Becoming a real estate investor in the East Valley, or anywhere else, is a big step toward the financial future you desire and as such shouldn’t be taken lightly. Mixed with a traditional retirement plan, real estate offers returns and monthly income that you can access long before you’re eligible to dip into your 401k. Keep in mind it’s a lot more complicated than buying a house, renting it, and collecting income. It takes identifying a clear goal, having a plan for the properties, and a willingness to bend with change.
What is a real estate investor?
If you have the financial ability to buy a second home, fix it up, and rent it, you may be a real estate investor. Determining whether or not you can afford to become an investor happens when you work with a real estate professional like me, Elaine Beery of Beery Realty, and our team of trusted lenders, to understand if you’re able to qualify for a loan, the loan amount, and loan programs to fit your needs. If you’re a seasoned investor, you may have cash to roll over into a new project without incurring capital gains; ask about a 1031 exchange.
What is a 1031 Exchange?
This refers to the IRS rule that you can swap one investment for another like it with limited or no tax implications. There is currently no limit to the number of times or how often you can do this. For long-term investors, you may be able to pay one tax at a long-term capital gains rate at the sale of the last rental property. As with anything related to taxes, the rule is subject to change at any time so check with your tax expert to be sure you qualify.
What are the benefits of becoming a real estate investor?
In addition to the 1031 tax benefit, being an investor means creating an income stream. That’s not without its challenges as that income is dependent on having renters who pay on-time every month. Rather than handling properties themselves, many investors hire a management company to vet renters, schedule repairs, and check on the homes.
Take my friends in Mesa as an example. They’ve been renting the same home for nine years because the location is perfect and because they don’t want the maintenance costs of owning a home. Their owner lives out of state and a property management firm handles processing rent and upkeep. It’s a win for the owner to have long-time renters who pay on-time and for my friends, they get to live in a house they like in a location that is convenient, without worrying about ownership costs.
Over the years, the equity in the home has increased which is another benefit of being a real estate investor. While the real estate market has its ups and downs, over time it can increase in value. Whether you hold it long-term or sell at the height of the market in order to invest in another property, you’re likely reaping the benefits of having equity.
Because equity isn’t a guarantee, make sure you’ve got cash flow.
Let’s talk in a hypothetical scenario about a real estate investor we call Carl who bought four homes in the East Valley 20 years ago when prices were significantly lower than they are currently. His mortgages are $650 per month and he rents the homes for $750 per month, making his margin only $400 per month total for the four homes. When one of the air-conditioners broke and needed to be replaced, he didn’t have the cash on hand and had to finance the transaction. If he’d been charging a rental rate aligned with current rental prices, $1300-1800 per month in his area, he would have had the cash to fix his rental home. Now, instead of being a source of income, he’s losing money.
You might think he can just get new renters at a market-rate but it’s not that simple. The homes were built in the 1970’s and haven’t been renovated since he took ownership 20 years ago. Other homes in the neighborhood are renovated and renting at the top of the market so Carl’s homes don’t stand a chance of renting at the same rate unless they’re renovated and there’s no cash flow to do that. While he had the best of intentions to leave the homes to his children and grandchildren, they are advising him to sell.
The lesson? Don’t be Carl. Make sure there’s enough margin to create cash flow.
While the idea of becoming a real estate investor in the East Valley sounds like a good idea, it’s important to have a plan for renovations, property management, and financial security.
