a. Money – Although it is nice when you have money to invest, it
is not totally required. What I mean about “money” is
disposable income and savings that you can use for this
purpose. Many banks will loan you the money to purchase a
home with as little as 10% down. It is currently more difficult
to get this type of financing, but that will change back to the
norm when the financial markets survive the current financial
meltdown.
b. No-Money Down – Yes, you can and still can. It really depends
on price and terms, but yes, you can. I purchase one of my
condominiums with “No money down”. The purchase price
was $60,000. At the time, I was able to assume the first
mortgage of $45,000 and the second of $15,000. The woman
was just going through a divorce and this was an investment
property for them. They wanted $70,000 and just to get rid of
the rental. I told them I would assume all the mortgages and
pay her closing costs and two late payments. Yes, you can!
c. Qualifying for a loan – Do this now and make sure you can
close within 30 days of less. Not only qualify for your loan,
but also take the extra step and get “Pre-Approved!” The Pre-
d. Approval process will ask you to provide all the necessary
paperwork, (W-2, 1040’s for two years, copies of bank
statements, IRA accounts, and more.) You should be able to
call your lender and tell them “I have found a property and it’s
in escrow. The lender should then close your transaction
within the timeframe negotiated without any additional or very
little paperwork from you.
Holding Title in an LLC – If you are investing with someone
else or have a large amount of personal assets at risk, then I
would suggest an LLC. An LLC will shield you from any
lawsuits brought against you for the particular properties
placed into it. The initial costs to set up the LLC have
dramatically dropped with online internet sites, which set
everything up from the comfort of your computer. In
California, there is an $800 yearly fee, for just filing a state tax
return each year. My accountant charges about $900 to file
the federal and state returns, but I am trying next year to use
turbo tax instead. Take into account all these fees in your
calculations. If you only making $200 a month profit from
your purchase it may quickly be used up by just the above two
fees.
Filing taxes
As I spoke about above, filing taxes, along with keeping good
paperwork is necessary. If you are skilled, enough to file your own tax
forms then I highly suggest that you continue to do the same. It is not too
difficult to file your 1040 taxes with the addition of one or more
properties. I personally use Turbo Tax® to assist me year over year and
have great success. I file 1040 federal & state taxes on the properties I
own individually and corporate returns on the properties I own with my
business partner. I have read that the odds of an audit are greatly reduced
with a corporate return as opposed to an individual return. Over the past
thirty years, the IRS has audited me once.
My audit experience was stressful and educational at the same time.
Not knowing what to expect I walked into the IRS office in Santa Ana with
all my paperwork. I am a great bookkeeper, so I had receipts and proof of
all income and expenses for the auditor. He went over all my income,
added up all the expenses (with receipts) then went to the bottom line. He
looked at me and said, “Well, everything looks fine and there appears not
to be any changes I would make. Thanks for coming in today.” I looked at
him and said, “That’s it? I was scared to death about this meeting and
that’s it?” He said, “I was more scared of you!” I said, “What? Why?” He
said, “I just audited a police officer from Orange yesterday and it wasn’t
pretty for him. He became so upset and boisterous that our security had
to escort him out of the office. Therefore, when I opened your package
today and discovered that you are a Police Officer I was expecting the
same outcome. I was scared to death that you were going to explode if
I found something, but that was not the case.” I still laugh about that
meeting today. What I learned about the process! When the IRS audits
you, they usually target a specific area of your return. They were targeting
my rentals, since at the time; I had enough legal “write- off’s” to make my
adjustable taxable income “zero”. Yes, I said, “Zero”. I did not have to
pay any taxes that year. The IRS is looking that you have claimed ALL
your income & expenses correctly. They want written proof of all the
expenses you have written off. As long as your honest with the IRS and
can prove all your income and expenses, you will not have any difficulty
with an audit.
