Real Estate Investing

So what about the mantra we hear from so many different real estate investing gurus? “To learn how to invest in real estate today with no money down, attend my seminar … or read this book … or listen to this tape … or watch this video …” Is zero-down investing really possible, or is it merely an appealing myth that the gurus cash in on?

For the purposes of this article, we are going to assume your investment plan is long-term renting, not short-term flipping. The short answer is yes, zero-down investing is possible. Even if you have to resort to seller financing, you could eventually own property that you could rent (but probably not until the whole thing is paid off). Banks may be a little tighter these days and you would certainly need to have pristine credit, but there was a time not so long ago when lenders happily handed over full financing. We’re reaping the rewards now with the foreclosure circus, but I digress.

The more complicated answer — and the one most people don’t want to hear — is that zero-down investing is not a practical way to invest. Presumably, with 100% financing, you don’t have a lot of cash flow. You may view real estate as a way to generate cash flow. However, unless you plan on being a slumlord, you’re going to have to fix things. The HVAC unit, roof repairs, broken windows or doors, rotting floors … the list of things that could need replacing is virtually endless. Combine that with monthly obligations like insurance, the mortgage, homeowner’s association dues and the property manager’s paycheck, if applicable, and you’ve got yourself a very small profit margin (if any at all).

Is that worth the headache and responsibility of being a landlord? You are on call virtually around the clock, because emergencies can’t wait. Furthermore, with 100% financing, your interest and monthly mortgage payments are going to be sky-high. Your rental income might be enough to cover the monthly payment, but the loan will be stretched out over so many years that you will simply be treading water. It’s certainly not a profit vehicle for you. In fact, it will probably turn into a money pit and you will rue the day you bought it. The Dough Roller blog has a great post about real-world experiences with money-sucking investment properties.

Investment real estate that is paid for in full, or at least purchased with a significant down payment of around 50% or more, is so much more profitable and practical. Don’t sour yourself on the idea of investing in real estate by ruining your first experience with an impractical strategy. This can be a great money-maker, but zero-down investing is not the way to accomplish that goal. If your cash flow isn’t great, you’re better off investing in mutual funds until your cash flow improves. In most businesses, cash is king, but especially in the unpredictable real estate investment market.

Owning a vacation home packs extra perks besides just a good time. When not in use, vacation homes can add up to major tax savings. The first task is to distinguish between personal use and rental use. Personal use includes a visit by yourself or any family members — even if those relatives are paying money to stay there. Personal use also includes renting the property to a friend at a discounted rate. Rental use is self-explanatory, but also includes any time the property owners spend at the property for the purpose of renovating or improving the property.

Income from property rented for 14 days or fewer within a year is tax-free. Income from property rented 15 days or more within a year is taxable. Calculate 10 percent of the number of days the vacation property was rented out and determine if that number is greater or less than 14. Whichever number is greater should be used to determine how many tax deductions will be granted. For instance, say the property could be categorized as rental use for 40 days of the year. Ten percent of that would be four days, so the number 14 would apply in this case. If the property was rental use for 200 days, ten percent of that — 20 days — would apply because it is a number larger than 14.

Whatever the figure winds up being, the property owner should keep their number of personal use days under that figure if they wish to receive more tax deductions. This is particularly true if the property is technically categorized as rental property, and double bonus if the property owner is actually the property manager. In that case, expense write-offs can tally up to $25,000 in excess of rental income!

For more information, visit the LataRealty blog. And of course, don’t forget that property taxes and mortgage interest on vacation property is tax-deductible, regardless of whether it is ever used for rental purposes. Furthermore, even a boat or RV can be considered a “second home,” provided it has a permanent kitchen, bath and bedroom. Vacation home tax deductions are a relatively complex procedure that will probably require an accountant, but could be well worthwhile in the end.

When it comes to tax time, most people want to claim all the deductions possible. However, many simply may not even realize all the minor details they are overlooking. We’ve discussed the tax benefits of homeownership, but rental property is another area chock full of deductions.

Stephen Fishman has a more complete list with more in-depth explanations of each item in his article on nolo.com, but here are some of the most common rental property tax deductions:

Interest: You can deduct all interest on any loans used for property purchase or improvement, as well as interest on any credit cards used for purchasing related supplies or services.

Repairs: Got a leaky faucet? Broken window? Look on the bright side — the repair costs are tax-deductible!

Travel costs: Your mileage and any dining or lodging expenses related to rental management is tax-deductible. You can either deduct actual costs, or use the standard mileage rate, which is a certain amount of money per mile (48.5 cents in 2007, according to Fishman).

Insurance: Whether you buy flood, fire, theft insurance, or all three, the premiums are fully deductible!

However, if you are getting into the rental market, save receipts as proof in case the IRS decides to audit you. And beware of getting involved in shady real estate partnerships where tax evasion may be involved. Tax trouble will mess you up for years to come, so taxes should be taken very seriously.