Let’s Talk Real Estate – December 2021/January 2022
With the New Year comes the tradition of resolutions. We all resolve to continue good practices, change undesired traits or behaviors, accomplish personal goals or otherwise improve our lives. Some will set resolutions to improve physical, emotional, spiritual or financial wellbeing. Although I can’t help with the first three, I may be able to help if your sights are set on improving your financial wellbeing. Life is one long learning lesson and I believe the best way for me to help is to share my story and my 4 investing epiphanies that I learned along the way.
My first investments were limited to investing in stocks. Thirty years of my early life was spent in the high-tech industry so that became the majority of my stock portfolio. Over the years, my investments in high tech stocks doubled, tripled and crashed, but on average, increased about 6% a year, so I had no complaints.
It wasn’t until I sold my home in Sonoma County in 2002 and moved to Southern Oregon and became a Realtor, that I realized I accidentally made more money off the equity in my home than I have ever made over the years with my stocks. This was my first investing epiphany—an “accidental” tax-free windfall started my obsession for real estate investing as I learned the power of appreciation.
When I reached the Rogue Valley, I began doing small side projects of buying undeveloped rural land, developing it then reselling. Then I moved into buying distressed, beat-up and bank-owned properties, renovating them and then flipping them. I quickly realized that flipping houses was a lot of work and I was missing out on one of the greatest benefits of owning real estate—the passive monthly income. So, my second epiphany was realizing that I needed to buy, rent and hold in order to build a monthly passive income stream.
Buying real estate can take a lot of money, and if you purchase a property as an investor, you are going to need at least 20% down plus cash reserves on-hand to qualify for a loan. It was going to take a long time to buy enough rental homes to have an income stream that I was looking for, but I did figure out a short cut. I could buy a house, duplex or triplex with an owner-occupied loan, move into it with 3% down and a lender would finance the rest. This was my third epiphany, the power of leverage. I could use other people’s money to buy rentals and I could keep all the rent. Lenders require that you live in the home for at least one year, so this began the period of my life where I moved 8 times in 10 years, acquiring one rental home after another.
My next epiphany came when I did my taxes and realized not only can I deduct all my expenses of renovating and managing my rental homes, I can depreciate each rental by 3.636% a year for 27.5 years. This is my tax savings epiphany, my rental homes were appreciating every year, but the tax code allowed me to depreciate them every year. What a great advantage!
Fast forward to today and I’m on auto-pilot. I can refinance my rental homes and use their appreciated value to get the cash needed for the next rental home or I can use my rental income stream to finance additional rental properties.
So, if your resolution in 2022 includes improving your financial wellbeing, I hope by sharing my experience, and my 4 investing epiphanies, it can help you increase your passive income, decrease your taxes and give you a lasting resolution.