Business Times of Edmond, Oklahoma February 2020 - Page 24

BUSINESS MATTERS JIM DENTON L edger L ines Real Estate Investing Options H aving overheard investors speak of certain tax advantages, young clients will often ask us about investing in real estate. It is true that real estate investing comes with some tax advantages, but such breaks should not be the sole reason for putting up your hard-earned cash and your credit rating to experience a stress test. Successful real estate investing involves strategy, vision and planning. My rule with clients is: “I never want you to invest in something you don’t understand.” This holds very true with real estate. If you do not understand how a return on your money is generated, what the goal is and how to exit the investment, do not invest! For example, general partnerships in real estate developments can be tricky and expensive if you do not understand the risks associated with ownership and partnership debt. You could unknowingly find yourself paying a debt for someone who, at best, misjudged marketability or at worst was fraudulent. Either way, you’ve lost your money! Investing in real property is usually a big, long-term commitment. Anyone who has signed loan documents when buying a first home knows as much. On a 30-year mortgage loan, there are payment dates that many young people have not even contemplated as to what they will be doing at that point in their lives. By signing the documents, they’re committing to making a payment on or before that date to satisfy their written obligation. 24 February 2020 | The Business Times Why do people invest in real estate? There are benefits. I’ve summarized a few, as follows: Housing — A big part of investing in a personal residence is to no longer be subject to rental agreements for personal housing costs. Homeowners can also benefit from interest deductibility on their tax return. (Such a deduction may be of little consequence currently, due to the higher standard deduction allowed starting in 2018). Buying your own home provides a great initial investment in the real estate market. It educates young buyers on real estate terminology, financing and marketability issues early in life. My advice is not to overbuy on your personal residence. Save your money for other investments. Appreciated value — When you buy low and sell high, you have realized a gain in the value of your initial investment. There is an ever-present risk when this is your primary strategy: The risk of a downturn in the economy where the pool of potential buyers of your property is reduced. When that occurs, your property’s value will correspondingly sink. The risk associated with poor choices of your property’s location can also cause your market value to decrease. Due to marketability or other factors, you may need to hold it longer than initially planned. Such is the primary risk associated with house-flipping activities often glamorized on cable television. Nevertheless, when you have the right vision, strategy and some luck, appreciated value can work to your benefit. Income generation — Rental property can produce rental income when you contractually allow others to use the property. Such arrangements come with some risks as well. There is the risk of non-payment or delayed payment of rental payments. People have been known to stiff the landlord. When this occurs, be ready to assert your legal rights under your well-crafted rental contract. Additionally, it is critical to know the rental rates in the area and be able to keep your property occupied. Rental income provides necessary cash flow to reinvest in the rental property, pay property expenses, buy other properties or use as you see fit. There are various ways to invest in real estate but no set way for all investors. Home ownership — Owning your home is a great way to get started in real estate investing. Paying off your mortgage would be a solid first step to start investing. If you have a 5% mortgage note, it’s like making 5% on your money. I tell people: “It’s like getting a big pay raise!” You’re no longer paying interest and now you are generating monthly cash flow to potentially invest in your next venture. I consider this to be the first step before investing elsewhere. This is a sure winner for a homeowner. Invest in yourself first! Residential rental properties — As for buying and renting houses, having the time and the handyman talent helps. That, paired with the ability to handle calls late at night as well as the skills to market your property for renters, makes your experience doable. Apartment houses