first and most important things that Scott says in the show is this: There’s “no one blanket piece of advice that applies to everybody… Everybody’s business is different. Everybody’s situation is different.” If you don’t invest your time and money into some sort of individual asset protection -- beyond reading an article on the internet -- you’re definitely not doing all you could to avoid a lawsuit. While we might be able to give you some tips that likely apply to your business, it’s still important to get a more personal look.

It’s Just Like Flood and Fire Insurance (If You Don’t Have Those, Get Them)

Obviously, floods don’t happen all the time. There’s no guarantee that your property will have a flood, even if it’s in a flood zone. Still, that danger exists -- and you likely have some form of insurance to protect against it (if you don’t, get it). The same thing is true for fire insurance: fires might happen, but there’s no guarantee. In case that they do, you know you want to be protected. Finally, lawsuits work the same way. A lawsuit might happen—or it might not—but you still want to be protected in the off-chance that it does.

When You Get Sued, You’re on Your Own

What happens if someone sues your LLC?

“You don’t really have any friends once you start getting sued,” Scott says in the podcast. When your friends and associates hear that you’re getting sued, it’s very likely that they’ll consult their attorneys for advice on what to do, and it’s very likely their attorneys will tell them to distance themselves from the situation as much as possible to avoid any additional scrutiny. 

More Strategies and Tips on How to Protect Your Assets

Avoid putting your properties in your own name. When it comes to asset protection, this is a big deal. In fact, Scott said it’s one of the first things he’ll ask real estate investors at conferences and business events. He puts it this way: “what rich people do is rich people don’t own things. What rich people do is they control things.” You don’t have to keep the property in your name, because that indicates ownership to any outsider who might be interested in pursuing a lawsuit just because they know that you have a lot of money.

Use a Series LLC to isolate your assets. This falls under a similar category as the point above. It’s possible to separate your real estate assets from your personal assets, creating an additional layer of security and making lawsuits very difficult. One way you can do this is by holding the properties in individual LLCs and then setting up those LLCs in one legal entity. This strategy is only specific to certain states, however, like Texas. You’ll have to do your due diligence to find out if it’s an option where you live. If it is, it offers an additional layer of protection and makes doing your taxes that much easier.

Use advanced strategies. When you’re setting up an LLC, you can actually put the name of a trust as the registered manager. Since the trust doesn’t have to be publicly filed with the state, every aspect of your business is essentially anonymous as long as you don’t attach your name to any of your properties or LLCs. 

Conclusion: How to Avoid Getting Sued When You’re a Real Estate Investor

Getting sued is probably one of the scariest things that can happen to a real estate investor. In this article, we laid out some basic strategies on how to avoid it.

One of the first things you should do is consult with your lawyer. While some of the strategies in this article are nearly universal, laws do vary from state to state, so it’s important to make sure the advice that you receive is personalized and actually applicable for your specific situation.

Beyond that, make sure that you have more than an umbrella insurance policy, don’t put your real estate assets under your own name, use a Series LLC to isolate your assets, and possibly even utilize some advanced strategies.

Want to make sure your real estate investing business is protected? Start with our investor quiz and we'll help you find ways to protect your assets.

‘Time Value’: The One Thing Real Estate Investors Always Forget 

The time value of money represents how much more valuable one dollar will be tomorrow than it is today. 

It’s a bit more complicated than that (as we’ll see), but for now just understand that real estate investing follows this same principle—and investors all too often forget it.

Thanks to inflation, prices today are lower than the prices will be tomorrow. If your retirement savings consists of a mattress stuffed with cash, you are losing value by hanging onto your money. 

Investing in real estate can help you maintain the value of your money over time and protect against inflation.

Understanding the Time Value of Money

The time value of money is a financial principle that states that if you have money now, it's worth more than that same amount in the future. This principle has to do with interest rates and inflation. By saving now, your funds can either grow over time, or you can hold them as cash to protect them.

Time Value of Money Formula

According to Rehab Financial, a private money lender, the time value of money formula is FV = PV(1 + r)ⁿ.

Here are the components of the time of money formula:

Factors Influencing Your Investment Decision

Formulas like the one from Rehab Financial can help you determine how much you must invest today to achieve a specific future amount. However, their accuracy may be affected by how much the market value fluctuates over time. Here’s how the value of money changes based on time: 

Factor #1: Inflation

In the U.S., the long-term inflation rate is roughly 3%. Because of inflation, $1 this year would only be equivalent to $0.97 next year. Inflation raises the price of goods, meaning you have to spend more money to get the things you need. When your savings do not grow at the same rate as inflation, you are actually losing the value of your money.

Factor #2: Risk

Risk directly correlates to the time value of money. If you receive the money today, then you will have that money and know it is there. If you put off receiving it until the future, you do not have that money and cannot use it for anything, nor do you know if you will receive it if something happens to prevent you from getting it. 

Factor #3: Reinvestment Potential

One key aspect of money is investment potential. Having money now means you can reinvest the money into something and potentially end up with more money in the future. If you wait to receive the money, you cannot invest it, and the amount will remain the same. Having $100 today means you could invest it and potentially have $200 by next year rather than just waiting to receive $100 next year.

Where there is potential for a return on your investment, it’s usually better to invest the money you have now at its greatest time value and allow it to grow exponentially for the future. 

Compounding and Discounting in the Time of Value of Money

With the time value of money, you can look at compounding and discounting to determine whether it is better to spend now or invest later. Do you want to wait for your money to grow or do you give up some of your money today for more tomorrow?

Compounding

Compound growth is when you invest money today, expecting it to increase at an interest rate. After it increases, the next increase is then based on the initial price and the first increase. If you buy a home for $100,000 and expect it to increase in value 3.5% a year, after one year, it would be worth $103,500. After two years, it would be worth $107,122. The $3,500 that it increased after the first year adds to the 3.5% increase. When an investment accrues value this way, it is called compounding. 

Discounting

Discounting is when you convert the value of something you’ll receive in the future to determine what it would be worth if you had it right now. It can be viewed as the inverse of compounding because you are figuring out how much a future value is worth today rather than how much a current value is worth in the future.

For example, if you were to receive $1,000 in a year and expected an inflation rate of 10%, that $1,000 is currently equivalent to $909.09. To plan accordingly, you would see what you can do with $909.09 today to find out what you can do with $1,000 next year.

Property Metrics has many formulas that can be used to calculate this, but these are concepts you'll want to master because they will pay off for years into your future.

What is an Example of the Time Value of Money?

Imagine that you had $500 to invest at 5% interest for 10 years as a real estate investor. You can figure out the amount of money you will have at the end of the 10 years if you move ahead with the investment.

If FV = 500(1 + 0.05)¹⁰=$814.45, then investing the money for 10 years results in an extra $314.45 at the end of the period.

Real Estate Investors Should Understand The Time Value of Money

Real estate can appreciate much faster than money invested since prices for goods can increase even in times of low inflation. You have to factor in your own income taxes when deciding whether to borrow money, use your own money, or do both. When you calculate the internal rate of return of your real estate investments, understanding the time value of money can help you determine if it’s a good time to invest your money in a property.

Are you looking for ways to protect your real estate investing business? Learn about how to keep your assets with our investor quiz.

Tax-Free Real Estate Investing: How To Get Started

Scott Smith, Royal Legal’s founder, and lead attorney, recently sat down with real estate investor J. Darrin Gross to discuss tax-free investing on Gross’s Commercial Real Estate Pro Network Podcast. 

The delightful discussion covered not only the possibilities of tax-free investing in real estate but also how real estate investors can protect their assets. You can click the link above to listen or read on to learn more. 

Tax-Free Investing vs. Tax-Deferred Investing

“Tax-free” investing is better thought of as “tax-deferred investing.” Whether you invest in a traditional 401(k) that taxes withdrawals or a Self-Directed Roth IRA, which taxes funds before use, the tax doesn’t just disappear. It’s a question of when the tax is paid.

You can accelerate the growth of your retirement account using either a Solo 401(k) or a Self-Directed IRA. In a nutshell, with tax-deferred real estate investing, you lend yourself money from your own Solo 401(k) that doesn’t have to be repaid until you retire.

How does this work in terms of W2 income?

Anyone with a W2 (employer) income can create their own 401(k) or IRA account. But with non-W2 income, one can take advantage of creating a Solo 401(k) that allows you to defer taxes.

What is a Solo 401(k)?

If you have non-W2 earnings and can demonstrate that you’re an “active” investor, you may qualify for a Solo 401(k). If you structure an entity properly and demonstrate that you are active in its operations, multiple advantages become available. You have to be able to deposit up to $50,000 annually and be in a position to borrow up to 50% of that balance without creating a taxable event. Royal Legal Solutions helps clients set up a Solo 401(k) to run themselves. 

What is the advantage of a Solo 401(k)?

The advantage is that you only have to pay it back by the time you retire. So, for example, you can take $50,000 and put it into your 401(k) tax-free and loan yourself $25,000 of that to invest in anything you want.

You still owe that money back to your 401(k), but you don’t need to pay it off until you retire. In the meantime, you’ve got $25,000 in tax-free money in your Solo 401(k) that you can invest immediately.

Does passive real estate qualify?

No, it’s not legal to set up a Solo 401(k) with passive income. But you can open up your own property management company. Doing this turns passive income into active income. 

Setting up a property management company for a Solo 401(k)

You can establish an S Corporation to be your property management company. As the sole employee of that S Corporation, you can then set up a Solo 401(k). There are a few inexpensive legal steps to this process, and Royal Legal Solutions can help set up a Solo 401(k) for you.  

Do I need to be a real estate professional to have a Solo 401(k)?

No, you just need to be earning active income. The income cannot be classified as passive. But passive income is easily converted into active income by setting up a real estate company, which can then be used to establish your Solo 401(k). The restrictions are light - you just have to be the sole employee of your own company to meet the conditions of a Solo 401(k).

Once you have set up the company, you can channel $50,000 per annum of non-W2 income into the company. That amount pays into the Solo 401(k) up to the $50,000 mark, and all of that is tax-free for now. 

The advantage of investing with pre-tax dollars instead of post-tax dollars can typically be a 20-30% bump, and that’s where the actual returns are. You get a pretty significant increase in your investment amount this way, without much risk.

Should I invest with a Self-Directed IRA?

Income from a Self-Directed IRA LLC is also tax-deferred, meaning real estate investments can be made tax-free. The tax is paid later instead of paying tax on the returns of a real estate investment. This allows investors to select the assets they want to invest in, except for “prohibited transactions,” such as collectibles and life insurance.

Tax-Deferred Investing: The Takeaway

Tax-deferred investing is important to real estate investors because it allows them the available funds to buy property from their own Solo 401(k) without paying back a loan to a bank or other financial institution. Essentially, you owe the money you’ve borrowed back to your retirement account, in effect turning yourself into your bank. The difference is that you are an active business, not a passive generator of income.

If you start with tax-deferred investing in your 30s and you don’t have to pay the loan you took from yourself back for another 35 years, your wealth curve will likely have been on an upper trajectory, making it easier to pay the loan back at retirement. Having money available makes a real difference to your ability to invest in real estate today for profit in the future. Unlike using a credit card, the debt here makes more money in the short term, which will pay down later debts more quickly.

Royal Legal Solutions: Helping You Grow Investments Tax-Free

Royal Legal Solutions has tax-saving strategies for everyday real estate investors. Royal Legal Solutions can help you form a legitimate strategy to protect assets.  If you are a real estate investor anywhere in the United States and want to learn more about tax-free investing and tax-deferred investments, start with our investor quiz, and we'll help! We are the one-stop shop for tax, legal, and business advice for real estate investors everywhere.  

Using Your C Corporation’s Tax Brackets To Reduce Your Tax Burden

Every real estate investor or business owner knows that taxes take up a big chunk of profit and earnings from investment income and capital gains. Understanding how the tax system and tax brackets work may help you reduce your tax burden and liabilities.

As a real estate investor, you may be able to minimize income taxes either by hiring family members or your C corporation. This article focuses on the possible tax benefits of outsourcing business contracts to a C corporation owned by you.

Interested in learning more? Check out our article, Using Your Family’s Tax Brackets To Reduce Your Tax Burden.

How the progressive tax brackets work

Progressive tax brackets start taxing the lowest amount of income at the lowest rate. The tax rate increases as income rises. Simply put, this means that you would fall in a higher tax rate bracket if you are a high earner; likewise, low-income earners pay at a lower rate.

Here’s a (hypothetical) example of how progressive tax brackets can work:

An annual income of $100,000 puts you in the 20% tax bracket. Note: The tax rates would be applied progressively—the first $15,000 will be taxed at 7.5%, the next $40,000 will be taxed at 15%, and the remaining $45,000 at 20%.

Using Your C Corp’s Tax Brackets

Similar to individual income taxes, C corporations have tax brackets. This is how it generally works:

  1. The first step is to set up two businesses. One would be set up either as a sole proprietorship, a partnership or an S corporation. This business would be your main real estate business, operating as a pass-through entity. The income you get from this business is taxed at your individual tax bracket. The second business you set up will be taxed as a C corporation.
  2. The next step is to hire your C corporation for tasks that can be justifiable and with payments that are reasonably within market rates. This can include things like property management, cleaning and maintenance or even digital marketing services.
  3. When you pay your C corporation for fulfilled and completed contracts, this counts as eligible expenses that can be deducted from your pass-through entity income. The goal is to transfer this income from your higher income tax bracket to a lower business tax rate. So if your individual tax bracket is at 40%, you can potentially transfer income from your pass-through entity real estate business to your C corporation, which can be taxed at a lower rate of say, 25% (for example).

Things to consider when using a C corporation to minimize taxes

Ordinarily, all of these money movements can be complicated, therefore it is important to keep constant records of all expenses, payments and transfer of income. All contracts and agreements should be documented appropriately. You may need an accountant to ensure this is done properly.

How to manage income from your C corporation

You are probably wondering how effective it would be to use a C corporation to manage and reduce your taxes and how to go about receiving your income from this business. Well, this is a valid concern and there are various ways to go about it, some more tax efficient than others.

In conclusion

If you're looking for ways to reduce taxes on your real estate business, you can explore the C corporation option. While this may require effort to execute, it could lead to potential savings for your business.

To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.

Using Your Family’s Tax Brackets To Reduce Your Tax Burden

Effectively managing income taxes as a real estate investor shouldn’t leave you feeling overwhelmed. If you understand how the tax system works, you can find ways to reduce your tax burdens and liabilities. 

A basic feature of our tax system is its progressive nature, which places individuals into different tax brackets based on gross income. 

You can minimize your tax burden by hiring family members, and here I’m going to show you how. First, let’s review the applicable taxes that business owners should know about. 

Types of employment taxes for family members

Bear in mind that when you hire family members, they have to be treated the same way as other employees. The employment taxes that may be applicable to your family members can include:

As we’ll see, when the family members hired to work for the business are children, you can be exempted from some taxes such as the FUTA and FICA. Sometimes, the income paid to minors may be totally tax-exempt.

How progressive tax brackets work

Generally, the federal income tax system is progressive. Tax rates are usually layered and sectioned into tax brackets such that the tax rate increases as income rises. Simply put, this means that you would fall in a higher tax rate bracket if you are a high earner, likewise, low-income earners pay at a lower rate. 

Here’s a (hypothetical) example of how progressive tax brackets can work:

If a taxpayer’s income for the year is $100,000, he or she falls in the 20% tax bracket. However, the tax rates would be applied progressively—the first $15,000 will be taxed at 7.5%, the next $40,000 will be taxed at 15%, and the remaining $45,000 at 20%. 

Reduce your tax burden by hiring family members

Now, if you have children or grandchildren in lower tax brackets, there are legitimate ways to leverage their tax brackets to reduce your tax burden. The money you pay them will (because of their bracket) be taxed at the lower rate while bringing your own taxable income level down.

Using the family tax bracket strategy requires that you first identify where it would be appropriate for the family member to be employed. Document the responsibilities that the family member would take on. This does not have to be complex, especially if the family member is not an adult. The roles they fill could be anything from administrative to managerial; even “personal assistant” is fine so long as you document and define the duties.

Since you’ll be transferring income taxes to a child or relative with lower tax rates, there are things to consider:

You should use a payroll company. Don’t do the payroll yourself. As with other business processes and documentations, it is important to keep records for tax purposes. 

Your family member/employee will report the earnings on their tax return. If your family member is a minor, you’ll be filing a tax return on his or her behalf. Wages paid to a child are exempt from payroll taxes if your business is either taxed as a sole proprietorship or a partnership in which the only owners are the parents.

Here’s some more good news … You stand to save even more on taxes if your family member is not currently using their standard deduction!

Final thoughts

Hiring your family members to work for your business can indeed be a win-win situation if done right. This can provide an avenue to keep more income within the family and reduce tax liabilities for your real estate (or other) business ventures.

To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.

When It Comes to Taxes, Is Managing Rental Properties a Business or an Investment?

Whether you are the landlord of a single-family rental or you own a share in a large apartment building, it’s essential to know how to classify this activity at tax time. 

Are you an investor or a business owner?

In this article, we’ll examine the distinction between the two and how qualifying as a business owner can save you money in deductions.

Rentals that qualify as a business

Your rental activity qualifies as a business under the law if you can prove your rentals are “for-profit” and that you work at this business “regularly and continuously.”  

Landlords can hire managers and contractors to do most of the work on their property, but they still must be engaged in running the rentals, according to the law. Also, if a rental unit is vacant, it doesn’t preclude you from qualifying as a business owner -- as long as you are marketing the space for rent.

Here are other factors the IRS uses to determine if your rental activity is a business:

Here are some other ways you can prove you are operating a business with your rental property:

The ‘three of five years’ test

If, as a landlord, you have earned a profit in three of the past five years, the IRS sees you as a business. If you cannot meet this requirement, you must pass the “behavior” test.

The behavior test

You can operate rentals at a loss every year and still qualify as a business owner if you meet the behavior test criteria. Here are the factors an IRS auditor will use in this case:

In order to pass the behavior test, you need to maintain excellent records, including a time log of all your real estate activities. You can establish your expertise through references, blogs, speeches, and podcasts.

Rentals that do not qualify as a business

Landlords often do not qualify as business owners when they do one or more of the following:

What you gain as a business owner versus an investor

For tax purposes, it’s always better for your rental activity to be a business rather than an investment. As a real estate business owner, you can deduct the following:

Landlords who meet the criteria of being business owners may qualify for the pass-through income tax deduction of up to 20% of their net rental income from 2018 through 2025.

This deduction—which is also called the Safe Harbor Rule—is part of the Tax Cuts and Jobs Act (TCJA), the tax reform package that became law in 2018. The deduction will end on January 1, 2026, unless Congress votes to extend it.

Use of the safe harbor rule is optional. To qualify for this deduction, a landlord must:

Landlords who use their rental property as their residence for more than 14 days during the year are not eligible for the Safe Harbor Rule. This requirement means that most short-term rental hosts may not apply for the deduction.

Finally, we cannot emphasize enough the importance of record-keeping as a landlord. Accurate, well-organized records will help you manage your rental property, prepare your financial statements, keep track of your expenses, prepare your tax returns, and support the items you report on your tax returns.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

Does Your Real Estate Business Need An Employer Identification Number (EIN)? 

Launching a new real estate business is an exciting and rewarding way to build your path to financial freedom. 

However, as with any business, you have to pay taxes (womp womp).

And a primary way that state and federal governments keep track of what you owe in taxes is with identification numbers.

One of the first questions you'll encounter when registering your business involves your Employer Identification Number (EIN). In this article, we'll discuss what an EIN is and help you decide if you need to apply for one.

Does Your Real Estate Business Need An Employer Identification Number (EIN)? What is an EIN?

An Employer Identification Number—abbreviated on forms as EIN—is a nine-digit number that the IRS assigns and uses to identify businesses and individuals for taxation. An EIN is also known as a Federal Tax Identification Number.

As an individual taxpayer, you identify yourself with your Social Security Number (SSN). However, as the owner of most business entities, you need an EIN to apply for your business license and file your tax returns.

That's right; we said "most" business entities. If your real estate business is a sole proprietorship or single-member LLC, you can use your SSN to file your taxes.

On the other hand, the IRS requires your business to have an EIN if you do any of the following:

However, even if the IRS does not require your business to have EIN, many investors apply for one anyway.

Why? As you can see from the above list, having an EIN allows you to make more business moves than you are able to make as a sole proprietor. Some banks will even refuse to allow you to establish a business account or apply for business loans or credit cards without an EIN.

Some investors also feel that using an EIN can make your real estate business look more professional in business dealings. In a competitive real estate environment, an EIN can show that you take your new business seriously.

Also, using an EIN allows you to keep your SSN more secure from identity theft. For example, identity thieves can use stolen SSNs to file fraudulent tax returns. All business EINs are considered public information, but if someone looks for credit information, your EIN will be the only identification number they will find.

Does Your Real Estate Business Need An Employer Identification Number (EIN)? Does a general partnership need an EIN?

Although your general partnership may appear to be a simple agreement between two or more business partners, the IRS sees it as a separate business entity. Therefore, all partnerships—including general and limited partnerships—must have a separate tax identification number.

This requirement remains true even if your partnership has no employees. In addition, all partners must report their profits and losses on a Schedule K-1 when they file their personal income taxes.

Does a sole proprietorship need an EIN?

If you have a sole proprietorship with no employees, you may be able to file your business income taxes along with your personal tax return. You will use your SSN as your business taxpayer ID on your tax forms.

However, an EIN for a sole proprietorship is needed when you do any of the following:

Does Your Real Estate Business Need An Employer Identification Number (EIN)? How do you obtain an EIN?

Fortunately, unlike many aspects of launching a new real estate business, applying for an EIN is easy, and it's free.

The quickest way to apply online, using the IRS EIN Assistant tool. The process takes less than 10 minutes, and you will receive your new number immediately upon completion.

If you'd rather go the old-school route, you can download Form SS-4 and send it by U.S. mail to the IRS. The processing time for an EIN application received by mail is four to five weeks, according to the IRS website. Please note: The IRS warns business owners to beware of fraudulent online services that offer to apply for an EIN for you.

What if you already have an EIN?

If you already have an EIN and your business goes through some standard changes, you may be able to keep your old EIN. For example, if you change your business name or move to a different address, you can continue to use the same EIN.

However, you'll need to apply for a new number if the ownership or structure of your real estate business changes down the line.

Dog Bites and Landlord Liability: Know Where You Stand

Making money as a landlord is hard. 

As a real estate investor, you have to deal with zoning, regulations, bookkeeping, advertising, online marketing, showings, no-shows, bounced checks, late payments, and the fun of fixing a broken toilet on Christmas eve. 

Keeping the money is even harder. 

You are constantly spending money on maintenance and repairs, expenses, insurance, mortgage payments, marketing, and more.

But as a real estate investor, you have probably taken all these costs into your investment strategy. There is one risk  too many landlords overlook, however: dog bite liability.

Unfortunately, if you are renting to tenants with dogs, you have a furry minefield of liabilities threatening your growing real estate investments. One dog bite lawsuit can wipe out all your hard-earned rental profits in the blink of an eye.

No matter how much you love dogs or how well you treat your tenants, a dog bite lawsuit against your tenant will almost certainly include you as the landlord. Pet ownership laws tell you your legal responsibility for your pets. These laws are complex and different in every state. 

As usual, we'll start with some education ...

dog bite liabilityLandlord Liability in Tenant Dog Bite Cases

Fortunately, in most cases, you (as the landlord) may not be DIRECTLY liable if your tenant’s dog bites someone. Just because you leased property to tenants with dogs is usually not enough to make you legally responsible for damages. But again, the landlord’s liability is different in each state and hard to predict.

As a real estate investor, you should know the three critical scenarios that affect your liability.

#1 Landlord Knows -  But Does Nothing

If a landlord has actual knowledge that his tenant is keeping a dangerous dog on the premises, some states will find him liable if he does not remove the dog to ensure the safety of others. The tricky part is that it is not the knowledge that makes the landlord liable. It is the fact that he knew and did nothing about it. 

Suppose the landlord has control over the property and knowingly allows a dangerous and vicious animal to be kept on the property. In that case, many states will find him at least partially liable for any damages.

pit bull with kisses#2 Landlord Knows - But Can’t Remove the Dog

But, let’s say the landlord knows the dog is vicious but cannot remove the animal. Seems impossible, but it is not. If you bought an apartment building with existing tenants, you might not have the authority or power to remove the tenant or the animal according to the existing lease. 

If you try to legally remove the dog but are denied by the court, you might not be held liable in some states for future dog bite attacks. But don’t count on it. Even if you could not remove the dog, you still have a duty to protect the other tenants and visitors to your property. Imagine what the judge will think if you do nothing. Now, imagine what the judge will believe if you warn all the tenants, put up warning signs, erect fences, establish safe areas and walkways, and closely monitor the situation. 

If you can remove the dog, then do so. If you can’t, you better have a suitable safety protocol in place.

#3 Landlord Harbors the Vicious Dog

This one is simple. If the vicious dog belongs to the landlord, or the landlord takes care of the dog for someone else - the landlord will most likely be liable  in every  state. 

Dog Bite Lawsuit Payout Numbers

There are about 85 million dogs in the US and millions of dog bites each year, according to the American Veterinary Medical Association. Unfortunately, most of them are children.

The number of dog bite claims in 2020 was 16,991 and dog owners paid out $854 million in damages, according to the Insurance Information Institute.

The top five state with the most dog bite claims are 

  1. California 2,103
  2. Florida 1,235
  3. Texas   969
  4. New York   881
  5. Pennsylvania   787

The average payout claim in the U.S. was $50,245, with New York at the highest with an average of $66,917. California averages almost six dog bite claims per day.

As a real estate investor and landlord, you should be aware that there might also be punitive damages in some cases should you be found liable under certain circumstances.

How Landlords Can Protect Themselves

Be Proactive

Build your dog-bite case defense today. Remove dangerous dogs from your properties if you can. If you can’t, then do the following:

Structure Your Business for Protection From dog bite liability

The American legal system can be stacked against you. A single lawsuit can wipe out your real estate portfolio if you are investing as a sole proprietor. That's why you need to protect your real estate business from dog bite liability. Man's best friend can be a landlord's worst enemy.

Whether you use trusts, LLCs, or other entities, you can establish asset protection and privacy—and usually gain tax advantages as well.

Most lawyers give cookie-cutter advice and use boilerplate forms and agreements. Remember, you are building your real estate portfolio for future income and asset security. Find asset protection experts who understand the risks you face.

 

A Beginner's Guide To Wholesaling Real Estate  

There are a few ways to get started in the real estate biz.

Investors who have a capital to invest in the beginning might consider flipping houses or buying properties to rent out.

For those who don't, there is another, less traditional way to get started ... One that doesn't require a lot of money. It's known as real estate wholesaling.

Wholesaling real estate involves signing a contract with a motivated seller, then assigning the contract to another party who buys the property. A wholesaler makes money by selling the property for more than the amount they contracted for.

Wholesaling takes time and legwork, but you can make a decent profit from your wholesale transactions if you want to get started in the business without a lot of money.

Let's take a closer look, shall we?

distressed propertyWhat is Wholesaling Real Estate, exactly?

As we already said, wholesaling is an excellent strategy if you're an investor who doesn't have much capital but wants to start investing in real estate.

Great wholesalers are good at finding sellers who are motivated to sell their distressed property, so if you don't have a lot of money to invest, you'll need to develop some sleuthing skills.

What is a "distressed" property, you ask? A distressed property is typically in need of repairs or is in danger of foreclosure. Owners of these properties are looking to get out from under their financial obligations and tend to sell quickly at a low price.

As a wholesaler, you step in and offer to buy the property. You then sign a contract with the seller, but instead of buying the property yourself, you sell that contract to a buyer.

This means you aren’t buying the real estate yourself; you’re deal hunting for a third-party purchase. If you close a deal, you receive a fee that might be $500-5,000 for each property. More significant deals come with a corresponding higher payout.

While wholesalers can sell these contracts to buyers, other types of investors make up the bulk of the wholesale market. One of the most common investor types is house flippers, who buy a distressed home and renovate it to sell for a profit.

Typically these investors are cash buyers, so the wholesaler will receive their fee much more quickly than if the funds for the purchase had to be approved by a lender first. As a wholesaler, you never buy or own the property, meaning you don’t have to worry about maintenance or repairs. There’s a minimal investment required upfront to be a successful wholesaler.

Wholesaling Real Estate  How To Start Wholesaling Real Estate

The process of wholesaling real estate is relatively straightforward: you find an excellent real estate deal, write a contract to acquire the property and charge a fee to sell that contract to a buyer. To begin real estate wholesaling, follow these steps.

1.    Find A Property

Check websites where you can find listings from sellers who don’t want to work with real estate brokers. HomesByOwner and Craigslist might work for you, depending on your market. You can also send out letters to homeowners in the area, attend networking events, develop contacts in the real estate market, and advertise with signs to let motivated sellers know about your services.

2.    Contact the Owner

Once you find a property, reach out to the owner. Find out what their situation is and explain the financial benefit of you buying their property. You may need to decide whether you'll inform the owner that you won’t be purchasing the home yourself or sign a contract without disclosing your process.

3.    Research the Property Value

Try to determine the property value before or after speaking with the owner for the first time. Use Zillow or a realtor contact to determine how much the seller’s home is worth. To make it worth your time and effort, aim to speak with sellers who would accept about $20,000 below the home’s market value. This shows they are a good candidate for a distressed sale.

4.    Estimate Repairs

As you near the point of making a final offer, you’ll want to estimate the repairs that a potential buyer will need to make. This helps you justify the offer you make to the seller and determine your overall profit.

5.    Get the House Under Contract

When you are ready to make an offer, it is important to crunch some numbers to ensure you offer the right amount. A useful formula is to calculate 75% of what the house will sell for after repairs. From this number, subtract the repair estimate and your fee of at least $5,000. The amount that is left is the most you’ll want to offer for the house.

6.    Locate a Buyer

After you get the house under contract, you have 30 days to find a buyer. Eventually, you will build a network of potential buyers to contact when you have a property to sell, but at first, you may have to do some networking, post flyers, or list the property yourself. Look for buyers who pay cash and want to close quickly; ideally, a person who buys and flips houses for a living.

7.    Close on the Deal

The most important aspect of closing your deal is to work with a title company that understands real estate wholesaling. Look for a company that can complete a title search in a few days and put your buyer in touch with the title company early in the process. The sooner you close on the property, the faster you receive your fee.

Wholesaling Real Estate  Should You Have an LLC for Wholesaling Real Estate?

A wholesaling business is considered an active business, not a passive activity like owning rental properties. For this reason, it is necessary to structure your wholesaling business as a limited liability company (LLC).

An LLC protects your personal assets if you become involved in litigation regarding your real estate transactions. There are also tax benefits to having an LLC because you avoid double taxation. Rather than filing a corporate tax return, you simply report your income from the business on your personal tax return. Setting up your business as an LLC can also provide a sense of professionalism and trustworthiness to potential sellers.

Mobile Home Investing: 4 Things To Know Before Getting Started

Have you ever considered investing in mobile home parks? 

If not, why? 

Mobile home investing is largely overlooked by real estate investors. We tend to prefer single-family homes, multifamily units or other kinds of commercial real estate. But mobile home (aka manufactured housing) parks can be profitable assets—in part BECAUSE they are often overlooked by others.

In this article we will answer three common questions about mobile home investing:

We’ll also give you four key points you need to know before jumping into this exciting opportunity. 

Soon, you’ll see how mobile homes can add value to your portfolio—even though they may not be the most glamorous asset class. And as always, take our quick investor quiz if you need more info, and we’ll help you take that next step.

Is Mobile Home Investing Profitable?

Mobile home investing comes with risks, just like any other investment, but it has a lot of potential to be very profitable. 

As mentioned, a lot of investors simply don’t think about trailer home parks. They simply don’t want to get involved.

Their loss, your gain! The relative lack of competition can benefit you in the following ways:

Mobile home investors often own the land and not the units themselves, making mobile home parks among the lowest-cost investments (per unit) in real estate. That low start-up cost means that yes, there’s lots of room for profit.

Aside from the relatively low barrier to entry, mobile home park owners have little (or no) maintenance costs compared to other real estate asset classes. This us because mobile homeowners (not the landlord) are responsible for:  

To put it another way, a mobile home park represents much less money spent on upkeep than apartment buildings, townhouses, or single-family dwellings. 

Finally, there is plenty of potential for your investment to grow over time. In general, mobile home parks appreciate because:

How Do People Become Wealthy Investing in Mobile Home Parks?

Tenants need affordable places to live, and increasingly mobile homes are fulfilling that role. With mobile home investing, you have an opportunity to meet an ever-growing demand for affordable housing and build your wealth.

There are several ways investors can become wealthy by investing in mobile home parks: 

Cash flow

Since the 2009 housing crash, mobile home park investors have seen an enormous return.

Recession resistance

Mobile homes are recession-resistant because they’re the most affordable type of housing available in the market. When a recession strikes, tenants who used to live in single-family homes look for more affordable options. This causes the demand for mobile homes to increase. Because of this, a mobile home park performs better in a recession than other real estate assets.

Lot rent

Most mobile home lots are leased for 12 or 24 months. It's standard to see lot rents increase anywhere from 10 to 15 percent annually to match the market. 

Tenant stability

Mobile home parks are in the “affordable housing” sector. Tenants living in mobile home parks do not have the financial resources to move. They stay in mobile home parks longer than they do in apartment buildings. Additionally, once a mobile home gets into a park, it stays there. Even if they own the trailer itself, when a tenant needs to move, they typically sell the mobile home to another tenant. The mobile home itself stays in the park. 

The Warren Buffett Effect

In 2002, Warren Buffet acquired Clayton Homes, the largest builder of manufactured housing and modular homes. Berkshire Hathaway then teamed up with 21st Mortgage to introduce the "CASH" program, which helped mobile home investors get new mobile homes onto their lots with little upfront cash. In exchange for the homes, park owners send prescreened tenants to 21st Mortgage. 

Investors benefit from having new homes to attract preferred tenants.  Clayton Homes and 21st Mortgage benefit from prescreened applicants. And the tenants get a home. Everyone wins!

Low risk/high reward appreciation

Using the "CASH" program (similar programs exist from other lenders), mobile home park owners can fill their lots with attractive homes. Then, they fill those homes with tenants and increase the value of the mobile home park. 

Tax and Financing Benefits

You can use IRS tax code Section 1031 to avoid paying tax when buying and selling “like-kind” assets. A 1031 exchange investment strategy enables you to: 

How Does Mobile Home Investing Work?

For a case study on how trailer park investing really works (and how you can get started), refer to our interview with Frank Rolfe about mobile home park investing and how he built a profitable empire. 

The short version is something like this:

To achieve success, Frank focused on offering lower rental rates than his competitors. The low rents appealed to potential tenants, and as a result he maintained full occupancy in his parks. The result? His $400,000 initial investment turned into a $1.5 million sale.

Let’s look at two types of mobile home investors. 

Owner type 1 owns:

In this type of ownership, the tenant owns the home and pays rent for the land plus the use of amenities. 

Owner type 2 owns: 

In this type of ownership, the tenant pays rent for the trailer and the land it’s on.

4 Things You Should Know About Mobile Home Investing

Now that we’ve covered the reasons you should consider investing in trailer parks, you’re ready to take the next step. But first ...Here are the four major things to know about mobile home investing before you take the big dive:

#1 Mobile home investing is a largely untapped resource. That’s why there’s huge opportunity here.

#2 Because this asset class has a proven track record, favorable financing options are available. That makes getting started easy.

#3 Section 8 vouchers to purchase a mobile home are driving demand for affordable housing. 

#4 Market cap rate compression means investors are seeing a solid return on investments—and will continue to do so for the foreseeable future.

Mobile homes are going to be in higher demand as economic uncertainty and a lack of traditional affordable housing lead people to look for affordable housing. So it may be the right time to make the leap. 

 

Do Canadians Need An E-2 Visa To Invest In The United States?

If you're a Canadian citizen interested in investing in property or other business ventures in the U.S., an E-2 visa is not the only way you can do so. However, there are advantages to obtaining an E-2 visa if you can qualify. 

The E-2 visa allows people from other countries (including Canada), to enter legally if they are investing substantial capital into the U.S. economy. For Canadian investors who can meet specific qualifications, the E-2 visa has many benefits, including allowing them to freely travel between countries without restrictions on the length or frequency of trips. 

e-2 visa: simpsons border crossingWhat Is A Treaty Investor (E-2) Visa?

An E-2 treaty investor visa enables citizens of countries with which the United States maintains treaties of commerce to buy or start businesses in the U.S. For Canadians, an E-2 visa will be valid for five years and can be renewed for as long as the business remains in operation.

So Do I Have To Move To The U.S.?

So you’re a Canadian who wants to get in on the super-hot U.S. real estate market. Does that mean you have to move to the States?

No way! Getting a treaty investor visa does not require you to move to the U.S.! You can remain a Canadian taxpayer and resident while managing your business. Getting an E-2 visa is more about giving you options and simplifying business travel to and from the U.S.

canadian investment storyHow Do I Qualify For An E-2 Visa?

For you to qualify for an E-2 visa as a Canadian citizen, you must have “invested” a “substantial amount of capital” in a “bona fide enterprise” in the United States or be actively in the process of making such an investment. 

*All of the terms in quotes have a special legal meaning in immigration law, so we’ll define and discuss each of them below. 

You also must show that you are only seeking to enter the U.S. to develop and direct the business by proving you own at least 50% of the enterprise or have operational control over the business.

“Invested”

In this context, the term “invested” is defined as placing capital, such as funds or other assets, “at risk” with the goal of earning profit. This means that the capital must already be subject to partial or total loss if the enterprise fails. You can’t qualify for an E-2 if you have only planned to make an investment; you must have already done it. 

great white north“Substantial Amount Of Capital”

The law does not set a specific monetary threshold that must be met for your investment to qualify as a “substantial amount of capital.” Instead, it establishes guidelines that look at the proportionality of your investment compared to the entire cost of establishing or purchasing and operating the business. Your investment must also be of a sufficient amount to prove your financial commitment to the business’s success. 

“Bona Fide Enterprise”

A “bona fide enterprise” is defined as a real, active, and operating business that produces services or goods for profit. The condition that businesses be “active” is often the trickiest part for real estate investors. Ordinary buy-and-hold real estate investing won’t meet the qualifications for an E-2 visa, and a simple real estate flipping business probably won’t either. Investment plans involving managing multiple rental properties or consistently buying, selling, renovating, and renting properties are more likely to satisfy this requirement.

Justin Trudeau invests in American Real Estate? Shouldn't you? Just kidding ... we have no idea if he does or notHow Do I Know If I Should Get An E-2 Visa?

So to sum things up, Canadians don’t need an E-2 visa to invest in the U.S., but it can be a valuable thing to have if you plan on running an active real estate investment business in the States. However, it will not be a feasible option if you just want to passively invest in U.S. real estate. 

If you want to know the best course of action for your situation, ask a real estate investment attorney for their advice. Even if an E-2 visa does not work for your investment business, there are other options you can pursue that better meet your needs. An experienced professional can help you make the right decision for your investment plan.

You may also be interested in the following resources:

Why You Should Know Your Property’s Internal Rate of Return (IRR)

Internal rate of return (IRR) and return on investment (ROI) are two critical performance metrics for real estate investors.

But do you understand the difference?

They both offer ways of quantifying how well your investment is doing, but IRR is the one that is often under-appreciated and misunderstood. In this article, we’ll show you why overemphasizing ROI and ignoring IRR is a serious mistake if you’re a sophisticated real estate investor.

We’ll tell you what IRR is and how it differs from ROI, how to calculate it, and what it does (and doesn’t) tell you about your rental property.

Internal Rate of Return: IRR: bored baby gifWhat is IRR / Internal Rate of Return?

Let’s get this out of the way: IRR sounds boring. 

It sounds like one of those metrics that online real estate gurus dug up from some decades-old finance textbook so that they could sell courses.

It sounds like something you don’t actually need to know to make money in real estate, even though it might come in handy every once in a while.

To be honest, by and large, those guesses are not too far from the truth.

But rest assured you can use IRR for every rental property you’re thinking about investing in. Its utility as a key metric in real estate investing is massively underrated, and you can use it to show your friends and colleagues that not all investments are as good as they appear.

Two Things to Know About IRR

The first—and arguably most important—thing to know about IRR is that it takes the time value of money into account. The time value of money, or TMV, is a popular and widely accepted notion in finance that a dollar today is worth more than a dollar tomorrow.

Most economists and financial advisors believe that this is true for a myriad of reasons: every day inflation eats away at the purchasing power of your money, you could miss out on certain opportunities if you don’t have any cash on hand, you can’t cover emergency expenses without reserves (and borrowing that money could incur massive interest over time), among others.

However, when you use IRR to measure your investment, it takes this enormously important factor into account by setting the net present value to zero. This way, later distributions carry less weight.

Also, IRR is an annualized figure, which means it measures year-over-year performance. In the next section on the difference between IRR and ROI, we’ll show you an example of how ROI can mislead investors into believing that an investment performed better than it really did.

As a quick recap:

Internal Rate of Return: IRR: tennis playerHow Does IRR Differ from ROI?

If one of your friends told you that he earned a 170% ROI upon the sale of his investment property, your first inclination would be to think, “That’s a great investment,” right? 

What if you learned that he bought the rental property in 1990 and sold it in 2020?

Not as great sounding, now, is it?

Over the course of 30 years, that 170% return isn't as impressive as it sounded at first. Assuming he actually factored his maintenance, taxes, and closing costs into account, your friend fell short of beating even the most basic and easily accessible stock market index. In that same 30-year period, the S&P 500 delivered an 864% ROI (with dividends reinvested: 1692%). He underperformed ten-fold.

However, if he bought the property in 2019 and sold it in 2020, anyone would be in awe of those 170% returns.

Exact same ROI, totally different investment performance. Why? Because ROI doesn’t take time into account. That’s one of the key ways in which IRR differs from ROI. You can use IRR to compare your investment properties to the expected returns of other assets you might be interested in buying, like REITs, ETFs, commodities, and more. You can’t do that with ROI (at least not to the same extent.

Internal Rate of Return: IRR: money spiralHow to Calculate IRR

Before Excel spreadsheets and financial calculators, IRR wasn’t very popular. The formula isn’t easily understood, so we recommend you simply plug the numbers into an existing online IRR calculator.

With that said, we’re going to give you a quick overview of what IRR might look like for an average $300,000 rental property that you plan on owning for 10 years before you sell. To make things easy, we’ll assume you buy it in cash.

Let’s say it’s a duplex and each side rents for about $800 and increases to $1000 over your timeframe.

Initial Investment: $300,000

Then, you earned $100k after selling your rental property for $400k. All in all, you earned $311,200. That’s more than a 200% ROI. Your IRR ends up being 9.09%.

You can play around with the numbers above to see how IRR accounts not only for how much money you earn but also when you earn that money. If for some reason, you expected to charge higher rent for the first few years and lower rent for the last few years, the metric would drastically change to reflect that.

Internal Rate of Return: IRR: tennis player womanConclusion: Why You Should Know Your Property’s Internal Rate of Return

A property’s IRR is important because it takes into account the time value of money in an annualized way. A 200% ROI sounds good until you learn it took place over the course of 40 years, and there are tons of other investments that would’ve outperformed it by a mile.

By calculating your rental property’s IRR (or its assumed IRR), you can accurately compare the investment to those in other asset classes, like commodities or ETFs.

 

‘Subject-To’ Mortgage Investing: Buying Homes in the Post-COVID Market

“Subject-To” mortgages are going to be a defining feature of the post-COVID real estate market, and here’s why…

As of April, roughly 2.5 million homes are in forbearance, according to the Mortgage Bankers Association. That means that they’ve entered an agreement with their lender to delay foreclosure.

Due to restrictions set up during COVID to limit the spread of the virus, lenders couldn’t officially evict homeowners who weren’t paying down their mortgages. With those restrictions being lifted, lenders are going to start to foreclose on the homes that are in forbearance.

That means many people are looking to get out from underneath their mortgages, and that means that the housing market might experience a boom in the supply of certain properties.

For the savvy investor, this is the opportunity of a lifetime.

subject to mortgage: give me your mortgage

Give me your mortgage ...

What is a ‘Subject-To?’ How Will It Affect the Market?

"Subject-To" is a way of purchasing real estate where the real estate investor takes title to the property but the existing loan stays in the name of the seller. In other words, their interest is “subject to” the existing financing. The investor now controls the property and makes the mortgage payments on the seller's existing mortgage.

If, for example, the seller locked in a $200k mortgage at a 3.8% interest rate, instead of getting another lender to come up with a new loan (and therefore racking up a bunch of costs associated with that process, including inspection, appraisal, broker fees, etc), the investor just pays the ~$1150 mortgage and the home is theirs.

So here's the Cliff Notes version:

How Do You Find ‘Subject-To’s?’ Why Do You Want Them?

What makes subject-to mortgage investing so great? There are a few reasons…

#1 You Never Have to Qualify

"Subject-To" is a great way to build a portfolio. The loans are not in your name and you never have to qualify. The seller already qualified for the loan; all you’re doing is making their payments and putting your name on the title.

In order to qualify for a conventional loan, you have to provide proof of income, a solid credit score, a low debt-to-income ratio, and more. However, when you’re buying properties “subject-to,” those same requirements don’t exist. This makes it that much easier to rack up a bunch of rental properties.

subject to mortgage: cat reading book#2 Lower Fees

Fees can completely ruin a real estate transaction. A 3% broker fee every time you buy and sell real estate can kill many deals—even if there are potentially tens of thousands of dollars to be made. If it all ends up going into the realtor’s pocket (and their brokerage’s pockets), then what’s the point?

When you take over an existing mortgage, though, you don’t have to worry about brokerage fees, along with many others. You can become exposed to the real estate market in a low-cost way, completely changing the dynamics of the deal.

Even if the seller has a backlog of three months of missed mortgage payments, it’s a drop in the bucket compared to the costs that are typically associated with buying a home in the first place. 

#3 Easier to Rack Up a Portfolio with Little Money Down

This ties in with both of the points that we made above, but it’s a big one: when you don’t have to qualify (and re-qualify) for mortgages and you can avoid closing costs (along with many other fees), it becomes much easier to rack up a decently sized portfolio with less money.

Furthermore, many people who qualified for these mortgages simply suffered some form of financial hardship at the worst possible time: a once-in-a-century global pandemic. The loans don’t always have poor interest rates and the sellers were sometimes able to put down a sizable amount of cash for the down payment.

So, there are good mortgages out there just waiting for someone else to take them over. And, finally, that brings us to our last point:

#4 Unprecedented Opportunity

During the 2008 meltdown, roughly twice as many homes were in forbearance, so why is the COVID-19 pandemic any different? How could it possibly be an “unprecedented” (admittedly an overused word these past couple of years) opportunity? 

Unlike today, in 2008, many average investors didn’t know that a possible crash was looming. With the pandemic being such a global and ever-present phenomenon over the past year and a half, we have hard data on exactly how many people aren’t paying down their loans and we have a rough idea of when the restrictions might be lifted.

In this case, though, there’s time to prepare for the surge of these types of properties. Sure, they’ll be in demand—but there will also be an incredible supply.

subject to mortgage: owl faceConclusion: ‘Subject-To’ Mortgage Investing: Buying Homes in the Post-COVID Market

A record number of homes are in forbearance. According to the Mortgage Bankers Association, it’s about 2.5 million. With COVID restrictions being lifted across the US, lenders are going to start cracking down on those mortgages, which means many people will be looking for a way out.

Savvy real estate investors can offer them a way out: through “subject-to” mortgage investing. The investor will add his name to the title and make mortgage payments in place of the seller. It can be a great way for the investor to make a low-fee deal and for the seller to get out from underneath a mortgage that he or she can no longer afford.

Scott Smith's Advice For Canadians Investing in U.S. Real Estate

How will you accomplish financial freedom through real estate investing? 

Start by thinking where in the U.S. you’ll be investing, what type of asset you want to hold, and how you’ll form the relationships you need to make foreign investments.

Once you’re ready to make your first real estate investment in the U.S. the question is: Where should you look? Real estate markets are constantly changing, but Scott Smith, head attorney at Royal Legal Solutions, has a few tips especially for Canadian investors. Scott gave this tips on a recent appearance on the The REITE (Real Estate Investing Training and Education) Club podcast, which you can check out below.

In a hurry? Keep reading to get the high-level overview of everything covered on the show ...

Scott has all the answers!Where Should Canadians Invest In the U.S.?

Canadians looking for a good deal in real estate should keep a few specifics in mind. What kind of investment makes sense to you?

Our last article had lots of tips for Canadian real estate investors (go check it out if you haven’t already), but we’d like to look a little more at the “location, location, location” aspect in this article.

“I’m hot on the Midwest now, inside the Rust Belt,” Scott says. “I’m liking some of the deals I’m seeing in Florida. And Tennessee has some interesting deals coming through, as well as San Antonio in Texas. This is where I’m seeing people buy those single-family homes, or one to four-unit properties. Those are the areas where people are buying $90,000-150,000 properties and can scale from there. 

“I talk a lot about those properties because that’s where you get really great financing instead of personal financing. For most Canadian investors, that’s where you’re going to start.”

If you’re investing in an area that you don’t know anything about and can’t even visit, you are building more risk into the proposition. If you CAN scope out the property in questions, do your due diligence. Walk the neighborhood or ride a bike—you’ll see a lot more than you will just driving around the block. Get a feel for the neighborhood. 

What Tenants Do You Want To Rent To?

Research will give you insight into what kind of tenants you can expect to attract. For example, you should research the income range for your neighborhood. Government agencies have a lot of this economic data available for the taking.

“There are some key things you want to stay on top of regarding what makes a good deal in the U.S.,” Scott says. “You want the median income for the area to be above $40,000 per year. Look for job stability and job security as well. That’s why I like investing where the employers are the government, big corporations and universities.”

What about crime statistics? A lot of Canadian investors think about crime in the areas where they are considering an investment. But Scott says you shouldn’t focus on it too much.

“Almost invariably in the U.S., crime follows job stability and economic depression. So as long as wages are high enough, and we have job stability, crime won’t be a factor for you. I don’t even pay attention to crime reports at all, really. They don’t give you the best source of information for an area.”

What Prices Should Canadian Investors Expect To Pay?

Scott says you shouldn’t necessarily let high prices scare you away. It’s important to watch the macroeconomic trends of a given area or market. That’s more important than historic information based on what people think the prices “should be.” As long as an area has long-term population growth, big price tags shouldn’t frighten the investor away.

“If I have a lot of people moving into a city over time, I am not so price sensitive. I know the demand will push prices up over time. This is exactly what happened in Austin. Four or five years ago in Austin, nobody wanted to buy property at $200 per square foot, because just a few years earlier it was $150 per square foot. That was insane, we thought. But the demand to move to Austin and the tech industry there was so strong, now it’s $400 per square foot.”

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Buying and Financing Real Estate

You may acquire property directly in the name of the Limited Partnership. However, some of Scott’s Canadian clients get better financing rates when they purchase property in their personal name first. It just takes a Land Trust to do it right.

The Land Trust will let you own the property anonymously. It also allows us to avoid something called the due on sale clause.

“This means you can actually buy the asset in your personal name, then transfer it into the Land Trust,” Scott says.

Next, you’ll create a warranty deed to transfer the asset into the Land Trust so it's now held by the Limited Partnership. This is a huge cost saving measure for Canadian investors.

No matter what type of financing or what type of asset you’re working with, the Limited Partnership/Land Trust structure lets you hold that asset anonymously, in a way that's protected. You're also going to be able to always be able to take advantage of the best possible financing and have the best possible tax advantages.

what types of properties should you invest in?How To Get Started With Your 'US Team'

You’re a first-time Canadian investor in the U.S. It may be tough to know where to start, especially if you can’t fly out to a property and visit it in person. 

Royal Legal gives you access to a network of coaching, preferred vendors, and connections to people who can help you with your U.S. investments. In addition, you'll have access to other investors and to turnkey professionals, including tax and accounting specialists who are used to working with Canadians. 

When you partner with Royal Legal Solutions, you will have some of the industry’s finest attorneys and CPAs on your personal real estate dream team. We’ll help you break down the numbers you need to hit to reach financial freedom. 

We’ll even help you develop acquisition strategies. What do you see as your vision moving forward? Once you answer that question, you can set up the appropriate legal structures to get lending, estate planning, and all the other components needed to put your plan in place.

What’s your target ROI? Let’s analyze your full capital stack. What’s your target return over time to hit your retirement goals? Start with our investor quiz and we’ll help you. A coach will help you clarify your situation. Goals and tactics from books and websites are great, but you need to know something beyond “I want to invest in apartment complexes.”

It may take a couple of sessions to get all the numbers, but knowing the answers to these questions can help you know exactly what kind of ROI you need to hit your goals. From there, you'll work backward, using your current income to pinpoint the asset classes you should be targeting.

 

 

 

8 Tips For Canadians Investing In U.S. Real Estate 

Are you a Canadian investor with an eye on the red-hot U.S. real estate markets? 

If you are, break out the Tylenol, because complicated legal and tax issues can give you a headache before you’ve even started!

Our lead attorney, Scott Smith, recently met with Canadian real estate investing coach David Dubeau to discuss the issues Canadian investors face when investing in the land of the Yanks. Scott has a lot of advice in another article, [[LINK]]] but in this article we’re going to look at the “investment checklist” Lauren A. Cohen introduced during the meeting.

You can check out the talk between Lauren, Scott and David below, or keep reading to get a free download of Lauren’s Eight Steps to Successful Real Estate Investment Across Borders.

Lauren’s Investment Checklist

Lauren’s checklist is designed to ensure success when you're investing across borders. These elements are interconnected. That means you shouldn’t focus on one and ignore the others. 

Here are her tips for Canadian investors looking to make a play in the U.S.

Tip #1 Study The Local Market

Real estate is always about “location, location, location,” right? You’ve heard that one a million times, as have we all. But you need to truly understand the reasons to select a particular location over another.

Where in the U.S. should you invest? Are you looking at one city or region or multiple areas? Why?

Just as in Canada, there are hot areas and not-so-hot areas. You’ll need to look into state and city tax and zoning considerations before making your play.

Your coach/mentor (see the last tip) will help you find your way so you don’t waste time looking at properties in areas where you’re likely to fail.

Need tax help? See our article How Are Canadians Taxed If They Invest Or Do Business in The United States.

Tip #2 Define Your Investing Goals

Lay out your goals in the beginning. Where do you want to be in three months? What about in three years?

If your short-term goals do not match your long-term goals or if you don't consider your long-term goals at the beginning of your journey, you're going to end up in a world of hurt.

Here’s an example of what we mean: If you invest in your personal name because you found a good deal and want to act fast, you may very well realize down the road that you should have set up the appropriate asset protection structures first (often a limited partnership for Canadian investors). Then you may have to go back to square one and fix everything. 

A failure to plan is a plan to fail!

what types of properties should you invest in?Tip  #3 Know Which Property Types To Target

What types of properties should a Canadian investor look at and why? 

You have a lot of options to consider: Vacant lots. Residential. Multifamily. Commercial. Industrial. Mobile Homes. Retail. Real Estate Investment Trusts (REITS). All of these could potentially qualify you for immigration status (though REITS have to be set up very carefully to qualify).

Refer back to your short and long-term goals. Here again, your coach should be able to offer guidance, as there aren’t really any one-size-fits-all solutions.

“As soon as you're investing in multi-family properties with five or more units, you could be ready to invest in a commercial building, and commercial financing is a little easier to come by because it's not only based on your credit score,” Lauren says.

“In the U.S., unlike in Canada, your credit score dictates everything. It’s like the be-all and end-all. And when you're dealing with a commercial property it's also based on the returns on that property. You're going to show tax returns—kind of like buying a business. So it's all about how creative you can be when it comes to financing.”

Tip #4 Choose the Right Legal Entity

Do you need an LLC, a corporation, or a partnership? 

“From a pure asset protection standpoint, it doesn't matter what's happening on the Canadian side of things,” Scott says. “So if you already have a Canadian tax treatment that you like, the Limited Partnership structure is going to be the right structure on the U.S. side of things for you to then channel into whatever Canadian asset holding company you have.”

#5 Decide Whether To Invest Alone Or With Partners

A lot of Canadians like to joint venture with other Canadians who already have properties in the U.S.—especially if their partners already have access to financing. 

Maybe you want to create a real estate fund. Maybe you already have partners that want to invest with you. You may need to bring in a securities attorney, but there is a way forward that is right for you. 

Can’t find the way forward? Then you need to … wait for it … Discuss your needs with your mentor. You may also visit DavidDubeau.com if you need help finding other capital sources. 

#6 Learn How To Purchase Properties in the U.S.

Canadian investors can apply for a mortgage with an American bank or with Canadian financial institutions with operations in the U.S. You’ll probably have to show your passport, international credit report, employment history, residency verification, tax submissions, and proof of down payment.

Generally, dealing directly with Canadian banks means better mortgage rates. Think about it: Canadian lenders are naturally more comfortable lending to Canadians. A Canadian bank with U.S. operations will often approve your financing quickly and relatively painlessly. These would include Royal Bank of Canada (RBC) and Bank of Montreal (BMO).

What about your investing strategy? There are a lot of different strategies: the BRRRR Method, flipping, the buy and hold method, wholesaling … Some of these qualify for visas and some of them don't. Again, that's why your short and long-term goals are so important. Do you want to buy properties outright? Do you want to buy them “subject to”?

Side note: Everybody wants to buy “subject to" mortgages and they're going to be available in a big way in the next year. Why? Because forbearance is going to come due. Forbearance was implemented in the U.S. so mortgage holders could flip payments to the back end of their payment schedule. Any COVID-related pause on mortgage payments is ending and some property owners are simply not going to be able to pay their mortgages.

#7 Know The Immigration Considerations

Do you need a visa to invest in the U.S.? Does getting one mean you have to spend a lot of time in the U.S.?

Getting a visa is often about giving you options. Just because you get a visa does not mean you have to move to the U.S.! 

That's why Lauren loves Treaty Investor (E-2) visas, which are for citizens of countries with which the United States maintains treaties of commerce.

The Treaty Investor visa is based on a substantial investment in a non-marginal business. It gives you, the private investor, the flexibility you need. With this visa you're never going to have a problem coming and going across the border. 

But again, you don't have to move. You can remain a Canadian taxpayer and resident. Or you can be a resident of another country and stay in the U.S. on an E-2 visa from Canada.

You have to have an “active” business to qualify for a visa. You have to figure out how to turn what's usually considered a passive investment (real estate investing) into an active business.

You need to be at least 50 percent owner in the company making the investments.  You have to show that you have boots on the ground if all you're doing is becoming an equity partner in the company.

tips for investing: download

See below to get your free copy

#8 Partner With Professionals (And Find A Mentor!)

Lauren says her favorite words are, “Stay in your lane.” 

Don’t try to play realtor, lawyer and accountant. Put together a team that can guide you, help with due diligence, analyze the price comparisons, and perform deal analysis. It's important when you're working with people on cross-border deals that it's not their first rodeo. 

You may be an experienced real estate investor, but it’s important that you (and your tax and legal advisors) know the differences. Dealing with Americans is different than dealing with Canadians. Not getting the right advice is going to end up costing you more than you will pay to get the guidance you need.

Make sure your team members are vetted and reliable. You need to think about immigration and securities. You need Canadian counsel to make sure that your estate in Canada is protected. Someone will have to help you with taxes on the CRA side and the IRS side.

This can be overwhelming if you don’t have help. That’s why you need a coach.You need somebody that understands everything on both sides of the border. You need somebody that has been down this path, someone who can guide you. Otherwise you’ll invest haphazardly and without a strategy.

Start with our investor quiz and we’ll help you put together the right team for your goals—a team that will evolve as your needs change.

“Without a professional team, investors will get set up right for what's going on at a specific time and point in their life. They don’t think that anything might change ... because they don't know what triggers different considerations,” Scott says. 

“If you have a limited budget, that's fine. Just budget out an hour per quarter to meet with your team. It will only cost a few hundred dollars or whatever the case may be, and it is going to potentially save you tens of thousands of dollars.”

In other words, as Scott says, you should avoid tripping over pennies on your way to dollars and you’ll be set up for long-term success.

Get Lauren’s Guide

Before you get a coach, you can get a guide. This article is a very basic overview of Lauren's popular guide called Eight Steps to Successful Real Estate Investment

Across Borders. It will help you figure out your next step. 

It’s a $47 value, but if you use the special code for Royal Legal Solutions readers, you get it for free. The code is REI4FREE.

About Lauren

Lauren, originally from Toronto, is founder and president of e-Council Global and is a cross-border strategist experienced in both law and real estate. She hosts a podcast, Investing Across Borders and works with us to help Canadians looking to invest in U.S. real estate.