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In my last video about my first rental property, I mentioned that I would do a video covering different real estate strategies or plays and how they relate to your overall investment goals so that you get off to a good start without realizing down that road how you should have gotten started in real estate.
This is so important and so simple, but you never hear about it.
I think it’s very important for new and early real estate investors to think strategically and look at this from 30,000 feet, early on to save you from paying too much “Stupid Tax” (as David Ramsey calls it).
My goal is to help you choose the right strategy for you to get started in real estate investing.
Body:
Explore the different real estate strategies and which goals they support:
income generating vs wealth building,
which are good if you have a full-time job or part time job and which are good if you want to make into a full-time job, part time job or just in your spare time,
which are better for starting out, which ones you can work to move towards down the road
Start with the end in mind (Stephen Covey). Let’s start with your investing goals first to see what kind of strategies fit those goals.
Goal = Income – The following strategies/ plays support this goal
Wholesaling
Flipping
Realtor
Trailer rentals
Mini storage units rentals
Pros:
Need minimal to no capital
great experience in the real estate and can be well positioned to move into passive strategies.
Barriers to entry: low
Cons:
Active income – you must show up daily to make money. They are more like having a job.
Higher income taxes – This income is generally taxed as earned income or short term capital gains which has some of the highest income tax rates.
Goal = Wealth building – The following strategies/ plays support this goal
Buy and hold income producing properties
Single family homes
Multi family units
Commercial property – These are on sale right now. If you could find a niche that will need brick and mortar going forward, you could make a tone on these if you can get them cash flow.
Pros:
Passive income. You make money 24/7. You don’t have to work every day. This is great for people who already have a full time job, and don’t want to invest in real estate full time.
Favorable Income tax rates – Rental property income is unearned income which is a lower tax rate. Also, the value of the building is depreciated over 27.5 years which lowers your taxable rental income which can even lower your earned income from your day job up to $25k per year. Sales are taxed as long-term capital gains which are also taxed at very favorable income tax rates.
Cons:
Barriers to entry: moderate. Need capital or access to capital and credit
Goal = capital preservation – The following strategies/ plays support this goal
Buying property and land with 100% down or a significant amount down.
Entities or anyone interested in parking some capital in a safe asset class that will grow with inflation may be interested in this strategy.
This is not where new investors usually play. Most investors’ goals are income or wealth building, and so they generally want to use financial leverage by putting down as little as possible to magnify their returns and leverage OPM via loans.
Land
Land – non-income producing – speculation, holding costs, loans are not as good, realtor fees are more/ 10%. Income producing or absorbing depending on holding time.
Develop – income producing
Summary
So spend some time thinking about what your investment goals are right now, and which strategies support that goal. Which strategy is the best fit for you right now. Will your goals change over time, and what strategies would be a good fit for you in the future?
Consult your professionals to help you define your goals and which strategies may be the best fit for you.