Improved Accounting and Bookkeeping Best Practices

Why would you want to take the time and effort to learn accounting and bookkeeping best practices? It can mean the difference between the life or death of your business.

As a real estate investor, your accounting practices provide you with a valuable snapshot of the health of your business, expenses, and possible avenues of profitability.

With sloppy or inaccurate accounting and bookkeeping practices, you will miss critically important information and have no sense of your overall financial health. That ignorance may turn out to be catastrophic. Read on to learn more about the benefits and importance of accounting and bookkeeping best practices for you.

We also featured this topic in one of our Royal Investing Group Mentoring sessions that you can view a replay of.

What Are Accounting and Bookkeeping Best Practices?

It depends on where you are in your real estate journey. A sole proprietor or married couple investing together may be perfectly suited to self-managing their books. In that case, you can keep detailed records with Quickbooks desktop.

The software gives you local control. That means you don't need a CPA or an accountant. One factor to keep in mind is that doing your books is time-consuming.

Ultimately, maintaining your books is a best practice because it keeps you intimately familiar with the details of business:

There are additional benefits to keeping good financial records, especially if you are looking for a business partner.

Why Bookkeeping Best Practices Are Important for Partnerships

Sloppy books kill business partnerships. For instance, you can't have garbage books and claims transparency. Making sound financial decisions based on accurate information undergirds importance in bookkeeping.

It takes effort, but maintaining accurate financial records is worth it because it helps bring peace of mind to your investments. Sloppy books might cover up embezzlement. Detailed and accurate bookkeeping is a good return on your investment because it provides peace of mind. And you can't put a price on that.

You can't make well-informed decisions when your books aren't straight. Excellent books help you make informed, unemotional decisions. You have to make sure you keep track of your records no matter what.

Here are some benefits of following accounting and bookkeeping best practices:

When Is the Right Time to Outsource Bookkeeping?

Finding good deals and building wealth are your most dollar-productive activities. The right time to outsource is to define standards and what it means to have good bookkeeping. Hire someone as a bookkeeper to increase your ROI. Your time spent on bookkeeping produces less value to you than finding good real estate deals.

When you decide on hiring a professional, they should be able to give you a tax strategy. Whether you hire a CPA, CFO, or tax attorney, they will show you how bookkeeping is essential for peace of mind.

You will also learn how your business is performing and how much it makes. Getting a solid understanding of your financial situation is the first step you have to take before leveraging tax strategies. All in all, your relationship should produce detailed, robust tax strategies from good, accurate bookkeeping.

What Do I Need to Do for My Accounting and Bookkeeping?

All business owners must regularly review their monthly operational expenses. Only by understanding your financials will you be able to achieve your financial freedom goals.

Another thing you need to do is find someone whose advice you trust and who you can listen to. It might be a person who has experience with the same real estate investment or a similar business. Part of doing the research is determining the scope and need of your relationship.

What Does a Good Bookkeeper Do?

You should find someone who is competent. That means your professional would have:

A dedicated partner will listen to your specific situation and help you think through your scope and needs. Also, they are more likely to provide upfront value to you before you make a financial commitment.

The ability to communicate is essential. Your partner needs to be able to tell you what is happening with your business at your level of understanding.

They need to be familiar enough with you to be able to speak to you on your level, just like Goldilocks–not too high and not too low. That helps them identify pain points and how to mitigate them. One of the critical things you can do to help yourself out is to make sure your expectations are clear.

Your professional needs to be an expert in real estate. That means they focus on real estate and have excellent knowledge about real estate. Don't waste time here with someone who doesn't provide value, as developing relationships are expensive in both time and cost.

Key Takeaways

Regardless of an individual's situation and the appropriate approach they choose, maintaining and regularly reviewing your books is crucial.

For example, the scope of your investments may dictate the bookkeeping process or processes you follow. A sole proprietor or married couple investing together may be perfectly suited to self-managing their books. Alternatively, investors who enjoin with partners or have many properties will prefer a solution accessible from the cloud by their team of professionals.

Ensuring that you have a solid understanding of accounting and bookkeeping best practices for real estate investors is one of the first steps to sustained wealth development.

Do you want to learn more about how to secure your financial freedom? Register for FREE Royal Investing Group Mentoring on Wednesdays at 12:30 pm EST to learn more while networking in a casual, fun, and friendly environment.

Buy Real Estate through a Solo 401K to Achieve Total ROI

Your Return on Investment (ROI) is the most vital metric to measure success. When you invest in real estate, you may be able to achieve total ROI with a Solo 401K.

Do strategic investments with high returns interest you? Then you're in precisely the right place. This article will cover investing in real estate using a Solo 401K.

What Is A Solo 401K?

Unlike a traditional 401K, a Solo 401K (or self-directed 401K) is designed specifically for self-employed individuals. To qualify for a Solo 401K, you must be the sole owner or operator of a business with no employees other than your spouse.

What Are Some Advantages of Investing Through My Solo 401K?

Your Solo 401K offers unique advantages that make it an efficient and powerful investing tool. For a real estate investor, those advantages include:

Another key advantage of using your Solo 401K to invest in real estate is avoiding the Unrelated Debt-Financed Income (UDFI) tax. For a real estate investor, you do not have to pay the 40% UDFI tax on income or gains on your investment paid for by your Solo 401K.

Here are two scenarios that illustrate the advantages of investing through your Solo 401K.

Scenario 1: Bob uses a Solo 401k and invests $100,000 of Solo 401k funds to acquire a real estate property. Bob also secures a nonrecourse loan from a bank for $100,000 and purchases the property for $200,000.

Assume the property generated $10,000 of net income in a year after calculating all eligible deductions. The UBTI tax would not apply to any of the income or gains generated by the real estate investment!

Scenario 2: Bob uses a Solo 401k and purchases a property for $200,000. Bob then sells the property three years later for $400,000. The $200,000 earnings Bob captured are tax-free!

How Can I Achieve Total ROI with a Solo 401K?

Typically you cannot use a traditional 401K to invest in real estate. However, the Internal Revenue Service (IRS) allows Solo 401K holders to invest in:

The Solo 401K is a powerful investment strategy that you can use for total ROI. Here is how you would go about using your Solo 401K to invest:

Step 1: Open Your Solo 401K Connected To Your Business Entity

The process entails making sure that your Solo 401K account is the only entity associated with:

Step 2: Fund The Solo 401K

You can fund the Solo 401K and make contributions using:

Step 3: Choose How You Want To Purchase The Property

Typically, you have three options when you invest with a solo 401K:

  1. Cash purchases: are the most straightforward options in which you use funds from your account to purchase a property
  2. Tenants-in-common: allow you to use both personal money and Solo 401K funds to invest in a property
  3. Nonrecourse business loans: protect your assets from lawsuits, bankruptcy, and other potential risks

Step 4: Conduct The Transaction With Your Solo 401K

Your Solo 401K must be the purchaser of any investment property. If you use your name on any documents on the purchase, the IRS will prohibit the purchase. Conduct the transaction by having your Solo 401K:

You are the trustee on the Solo 401K. As a real estate investor, you need to submit the purchase documents to your escrow agent. Store all the documents in a secure place.

How Can I Get Cash From My Solo 401K?

You can lend to yourself from the retirement plan, and the funds have no restrictions. You can take out half of your retirement account, or $50,000, whichever is lower.

For instance, if your retirement account had $75,000, you would be able to take out half of that amount, or $37,500. On the other hand, if your retirement account had $150,000, you would only be able to take out $50,000.

The loan money comes out of the fund as cash, but you must pay the retirement account back with interest. As long as you pay the market interest rate, you have the option to pay your loan back quarterly over five years.

For unique investing opportunities, check out our additional resources: Buy Tax Liens With Your Self-Directed IRA LLC OR Solo 401K.

Is A Solo 401K Plan Safe From Creditors?

Solo 401K plans do not automatically include protection from creditors. However, you do have protections under federal bankruptcy laws.

For non-bankruptcy creditors, protections fall at the state level. Solo 401K plans do not receive protection from the Employee Retirement Income Security Act (ERISA). State laws protect you in most cases subject to certain exceptions, such as child support.

Total ROI with a Solo 401K IS Possible

Investing in real estate may result in a total ROI with a Solo 401K.

There are some distinct and attractive advantages of investing with a Solo 401K:

We covered four critical steps to investing with a Solo 401K:

  1. connecting your 401K to your business
  2. funding the retirement account with your contributions
  3. choosing how to acquire the property
  4. using your 401K for all transactions

Are you interested in learning more? Register for FREE Royal Investing Group Mentoring Wednesdays at 12:30 pm EST.

Complete Guide to Selling an Inherited House As-Is with Siblings

Are you considering selling an inherited house with your siblings? Dealing with the death of a parent or guardian is an emotional period, complicated by the administrative and legal tasks that go hand-in-hand with death. If you're inheriting a house with siblings, there are also financial and sentimental challenges to navigate.

Many families opt for selling an inherited home as-is to minimize the timeline and see the financial returns as soon as possible. However, what's intended to be a gift can become a burden if this process isn't handled properly.

Types of Home Inheritances

Inheriting a home may seem pretty straightforward. However, different types of inheritances can impact how you handle the sale of the property: deed inheritance, will inheritance, and trust inheritance.

A deed inheritance works similarly to a life insurance policy. Also known as a "Title by Contract," this applies to mortgages that have a beneficiary or beneficiaries listed to receive the property in the event of the contract holder's death. The beneficiary is listed as a "Remainderman."

A will inheritance is a bit more complicated to manage. This type of home inheritance is what most people envision when they consider an inheritance. The property owner leaves the house to you and your siblings in the will. However, as the will is not a part of the original ownership contract, you must use the will to go through probate proceedings to secure the property. This process delays the sale of the home by months.

Finally, a trust inheritance indicates that you and your siblings are entitled to the home after a certain age. This type of inheritance typically doesn't apply to adult children or siblings.

Determining the type of inheritance you've received will help you understand the timelines and legalities involved. It's worth hiring an attorney to navigate these processes.

Selling an Inherited House? Understanding Inherited Ownership

When you inherit a house with your siblings, state law dictates that you share ownership equally. In addition to sharing the asset, you're also equally responsible for any outstanding liabilities and debts (i.e., the mortgage and property taxes) and for claiming income from the property.

This means that you and your siblings will be equally responsible for paying debts— especially if there's no life insurance to cover the outstanding mortgage— even if you have different income levels. Additionally, you'll all have taxable income from the sale to navigate with the IRS. It's worth getting professional legal and accounting advice as individuals when navigating the process.

It's also important to note that selling an inherited house can't take place without agreement from all of the listed beneficiaries. If a sibling is pushing back, you may require legal intervention before listing the home.

It should be no surprise that handling the administration of dividing debts and income and listing the home is a significant undertaking. If one sibling handles the majority of the work, they are legally entitled to additional compensation for their time from the estate. Again, having legal counsel in place to assist is beneficial.

Dealing with an Outstanding Mortgage

Getting mortgage insurance is one of the best things a homeowner can do to protect their family should death occur— unfortunately, many opt out of this coverage. When mortgage protection is in place, the costs are covered, and the beneficiaries don't have to worry about paying it off.

So what about those cases when the parent didn't have mortgage insurance or life insurance, and a mortgage is still outstanding?

Rest assured that under federal law, a mortgage lender cannot demand the entire mortgage in a lump sum from the beneficiaries of inheritance. In some states, there are even protections in place to give beneficiaries the right to walk away from an inheritance with a mortgage without the bank being able to go after their personal assets.

The process of transferring a mortgage after death is contingent on each lender's policies and procedures. Generally, it's a lot of tedious paperwork, but not too difficult. Inheriting a mortgage does mean you'll be required to make those payments until the house is sold. When the home sells, the profits will be applied to paying off the mortgage before being divided between the beneficiaries.

Home Inheritance Taxes

When you inherit a home, a policy called "stepped-up basis" comes into effect. This policy ensures you only pay gains on the selling profit versus the home's value today rather than the original value. Suppose your parents bought the home for $50,000, and it's now worth $200,000. You sell it as-is for $220,000. You and your siblings would be taxed on the gains of $20,000 rather than $170,000.

It's important to understand this concept, as many parents mistakenly "gift" the home to their children before their death. In that case, you would be taxed for the $170,000 gain.

Selling a House As-Is

Selling an inherited house as-is means that you're listing the property in its current state with the understanding among buyers that you won't be making any repairs. Buyers still retain the right to have an inspection completed, negotiate the price, and access a full property disclosure from the sellers.

The advantage of selling a house as-is is that you won't have to put any time and money into the property before selling. This streamlines the process of paying off the mortgage, potentially getting extra money, and moving on with your lives.

As inheriting a home with siblings can be complex, it's important to hire a professional attorney and consult with a skilled accountant.

Key Takeaway

Spare loved ones the pain of probate and ensure that your assets are distributed exactly according to your wishes by having a professional estate plan put in place. This can be accomplished through a 3-part strategy that involves a Living Trust, Pour Over Will, and power of attornies for making medical, financial, and managerial decisions. By not having a proper estate plan, you are at extreme risk of losing up to 1/3 or more of your estate to probate court and attorney fees. To learn more about Royal Legal Solution's rock-solid estate plan service, visit Estate Planning for Real Estate Investors.

Real Estate Syndication to Diversify Investments

Suppose you want to invest in real estate but don't want to personally oversee or manage the investment. In that case, you might want to diversify with real estate syndication. Ideally, a real estate syndication would provide you with the benefits of real estate investment, and you wouldn't have to worry about personally being a landlord.

In this diversification strategy guide, we will discuss real estate syndication basics.

What Is Real Estate Syndication?

A real estate syndication occurs when investors pool their money to make large real estate purchases. Here is a list of some things that real estate syndications commonly invest in:

You can diversify with real estate syndication and enjoy the benefit of your partner's shared expertise and experience.

If you want to learn more about real estate syndication as a diversification strategy, check out our article Real Estate Syndications.

How Does a Real Estate Syndicate Work?

There are two parties in a real estate syndicate: a real estate syndicator and passive investors.

What is a real estate syndicator? 

The first party, the real estate syndicator, will:

After your group finds a property for investment, then the syndicate will:

The real estate syndicator handles virtually all aspects of the investment. Their role is to create, execute and deliver a business plan that brings cash flow to you, the passive investor.

What is a passive investor?

The passive investor is someone like you.

A passive investor would provide a percentage of the syndicate's capital to purchase the property. Then the passive investor would receive a portion of ownership in the property.

The ownership you have in the property entitles you to:

Should I Diversify with Real Estate Syndication?

There are several benefits to investing in real estate syndications. Those include, but are not limited to:

Another beneficial aspect of real estate syndication is that the property will appreciate over time. When you get ready to sell the property, you could potentially increase your return on investment.

Perhaps the most intriguing aspect of real estate syndication is the ability to control which properties you invest in and the ability to diversify. As a passive investor, you have the opportunity to split your investment across several syndications.

What Are the Risks of Investing in a Real Estate Syndication?

All investments carry an element of risk–investing in a real estate syndication is no different. The most considerable risk comes from finding someone you trust with your investment.

You have to find an experienced, trustworthy, and competent syndicator as the investor. Ensure to do your due diligence and research that company before you invest with a real estate syndication company.

How Can I Diversify with Real Estate Syndication?

You must be either an accredited or sophisticated investor.

An accredited investor must:

A sophisticated investor refers to an investor who has enough money, investing experience, and net worth to conduct complicated investments. Sophisticated investors must be knowledgeable and have a track record of successfully identifying and evaluating winning investments opportunities.

What Are the Steps to Invest in a Real Estate Syndication?

You have to do a little bit of research to find just the right place for your investment. One thing you will want to do is communicate and network with other investors. As you develop strong bonds with other investors, they will be able to direct you to trustworthy real estate syndicates.

You can also attend real estate conferences to meet other investors, learn more about investing in real estate syndications, and land your first deal.

All in all, you (as a passive investor) will need to find a trusted, successful, and experienced real estate syndicate. Once you identify and invest, the real estate syndicator will do almost all the work, find an investment property, structure the syndication, and conduct the business.

Key Takeaways

If you want to invest in real estate but don't want to control the day-to-day aspects of owning property, you may want to diversify with real estate syndication.

The benefits of this type of diversification strategy are appealing. You can invest without the hassle of being a landlord, earn passive income, enjoy the benefits of appreciation and real estate tax rules.

As always, you need to ensure that you know about any investment you make. To learn more about real estate syndication and other real estate investment opportunities, Register for FREE Royal Investing Group Mentoring Wednesdays at 12:30 pm.

Judgment Enforcement Effective Strategies for Collecting

Have you ever wondered how about judgment enforcement on non-paying tenants? Or maybe you want to know what your options are other than evicting someone and putting them out on the street?

If so, you’re in the right place. Keep reading to learn more about:

What Is Judgment Enforcement?

First, it’s helpful to know that a judgment is merely a court order or a decision from a lawsuit. Sometimes, the court will order the defendant to pay the plaintiff a certain amount of money in the judgment.

Lawsuits happen. In most cases, it’s not if but when they occur. As a real estate investor, you must protect your financial future and assets. Take our FREE, five-minute investor quiz to learn more.

Why does this matter for real estate investors?

Here is a typical example you may encounter as a real estate investor. Imagine you have a tenant who has stopped paying rent. While it may not be easy to evict your non-paying tenants, they still owe rent to you. You have other options available for judgment enforcement.

What Should I Do If a Tenant Stops Paying?

You don’t always have to evict. You can sue the tenant for breach of contract, get a judgment, and then enforce the judgment. Remember the tenant signed a lease agreement with you. You can sue the tenant in small claims court.

What is a small claims court?

First, you should know the rules that control your state’s small claims court system. Second, you should know that small claims court is a low impact, relatively cheap, and hassle-free way to get paid.

In general, small claims courts are:

How does small claims court work?

What’ll happen is this, you will file a suit in small claims court against your tenant for breaching their rental contract with you. After that, the court will set a hearing date. Then you serve your tenant with papers (this is easy because you know where they live).

Both you and your tenant have the opportunity to represent yourself in court. Present your facts:

After that, the court will most likely issue a judgment in your favor. Here are some things to consider about court decisions:

After you win a case, you will need to enforce the court’s judgment.

What Tools Do I Have for Judgment Enforcement?

If your state allows it, you can:

These options are convenient because you most likely have your tenant’s job history and banking information already on the leasing contract.

Wage garnishment

Suppose you’ve won in court against someone that is gainfully employed. In that case, you may be able to garnish (or collect) a portion of their wage to satisfy your judgment.

Just the threat of wage garnishment is enough for most defendants to pay. Generally, to garnish someone’s wages, you don’t have to expend much effort:

There are various rules and limitations to wage garnishment, but this is an effective judgment enforcement strategy.

Bank levy

You have your tenant’s bank information, so it might be better for you to enact a bank levy.

When you win a money judgment, you become a creditor, or someone owed a debt. As a creditor, you may be able to tell the bank to withdraw money from an account without the debtor’s permission.

Sell the judgment

Another option for judgment enforcement is to sell the judgment to an enforcement specialist. Selling is a win-win situation because it allows you to relinquish the responsibility of debt collection to a third party.

Selling debt might be a good option for you if you think the debtor cannot pay or will not pay. The enforcement specialist will usually enforce the judgment and pay you a portion of the debt.

Key Takeaways About Judgment Enforcement

You have rights as a landlord too. When a tenant does not keep their promise, you should follow the law because it’s the right thing to do.

We discussed what judgment enforcement means, how to take action against non-paying tenants, and what tools you have available to enforce judgments. Now that you know this information, you have proven strategies at your disposal to ensure that your real estate investment journey is successful.

Secure your financial future, and register for your FREE Royal Investing Group Mentoring Wednesdays at 12:30 pm EST!

How to Maintain Operational Anonymity

How do I maintain operational anonymity after a structure is in place?

Maintaining operational anonymity isn’t easy, which is why most real estate investors worry about being the target of a lawsuit, regardless of the protection in place.

Does this sound like you? You’ve made it to the right place. In this article, we’ll explain:

We invite you to read on and learn how to maintain anonymity operationally.

Why Is Operational Anonymity Important?

Anonymity is essential because it stops lawsuits before they start, as belligerent parties will be unable to find the actual target of the suit.

How Do We Obtain Anonymity?

We obtain anonymity by using a variety of tools. These tools include using:

We hide assets using Anonymous Trusts, which allows you to keep ownership information hidden. The Anonymous Trusts keep you safe by owning your LLC and serving as the Title Holding Trust, the name disclosed when filing Articles of Incorporation.

In practice, it would look like this:

When someone goes to research the owner of the real property, the Count Clerk’s records will show the anonymous trust as the owner. Neither the trust owner nor you registered with the state, so your identity is safe.

How Do You Maintain Your Operational Anonymity?

There will be times when you need to maintain operational anonymity throughout running your business. As you continue on your real estate journey, you want to make sure that you protect your investment and your livelihood.

What follows are three common scenarios in which you will want to maintain your anonymity:

#1 How To Purchase A Home

What matters is how you plan to purchase the home. If you buy it:

#2 How To Enter Into A Contract With A Third Party

When you contract service providers, you will want to interact through an anonymous operating LLC. These providers include, but are not limited to:

The operating LLC will be the party that contracts with the service provider, and you will sign as the manager of the LLC.

When you contract with a tenant, you will interact through an anonymous operating LLC or a third-party property manager. The operating LLC will be the party that works with the service provider, and you will sign as the manager of the LLC

#3 How To Sell Your Property

When you sell your property, anonymity is not a priority. To sell, you should move the title back to your name and sell. When you sell the property in your name, it simplifies the closing process. Finally–as the seller–you ensure the proceeds check comes directly to you.

What Parties Can You Disclose True Ownership To?

In some cases, you will want to disclose actual ownership. Some of the most common parties to tell include:

How Should I Disclose True Ownership?

Sometimes you may not need to maintain complete operational anonymity and disclose true ownership. When considering whether you should tell your identity to each of the previous parties, ask yourself the following questions:

What Happens If Your Anonymity Has Been Compromised?

Don’t panic if someone compromises your anonymity. You have options available to you to address the situation. The initialism “STACK” details the steps you should follow:

Conclusion

Ideally, it’s clear how to maintain operational anonymity while managing your real estate investment.

Now that you know how to protect your privacy, here are some key takeaways about the protection provided by anonymity:

Do you want to join other savvy investors and learn more about how to protect or grow your investments? Register for FREE Royal Investing Group Mentoring Wednesdays at 12:30 pm EST.

Tax Savings Strategy to Achieve Financial Freedom

Are you ready to grow your real estate business? To do that, you need a solid tax savings strategy.

You already know that there are considerable advantages to investing in real estate. The passive income, substantial tax savings, and long-term security most likely drew you to real estate investing.

Real estate investing is the first step in your plan for financial freedom. The first thing you need to focus on is finding good real estate deals.

The next step is to maximize how your money works for you. Read our list of six tax savings strategies to achieve financial freedom and build wealth.

#1: Start with the children, house, and vehicle

#2: Maximize your deductions

This tax strategy is primarily for single-family home investors and the available deductions.

You have a multitude of deductions available to you as a real estate investor.

Deductions that do not impact financing Deductions that do impact financing
- Amortization
- Auto
- Depreciation
- 529 Plan
- Home office
- HSA
- SDIRA
- SOLO 401K
- Business expenses
- Credit card processing fees
- Legal fees
- Office furniture
- Office supplies
- Repairs and maintenance
- Tax prep fees
- Travel expenses

As a sharp real estate investor, you need to know which deductions impact financing because it affects your ability to get loans, secure more properties, and generate wealth.

#3: Start a SOLO 401K

With a SOLO 401K, you can save $58,000 a year in taxes. If you're married, the tax savings increase to $116,000.

How a SOLO 401K works as a tax savings strategy:

Do you want to know more about this powerful tax vehicle? Visit our SOLO 401K Hub to learn more!

#4: Create a Self Directed IRA (SDIRA)

You can add a Self Directed IRA on top of your SOLO 401K.

This SDIRA enables you to manage everything as long as you set up an LLC owned by the IRA. Then, you can invest through the LLC and shelter about $7,000 more per year from taxes.

#5: Use the DB(K) Tax Savings Strategy

The official name of this plan is the Eligible Combined Plan which Congress created as part of the Pension Protection Act of 2006 under Section 414(x) of the Internal Revenue Code.

You can combine the SOLO 401K and SDIRA with the DB(K) strategy. You gain an additional shelter which allows you to grow your wealth with a deferred tax, more capital in play, and higher returns.

#6: Get a Real Estate Professional Designation

If real estate is the primary source of your income or you are a "stay at home" husband or wife, use this strategy.

You can use your depreciation and other losses from real estate to offset other income.

If you are a high self-employed or 1099 income earner, you should consider investing in commercial and multifamily investments. You can use cost segregation, accelerated, and bonus depreciation to avoid taxes.

Even if you are a W2 employee, you have to document your time thoroughly and may be able to secure the designation.

Learn more about the requirements it takes to earn a real estate professional designation.

Tax Savings Strategy Key Takeaways

We went over six tax strategies you need to take to grow your real estate business. These six strategies will help you achieve financial freedom and grow your wealth.

Remember to:

  1. Start with the children, house, and vehicle
  2. Maximize your deductions
  3. Start a SOLO 401K
  4. Create a Self Directed IRA (SDIRA)
  5. DB(K) strategy
  6. Get a Real Estate Professional Designation

We've covered a lot of information that may include concepts that are new to you. To hear this content presented by Scott Smith check out Royal Investing: Episode #1 Tax Savings Strategies on our Wistia channel.

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.

1031 Exchange Update for 2022

Are you fed up with paying taxes on your hard-earned real estate profit? Are excessive taxes preventing you from securing your financial freedom as a real estate investor? If so, you should read further to learn more about the 1031 Exchange update for 2022.

As a savvy real estate investor, you can use this little-known tax break to increase your wealth. Once you've mastered the 1031 Exchange, you'll see an increase in your purchasing power as you keep your money working for you and not filling the federal government's coffers.

What Is A 1031 Exchange? 

First, you have to know what we mean when talking about a 1031 Exchange. In general, a 1031 Exchange is a tax provision that lets you sell an investment property, take those gains from the property, and reinvest those gains into another property without paying taxes. 

When you sell real estate and earn gains, you have to pay tax. Appreciated property means more tax when you sell. The flip side of that is true too. If your property depreciates, you are subject to depreciation recapture taxes when you sell. Those taxes apply to you whether you claimed the depreciation deductions on your taxable income or not. 

Either way, the federal government will try to extract their pound of flesh from your gains. 

The beauty of the 1031 Exchange provision is that you get to defer the taxes on your gains. That means as a real estate investor you pay no taxes when you sell your property and exchange it for a new real estate investment. If you follow the rules, you may be able to defer the taxes indefinitely as you reinvest into bigger or better properties. 

If you want to learn more about the finer details of the 1031 Exchange, we recommend that you read Understanding 1031 Exchanges And Asset Protection Entities

What Is The 1031 Exchange Update? 

When President Biden won the election, one of his campaign promises was to eliminate the 1031 Exchange because of the perception that it gave an unfair advantage to the ultra-wealthy. 

The Biden administration had planned on either eliminating the 1031 Exchange program or modifying it somehow. One of the planned changes was the complete overhaul of the 1031 Exchange program, but that plan hasn't come to fruition. 

The other plan included a $500,000 limit on the amount of money exchanged per year. That plan has also failed to earn widespread support.

One of the reasons the government failed to eliminate the 1031 Exchange program is that it is not in their best interest to kill it. Here's why. 

If the government were to limit the 1031 Exchange successfully, it would mean less tax revenue in the long run. In the short term, the government would enjoy the taxes from the sale of the property.

However, a limit or drastic change to the 1031 Exchange would probably chill the real estate industry. That means that more people will hold onto property to avoid taxes. When people hold

onto their properties, all the ancillary sources of tax revenue dry up. 

That means the contractors, cleaners, attorneys, real estate agents, and title companies do not participate in those deals. When you eliminate those people from transactions, you eliminate the taxes they would have paid. On balance, the federal government earns less in tax by removing or reducing the effectiveness of the 1031 Exchange benefit. 

Fewer taxes and political gridlock have prevented any significant changes from the tax code yet. However, as a competent real estate investor, you should prepare for changes, just in case. That means you should look into all tools available to you right now and take advantage of them. 

You might wonder if the 1031 Exchange is the right investment strategy for you. Answer that question by checking out Is a 1031 Investment Strategy Right For Me? 

Key Takeaways

The 1031 Exchange update doesn't take away from the fact that it still might be the right vehicle for you to avoid paying capital gains taxes. Right now, there is talk in Washington D.C. about making policy changes, but nothing has emerged from those discussions yet. 

That's not to say that nothing will happen, but a lack of support and institutional gridlock are keeping policy changes at bay. As an intelligent real estate investor, you should plan, but don't worry too much about things out of your control. 

The best thing to do right now is to use all your tools. That means finding out which real estate investment strategy is suitable for your particular and unique circumstances. 

Do you have a plan for your financial freedom? If not, let us show you how to secure your financial independence and build generational wealth to pass on to your family. 

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.

Real Estate Professional Designation

As a real estate investor, you have to contend with mortgage payments, repair and maintenance, insurance, and other myriad fees. On top of all of those fees, you still have to pay tons of taxes—capital gains, net income investment, and income.

Sometimes, it’s hard to carve out profitability, and you want to have all the weapons in your arsenal to combat your tax burden.

Sound like you? You’re in the right place.

This article doesn’t list every tax break you have available to you as a real estate investor.

What is in this article is a tactic that works. Establishing a real estate professional designation for yourself reduces the amount of tax you owe, improves your cash flow, and acts as a step toward securing your financial freedom.

Why should I get a real estate professional designation?

The short answer is that it might save you money. It’s essential to determine whether your involvement in real estate activities makes you a real estate professional for tax purposes.

First, the real estate professional designation establishes if you can deduct losses from your real estate activities against ordinary income. Second, it determines if your income from real estate investing is subject to the net investment income tax.

What are the rules that determine the deductibility of real estate losses?

IRS Sec. 469(c)(2) states that rental activities are considered passive activities regardless of your level of participation.

That is important to you as a real estate investor because:

That means your passive losses from those activities are only deductible against your passive income activity income.

However, if you qualify as a real estate professional, the passive activity loss rule doesn’t apply to you.

That enables you to deduct losses from rental real estate against nonpassive income. Examples of nonpassive income include:

You have the potential to reduce your taxable income close to zero and increase your cash flow.

A net investment income tax of 3.8% applies to income over the threshold amount. The threshold amount is:

However, there is an exemption for gross rental income from being included in investment income for real estate professionals.

What constitutes a real estate professional?

You, as a taxpayer, qualify as a real estate professional for any year as long as you pass three tests with your real estate business:

Test 1: Material participation means that you participate through the year on a regular, continuous, and substantial basis. There are seven ways you can “materially participate,” so finding a way to qualify is surprisingly easy.

Test 2: You must spend at least 750 hours per year in real property trades or businesses in which you materially participate. Personal services performed as an employee do not count unless you (as the taxpayer) are at least a 5% owner of the trade or business.

Test 3: You must spend more than 50% of your working time on real estate activities in which you materially participate.

For the real estate professional designation, an actual property trade or business includes, but is not limited to:

If you meet the requirements of the three tests and have documented proof, when you file taxes, you will file an IRS Section 469(c)(7)(A) Election to Aggregate Rental Real Estate Activities. The election is a written statement sent with your return for the tax year of the election.

Why should you become a real estate professional for tax purposes?

The IRS recognizes three categories of real estate investors. The third category, “real estate professional,” enables you to deduct 100% of your real estate losses against ordinary income. You can even deduct your real estate losses against your spouse’s income!

You might have one rental property or several properties. As a property owner, when you take the real estate professional election, you can create thousands of dollars in tax deductions. Those tax deductions may result in no tax liability at the end of the year.

Key Takeaways

As you will quickly learn, real estate has incredible potential with the sheer number of tax breaks to create cash flow.

One of the top strategies that savvy investors use is qualifying as a real estate professional.

As a real estate professional, you can:

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.

Millennial Real Estate Investors Outlook for 2022

Some might think that ‘millennial real estate investors’ sounds like a contradiction in terms. Until recently, this generation was happy to rent because of substantial student debt and the desire for flexibility in changing jobs.

Millennials also waited longer than previous generations before getting married and starting families. However, current trends show more millennials have begun to invest in real estate.

More Millennial Real Estate Investors

In recent years, real estate purchases by people ages 25 - 40 increased significantly. Buyers in this age group now make up close to 65% of the total population. Millennials are also the largest living generation in the U.S.

Financial Benefits

Millennials recognize the potential for income tax savings when buying a home. They also see property as a potential income source through renting.

Crowdfunding Options

Younger buyers have typically had difficulty investing in real estate because of the large down payments required. However, online investing platforms now offer lower-cost options through crowdfunding.

You can have a real estate offer accepted at the cost of only $500 to $5,000. In addition, most syndication or crowdfunding companies outsource property management, leaving the owner free of landlord duties.

Flexibility, low cost, and variety are vital characteristics of crowdfunding that appeal to millennial real estate investors. It’s also easy to manage online, fitting the lifestyle of this tech-savvy generation.

Changes After Covid

The pandemic changed millennials’ perceptions regarding homeownership. The following factors played a significant role:

Comfort and Practicality

After spending so much time working and studying from home, millennials realized they might enjoy more comfort than their rented properties afforded. Many professionals continue in a remote or hybrid model, making it critical to have adequate residential space.

Couples who work and study from home often look for homes with two workstations and an open kitchen.

Preference for Real Estate over Stocks

Most millennials believe property provides a better return than the stock market. Many of them were looking for their first job during the 2008 recession and had trouble finding work. After this experience, they became skeptical about purchasing stock.

Spacious, Multipurpose Homes

Except for some minimalists, most millennials prefer spacious larger homes with spaces that can serve multiple purposes. For instance, a large balcony may double as an exercise area and mini garden.

Location

While a few millennials prefer the suburbs, many choose to settle in the city. Some reasons include:

There’s a trend toward leaving larger cities like Los Angeles and New York. Instead, millennials choose places with low-income tax rates, for example:

Newer Homes

Most millennials prefer to invest in homes that are new construction or recently renovated. New dwellings carry several benefits with the decreased chance of a peril claim, leading to better insurance coverage. Modern houses are also more likely to be compatible with many smart home options that improve ease and comfort.

Sustainability

Millennials have always been interested in sustainability, so it makes sense that this characteristic carries over to real estate decisions. Living in the city allows for a shorter commute and a smaller carbon footprint. There’s also access to parks and walkable neighborhoods.

Millennial Real Estate Investors Strategies

Maybe you’re looking to invest in property to increase your income. Here are some specific approaches to try:

Subletting

Once you purchase a property, you may wish to share costs with a roommate or rent out a portion of the home. These strategies can help free up funds to invest in more real estate.

Short-Term Rentals

If you live in an area with significant tourism, short-term rental properties can yield a notable increase in income. A service like Airbnb or Vrbo can help you find tenants and manage bookings.

Investment Trusts

Real estate investment trusts (REITs) offer young investors the benefits of owning property without the responsibilities of private ownership. They require a smaller investment and give you access to returns that might not be possible as an individual.

You can buy into a REIT involving a collection of assets like:

To take a deeper dive into the details of Real Estate Investment Trusts, you should read:

Renovating and Reselling

This strategy, also known as flipping houses, requires an excellent understanding of the housing market. You want to find an undervalued property and renovate it as quickly as possible to sell it for a profit. To do so, you’ll need maintenance expertise or excellent contacts with skilled contractors who charge reasonable prices.

Pre-Construction Investment

Pre-construction involves purchasing an “option” on a property before the groundbreaking on the development project. You pay a fraction of the cost of developed land.

This type of investment is most successful in high-demand areas with frequent housing shortages. In such locations, prices can skyrocket, and new units often sell before they’re complete, leading to substantial profit for the investor.

Millennial Real Estate Investors Takeaway

Millennials are investing in real estate more than ever before. The Covid-19 pandemic led to conditions that favored these investments.

This generation looks for newer, spacious, multipurpose homes in urban areas. Sustainability is also a significant concern for millennials.

Millennial real estate investors interested in learning more are encouraged to register for our weekly FREE Strategic Group Mentoring sessions. We discuss the best practices for protecting your assets, strategies to achieve tax savings, and pitfalls to avoid when investing in property.

The Rental Property Asset Protection Checklist

Keep potential lawsuits at bay by viewing the rental property asset protection checklist we have prepared for you. By doing so, you’ll be able to protect your assets without worry or distraction.

The following checklist recommends some protective measures you can take for your real estate investments, cash, other assets, and financial future:

The bottom line is that the best asset protection strategies stop lawsuits from happening. This list will help you decide how best to protect your assets.

Anonymous Land Trust for Rental Property Asset Protection

Anonymous Land Trusts are highly effective but lesser-known instruments that protect your privacy as a real estate investor.

One vital benefit that anonymous land trusts provide is that unknown ownership makes it harder to file a lawsuit against you.

Here are some frequently asked questions about a Land Trust:

What are the parts of a land trust?
They are vehicles to help savvy investors hold properties anonymously. An anonymous land trust has three components: a grantor, a trustee, and a beneficiary.

How does a land trust work?
When you decide to form a land trust with Royal Legal Solutions, we serve as your trustee and manage the trust. You are the beneficiary which means you (1) are not publicly identified and (2) can enjoy the profits from your property.

Read “Anonymous Land Trust for Real Estate Investors” and get more details to help you decide if this sound legal strategy is the right solution.

Setting Up a Traditional LLC

Limited Liability Companies (LLCs) legally separate you from your business.

Benefits of an LLC:

We want to provide accurate information so you can make a sound decision. To that end, here are the most common drawbacks to using a Limited Liability Company:

Read “Texas LLC for Real Estate Investors” for more information. Ultimately, LLCs are okay for one asset, but a Series LLC is better for multiple assets.

Benefits of Setting Up a Series LLC for Rental Property Asset Protection

Series LLCs, a “parent-child” structure that ensures protection for your assets. Here are the steps of the structure:

Benefits of a Series LLC:

You might be having questions about a Series LLC. Here are the most common questions we encounter about this legal structure.

How does the Series LLC protect my assets?
Each asset is isolated from others.

How can I minimize my losses in a critical case?
The Series LLC structures your business in such a way that only one asset is at risk in any given lawsuit.

Why would I need anonymity?
If people think you own nothing, they have no motivation to sue you. Thus, the anonymity of the Series LLC shields you from lawsuits.

Read “Series LLC for Real Estate investors” to get a detailed account of how a Series LLC might benefit you. Overall, Series LLCs primarily help real estate investors with multiple properties or types of assets.

Avoid These Common Situations to Stay Out of Court

When you sign a lease with a tenant, you begin a legally enforceable contract that covers the terms of their tenancy.

Your tenant pays rent, and you conduct repairs and maintenance in exchange. When your tenant feels like they have no options, they might seek to sue you.

You don’t want to end up in a lawsuit, so make sure to:

Use this checklist as a guide to help you decide what type of asset protection is right for you. No matter what level of real estate investor you are, you need to protect your assets. Make sure to apply the lessons from this checklist today.

Bottom Line: Protect Your Assets

As you continue along your real estate investing journey, ensure that you protect your assets with the right financial strategies and business structures in place. Learn how to get bullet-proof asset protection with our FREE, 5-part educational series for savvy real estate investors.

Request your access to the Royal Academy Asset Protection Vault today!

Lessons in Multifamily Property Investing

Do you want to learn how to get started with multifamily property investing? If you’re ready to expand your investment portfolio to include this niche, continue reading for tips from seasoned investors.

In this article, you will discover fundamental lessons in multifamily property investing, including:

Class C Multifamily Property Investing Risks and Rewards

You have several options for multifamily property investing. As a result, you need to know the different classes to invest in a property that suits your goals. Property classification highlights the level of risk and returns for a variety of residence types.

To determine a property class, investors consider:

As the price of real estate and the cost of building materials increase in the United States, there is a trend toward investing in Class C properties.

Characteristics of a Class C Property:

Benefits of Acquiring a Class C Property:

Partner Up With an Experienced Investor

If you have decided to explore multifamily property investing, you may have taken the first step by scouting properties and deals.

However, closing the deal is where your inexperience could become an obstacle. Part of the problem may be money, and you can raise some, but not enough. One thing you might consider is partnering with an experienced investor.

Here are the benefits of partnering up:

Location, Location, Location

A fundamental truth in real estate investing is that location matters. For your first multifamily property investing endeavor, you might be looking into a Class C property. These types of properties exist in low-income areas. Despite that, you will still want to look for high-growth, high-yield areas where property demand is high.

As an investor, familiarity with your area of purchase is vital. Some of the things you can look for that indicate improving neighborhoods include:

Multifamily Property Investing Assumption Agreements: Risks and Rewards

An assumption agreement is when a new owner takes over loan payments from the previous owner. In other words, the assumption agreement shifts the financial burden of the loan to the new owner.

Possible risks and rewards for an assumption agreement are detailed below:

One thing to remember is that in an assumption, there are three parties:

At times, the bank doesn’t care what terms you and the seller agree to, and as a result, the bank may impose additional terms on the deal.

The Importance of Inspections

Don’t let the seller try to pull a fast one on you. Unscrupulous sellers may demand that you give up your right to inspect the property. Denying you access to the property should be a huge red flag.

You need to be present on your multifamily property so you can check for vacancies. In addition, if a unit is not rent-ready, you can negotiate a clause that enables you to recoup some of your closing costs.

Beware Fraud in Multifamily Property Investing

Not all sellers are fraudulent, but the temptation to commit fraud increases with the amount of money changing hands. Shady sellers will want to make their property look as favorable as possible to you so that you feel comfortable closing on a deal.

One thing to look out for is a type of fraud called phantom leases. This type of fraud occurs when the property owner claims a unit is occupied, and that a contract exists, but no paying tenant lives in the property.

This shady tactic makes it appear that the property has fewer vacancies and fraudulently increases its attractiveness. Properly accounting for your tenants is why it is so critical for you to inspect your property personally.

Another unethical strategy involves owner contributions. Review bank statements for the property. Anything ending with “000” is a huge red flag. That amount of money is most likely an owner contribution (not rent), indicating a poorly performing property.

Your Multifamily Property Investing Journey

No matter what type of multifamily property you choose to invest in, you need to be protected. Be sure to apply the lessons in multifamily property investing you learned today to protect your assets.

One way to get rid of the risk you will encounter is to form an LLC. Read more here to learn about the benefits of using an LLC as a multifamily home investor.

Before you dive into the world of multifamily property investing, ensure that you have rock-solid protection, financial strategies, and business structures in place. To discover how you can achieve bulletproof asset protection, check out our FREE, 5-part educational series for real estate investors.

Request your access to the Royal Academy Asset Protection Vault today!

Blockchain in Real Estate Unlocking New Potential

Blockchain in real estate has the potential to revolutionize the industry. Historically, real estate transactions could not occur using purely digital means. Overwhelmingly, real estate transactions take place face-to-face between buyers, sellers, and various intermediaries, but blockchain has the potential to change real estate investing as we know it.

An unknown person or group of persons named Satoshi Nakamoto invented blockchain in 2008. The technology is a digital database that computer network nodes share. The database stores information digitally.

A blockchain collects information into groups called "blocks" that hold the data. Once data fills the block, it is closed and linked to the previously used block. This information is recorded and distributed and is uneditable or immutable.

Since it is secure, blockchain works well as the foundation of ledgers with records that are permanently unable to be altered, deleted, or destroyed.

Here are four ways blockchain in real estate may unlock new potential.

1. Profitable Opportunities for Blockchain In Real Estate

When you invest in real estate, you have to engage with real estate agents, lawyers, and mortgage underwriters, each playing their part in the process. But, the emergence of blockchain in real estate may make those players obsolete.

Blockchain platforms can automatize each of their roles by handling real estate listings, legal documents, and payments. Reducing the role of 3rd party intermediaries means buyers and sellers saving money on intermediaries' fees, thus keeping cash in their pocket.

An added benefit of eliminating the need for 3rd parties is that the closing process will go much quicker. The presence of blockchain streamlines the transaction by removing the need for discussion between the middlemen, buyers, and sellers.

2. Secrets of Using Blockchain in Real Estate

Blockchain in real estate saves money through:

Blockchain's status as a decentralized technology gives it trust and security. Everyone in the network has access to the information on the blockchain. That information is transparent and unchangeable.

The fact that the system is decentralized means creates trust within the system. The information is available to everyone on the network. Thus buyers and sellers are confident in their transactions. In addition, everyone having access to the data reduces the chance for fraud.

Transparency in the system cuts down on costs of conducting real estate transactions in other ways too. Blockchain in real estate can automate inspection costs, registration fees, loan fees, and taxes. As a result, those fees can be reduced or eliminated.

3. Build Wealth Easily Using Blockchain in Real Estate

Blockchain enables novel ways of trading real estate via multiple platforms and marketplaces. For instance, Overstock's tZero sold a security token representing fractional ownership in a Coloradoan luxury resort.

In addition, tZero and real estate crowdfunding company NYCE joined together to tokenize $18 million worth of property. Tokenizing real estate makes it like a stock, where buyers purchase "shares" of the property.

Then, investors buy, sell, or exchange real estate assets in online markets similar to stock exchanges.

These platforms counter one of real estate investing's drawbacks, the lack of liquidity in real estate investments.

Real estate transactions typically take time for the sale to conclude, thus making them lack liquidity. Theoretically, blockchain in real estate makes the process faster because:

4. Unlock the Value of Blockchain in Real Estate

Tokenization, or fractional ownership, makes real estate investing flexible by reducing:

In general, real estate investments require a large amount of upfront capital to purchase the property. More expensive and larger purchases required multiple investors to pool their money.

With blockchain in real estate, investors only need access to a marketplace (usually via an app) to buy and sell the tokenized property.

Also, owners of tokenized real estate do not have to manage the property alone, which means the collective owners deal with maintenance and leasing issues.

What Impact Will Blockchain in Real Estate Have on the Future?

It remains uncertain what significant impact the emergence of blockchain in real estate will have on investors. If we watch the finance industry, history tells us that change is imminent and may occur at a dizzying pace. For instance, last year, 13% of Americans invested in cryptocurrency and earned $4 billion.

Whether blockchain and cryptocurrency continue to grow at this meteoric pace, we can assume that the technology is here to stay. That is why it is more critical than ever to ensure that your assets are protected and that you are in a position to take advantage of the potential.

Finally, we recently held a Royal Investing Group Mentoring meeting on this very topic. Listen to the replay on our Royal Investing Wistia Channel.

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

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

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.

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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.  

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.