After Tax Cash Flow In Real Estate Finance Finance The Absolute Beauty of Real Estate Investing

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The Absolute Beauty of Real Estate Investing

There are many investment options available these days. From cash to treasury bills, stocks, bonds, gold, emerging markets, art, start-ups, your own business, defaulted debt, etc. The options are endless and for every investment type there is a salesman or two who will tell you why their preferred investment is the best investment type. This means that you must be fairly savvy and knowledgeable about where you place your investment dollars. Are you diligently putting money into something? It will be nice to know that you have some sort of control over the outcome of those post daily grind years of shelling out money.

The sad truth is that most people work hard for years for their money, but are too tired to invest the time and effort to understand their investment options and strategies, and they just turn to a portfolio advisor who is able to sell their company. The first decent person to walk through the door with a plan or investment strategy. Some actually go so far as to seek a recommendation from a friend or colleague. The real litmus test is whether you’ve ever been told by an advisor who really blew their socks off, and I mean someone who wasn’t related to the person or had a financial incentive to get you on board. . There is a subtle but very important difference between someone who is satisfied with their advisor and someone who spends half an hour listening to your advisor about how great he is. Most people fall into the first category, and the vast majority are probably telling themselves they’re happy because they don’t want to feel like a fool for putting so much trust and confidence in someone who isn’t really excited about their financial future. .

Let’s talk about real estate. Following are some of the tremendous advantages of real estate over other investment options.

1) It is a tangible, touchable, feelable, smellable, habitable property,

2) It is insurable,

3) It is usable,

4) It is depreciable,

5) Value can be increased in many ways,

6) ROI can be achieved through increased equity and cash flow,

7) Buying or selling using inside information is not illegal,

Here’s an example of how you can use all these benefits on one property.

The other day I received a note about a man who had inherited a property through an heir but had personal money problems. Well, the property didn’t do the man any good, because it was untidy at the time. He needed the money within a few days and as nice as this inherited house was, it was actually a burden to the man, simply because one, his problem was not solved, and two, he had other things to take care of. This is a bit of what you would call inside information. The general public does not know this man’s situation, nor is it in any of the papers, nor do I intend to share this information with anyone, and that is good news to me, and completely legal. As Martha Stewart might contend, that’s not how the stock market works.

Now, I did a little research and the house is worth about $175,000. I called this guy and explained that I was a real estate investor and that he had recently inherited a property that he had no use for and wanted to see if he would be able to sell the property to me. He said, and explained to me the ins and outs of the property. I just asked a few more questions about why he would sell such a nice house and he came out and told me about his financial difficulties and how he had a huge property load on his shoulders. I sympathized with the guy and told him that we buy all properties in cash, can close early if needed at a discount. I further explained that we needed to sell the house quickly ourselves and make a profit for the deal to work for us. He indicated that he needed about $75,000 to treat his financial problems and give him some breathing room, and he hoped to sell the house to make a fresh start. I let him know that based on what he had told me about the property we could pay him $100,000 cash and close as soon as the title was clear and he jumped on it. Now, to be honest I probably could have said $75,000, which was his number, and he would have jumped on that too, but we’re not in the business of taking advantage of people. Regardless of the situation, that would have been my offer, as it is the right spread for the property for our business.

So, just by getting some good information, we built $75,000 in equity the first day. On top of that, his property was an old house and had three bedrooms and one bath. Updated homes with three beds and two baths, preferably one with a master bedroom, are selling for $225,000. So for about $15,000 I was able to turn this property into a fresh and clean three bed two with paint, carpet, relatively minor kitchen and bath updates (probably just re-glazing tile more modern white) and reconfiguring some odd spaces on the first floor. A bath home that was in demand in the area. With a little vision and $15,000 I was able to generate an additional $50,000 in equity or $35,000 in net positive impact in less than a month. So far we have $110,000 equity in the property and financially we are all in for about $115,000 plus taxes and a couple thousand dollars in insurance costs.

I’m not nearly done with it yet. I have a handful of investors who understand the power of real estate and want to take action, but don’t want to get their hands dirty. They will loan me up to 70% of the repair value (“ARV”) of the property, $157,500, ($225,000 x 70%) using either liquid funds they have available or money from their IRA, see chapter on IRA investments. As a practical matter we will only take up to 70% of the property’s post-renovation value as this gives everyone a 30% cushion, still plenty of equity to pull from if the market crashes or something unexpected happens. Get out of the deal and make a profit. In addition, I insure the property for the full ARV if the property is completely destroyed by an act of God so that everyone gets their money and returns the promised profits. Our investors also get the first registered mortgage location in the county.

Further for the privilege of accessing my investors’ funds at short notice and to entice them to remain satisfied as passive investors, we offer a good rate of 12% simple interest assuming the investor accepts full repayment of his dues. Once the property is sold, or refinanced, usually no more than two years, or 10% if they want monthly payments. The big old checkbook doesn’t have to be pulled out every month so I pay a 2% convenience fee and mail the checks and keep them in my ledger and QuickBooks, etc. Are my investors happy? He is earning 12% in tangible assets leveraged to a maximum 70% loan-to-value (“LTV”), his investment and returns are insured against catastrophe, he is the first lien holder on the asset, and the term is relatively short, no more than a handful of years, except he knows That’s all I do, so as soon as we get out of this investment, he can move on to the next investment. I say jokingly, the worst/best case scenario is that I don’t pay him back. He takes a full 30% equity position instead of 12%.

But, we’re not done yet. All I know is that there are people in this market whose credit cards have maxed out, a late payment or two and possibly a relocation due to a sputtering economy, and whose credit is so low. These are people who, if they were born a year ago, would have been first-time home buyers, but just got caught up in the financial crisis and couldn’t qualify through the traditional means. The good news is that I’m happy to help. These people are eager to move into their own home and are looking for three things in daily newspapers and online classifieds, 1) a decent 3 bedroom 2 bath home, 2) in a good neighborhood 3) an owner who will finance. It just so happens that I have it. My ad says, attractive 3 bed 2 bath home, great neighborhood, $235,000, owner will finance with reasonable down payment. They called out to me, look at this house, which I have partially put together, at least two nice towels in the kitchen and bath, some fresh cut flowers around the house, fresh coffee pots when they come in. A small radio is playing some kind of soothing music. It’s all they want.

We set it up as a lease with an option to buy, they put 3% down, which they were already saving 3% to qualify for an FHA loan, and I set them up for a lease for two years (time to get their credit in order so they could buy the property from me using conventional financing. can) and their lease payment is the same as the monthly payment on a 6.5% loan of 97% of $235,000 amortized over 30 years plus insurance or taxes of $1,774. Also the terms of my contract with them are as follows, they will make any repairs and maintenance to the property under $1,000 and after exercising the option to purchase the property from me within two years, I will credit them as their down payment plus what their principal deduction would have been if we actually had a loan vs. a lease. . They own the home in essentially every way but on title. They will have equity in the property on day one. For me, if they decide not to buy the property, I have their down payment, plus the 6.5% interest I was effectively charging over two years. Just for comparison, I borrowed $120,000 at 12% which is $14,400 per year my lease option tenant is paying me $14,817 per year in effective interest. All expenses on the property are included, I can put $400 in the bank each year, and by the way, did you notice that I was able to increase the price by $10,000 because I am owner financing?

I’m still not done. Since I am a real estate professional, I can deduct all my expenses related to this property for taxes, newspaper ads, vehicle expenses, and best of all, depreciation. Since I still own the property, I am allowed to depreciate the property for further tax savings. Plus, as long as I wait a year, the gain will be taxed at the capital gains rate versus ordinary income which will put another $20,000 or so in my pocket.

Since I haven’t crossed the 70% ARV threshold on this investment, my returns are unlimited since I haven’t put a single dollar into this asset. My investor, unlike the banks, might feel cheated if I don’t take full advantage of his investment and get him as much money as possible. I could have sold the property immediately for $225,000 with $110,000 less taxes in the bank, but I chose another path and decided to put some qualified people in the house for an extra $10,000 and get the tax benefits of keeping the property with no extra effort. short term It’s hard not to really like the benefits of real estate. The sky’s the limit when you find and work with the right people.

I win big time but it takes a little work. My private investors win big, they offer substantial returns with protection that you can’t get with any other type of investment. We were able to enjoy many benefits of investing in real estate with just one property. It also does not take into account multi-family housing or commercial property benefits that are similar to those listed above.

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