There is absolutely no requirement that the first piece of real estate you buy has to be your own personal residence.  One client of mine refused to own his own home until he had enough income from rental properties to pay the mortgage.  Another client bought an investment property every year so that he could retire and live very well on the income from his units.  He started small and built up to hundreds of units.

If you take a look at the wealthiest men in the world, many of them got that way investing in real estate.   This is a tried and true method that does not discriminate!  In fact, women are often better at managing real estate – we do it for others.   It’s important to think about how to do it for ourselves.

Robert Kiyosaki explains in his book, Rich Dad, Poor Dad, that an asset is something that puts money in your pocket, a liability takes money out.  Owning your own home, as wonderful as it is, is owning a liability that you have to pay for every month.  Owning rental real estate is owning an asset that pays you every month in one way or another. 

OPM – Other People’s Money – put it to work for you!

One of the great benefits of real estate is the ability to build wealth using Other People’s Money (OPM).   Owning rental real estate allows you to do this in three ways:

A) First, you get leverage.  The goal of buying an investment property is to put as little money down as possible.   The amount of the down payment is strictly related to the amount of cash flow you want the building to create.  To break even on an actual cash basis today often requires 40-50 percent  down, but having leverage  allows you to double the value of your asset using OPM.  

B) Second, OPM pays for your financing.   The income to pay all the expenses of owning an investment property comes from your tenants.   When you evaluate a building, you take into account vacancy factor, property taxes, insurance, maintenance and all the other expenses you will have.   Your rental income should cover all of those and then the balance will be what is available to cover your mortgage payments.   You should have zero outlay each month, but unforeseen issues often arise.  That is where the third  source of OPM comes in.

C) Tax benefits will allow you to use what WOULD have been the IRS’s money!   You will be able to deduct expenses against income and then take depreciation, resulting in a tax benefit to you every year.  

The Magic of NOT Paying Capital Gains Taxes!

If you use the tool of IRS Section 1031 tax-deferred exchanges to build your real estate portfolio, you may also never pay capital gains tax on any of the wealth you build.  When you die, your loved ones inherit your properties at the value they have at the time of your death – all gains are wiped out.   By continually rolling one investment into the next, taking money out through financing options and/or living on the income, you can leave an estate completely free of capital gains.   This is how wealth is built and passed on from generation to generation.   So think about it…tax-free wealth, paid for by other people – are you ready to get started???

What Can You Buy?

Investment property can be anything you purchase for the purpose of investment from land and condominiums,  to apartment buildings or commercial shopping centers.   

Turn-key investments handle everything for you – all you do is sit back and cash the check.  For example, condo projects like Footprints on the Bay in Monterey (see box), have a full property management program.  You can use your unit a few weeks a year, keep it furnished and then rent it on a weekly basis to vacationers.  Or, they will find you a long-term tenant.   

Another option for hassle-free investing is putting your money into a tenancy-in-common commercial investment.  By doing that, you get a percentage interest in a big shopping center, office building and/or apartment complex.   You get a return, an income check and all the tax deductions; however, your exit strategy may be limited.

Or you can do it all yourself – buy a property, handle the rentals, take care of the tenants and pay yourself the management costs.   What you purchase  is determined by the  time and effort you want to dedicate to this part of your life.  Tenants and toilets can be a drudge for some, but for others, it’s an exciting part of creating wealth.  Evaluating the level of involvement you want is part of the process I go through with you when setting up an investment strategy.

Where Can you Buy? 

Of course, if you are managing your property yourself, you will want to buy something close to home.  But the IRS allows you to deduct the costs of travel to inspect your investments twice a year, so why not consider something in a place you always visit or would like to always visit?  How about a condo in Paris, Buenos Aires or Tel Aviv?   What about a duplex in Portland or Arizona?  Or an apartment building in Manhattan?    There are management and tax issues involved in owning real estate in far away places, but they can be offset by the fun of being able to go to visit your property.  

There is no time like the present to get started on building your real estate portfolio.  The world is waiting!   In the next issue of the BAWJ, I will discuss some of the global real estate hot spots and the opportunities in international real estate!