If you’re thinking you might like to purchase your first rental property, “Big Al” Clopine, CPA of Your Money, Your Wealth® and Pure Financial Advisors offers three tips that all aspiring real estate investors should consider before buying any rental properties.
“Today I’m going to talk about real estate investing, which is something near and dear to my heart, as I’ve been a real estate investor for about 35 years. And I will tell you something, you can make a lot of money in real estate, as I have. You can also lose money in real estate, and I have done that too – through the savings and loan crisis in the 90s and the Great Recession. So I’ve got three tips for you.
Number one is real estate is like a business. It’s not like the late night ads that make it sound really easy. It’s actually, you’re going to be finding tenants, you’re going to be finding properties, you’re going to be collecting rent, you’re going to be evicting tenants and fixing toilets – so be aware of that. That’s number one.
Number two is, make sure you understand the finances of real estate because we’re here to make money in real estate. But if you don’t know how this works, make sure you understand what is called cash-on-cash. Cash-on-cash is your net profits divided by your investment. Maybe you have a $100,000 downpayment. Your profits, after all expenses, even the mortgage payment, $3,000, $3,000 divided by $100,000, that’s a 3% cash-on-cash. Realize, different areas of the country have different ratios. Texas might be around 10% cash-on-cash. In California, you’d be lucky to be break even out the gate. So be aware of that.
Which brings me to my third point, which is, understand why you’re investing in real estate in the first place. Because real estate can be a great investment to build net worth or to create cash flow. Very often, it’s not the same, again, I’ll go back to Texas. Texas, historically, has not appreciated that much, but the cash flow has been really, pretty good. So you make your money through cash flow. In California, the cash flow has been abysmal, but the properties have gone up in value, and so, you make them by appreciation. Realize, if that’s what you’re doing, if you have California properties, for example, when you retire, you’re probably going to be selling those properties, because selling the properties is really the only way to access that equity without borrowing against it. And when you sell properties, of course, you can do an outright sale, an installment sale, you can do 1031 exchange into a property that has a better cash flow, or you can do something called a tax-exempt trust – charitable remainder trust is the real term. Take a look at that.
If you’d like some more information, look at PureFinancial.com”