Purchasing Investment Real Estate 101

CHAPTER FIVE:

 

Preparing to invest

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 20% 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 purchased 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-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.

d.              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 (personally) 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.  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.