“Time is your ally, so you want to start investing as soon as possible. “– Raphael Castro
- Generating income
- Tax Advantages
- Increasing rents over time
- Availability of investments
Are you interested in investing with real estate rentals but are hesitant about how to begin? Do you want to start generating passive income as well as get an edge in understanding and recognizing good rental investments? These tips will help you decide and jumpstart your career in investing in rentals!
This article has been created based on the YouTube video titled “4 Reasons Why You Start Investing in Rental Income This Year” by Rafael Castro and Jorge Vazquez.
Rafi: Good afternoon, welcome to another installment of our Graystone Brown bag Sessions, I am Rafi, Chief Operating Officer of Graystone Investment Group.
Jorge: My name is Jorge, CEO of Graystone Investment Group.
Rafi: Hey Jorge. Where can they contact us?
Jorge: They can always find us at homes4income.com. Where you invest…
Rafi: We do the Rest!
Rafi: Today we have a very relevant topic because it’s the end of the year and we are going to talk about the four reasons you must start investing in rentals. So Jorge, what is the first and main reason we should start investing again in rentals?
Jorge: Rafi, the main reason why people should start investing in real estate is because you receive income every month. It’s income despite what you do as long as you have a good asset.
Rafi: It’s the end of the year and I’m sure you will sit down with your CPA, and do your end-of-year assessment strategy. Rentals have to be part of that equation if you’re investing in real estate. We always suggest the 80/20 strategy. That is 80% rentals and 20% flips. Rentals give you the stability of the income and flips are more on the high-risk high-reward investment.
Rafi: What would be the second reason why we should invest in rentals?
Jorge: Rafi, the second reason is the tax advantages you get from investing in real estate, especially most of those are either 1099 or even W-2’s. These are things that you can write off and it’s just a beautiful thing. Examples of these are regarding interest rates you pay on the mortgage and the depreciation you can take on the property. Each property you can take the depreciation for up to twenty-seven years.
Rafi: Now, Are you a CPA?
Jorge: I’m not a CPA, No.
Rafi: So again, these are just suggestions. So consult your CPA. There’s a couple of things that you need to think about.
“First, the tax laws were changed. They are much more business-friendly. You take advantage of that in terms of tax rates and Taxation rules for businesses are higher now than they were a couple of years ago.”
Rafi: Let’s talk about income. For example, you invest in something that gives you 8% income, there’s not much you can do with that income. You most likely have to report it. The same amount if you have a rental can be deducted in let’s say maintenance. If you get $1000 in interest income, you have to report $1000. But here you may get a $1000 rent but you have to report only $600.
Jorge: Absolutely, I would say the same thing for stocks. For those of you who have been doing well in the stock market, maybe now is the time to sell. I always say it’s the best mutual fund because you could depreciate it and you could ride off on the interest. You could borrow to buy and then write off the interest.
Rafi: You’re going to borrow off stocks. It’s an asset that you can borrow from.
Jorge: Absolutely, it serves multiple purposes. You can rent, you can sell or you can live in it.
Rafi: Remember to do rentable flips. That’s when you buy a flip opportunity. But as part of the analysis, think “what if I can’t sell it at the price I am looking for? Can I cover my expenses if I rent it?” That’s the best flip opportunity you can have. #RentableFlips.
Jorge: I want to talk about my personal experience Rafi. I am very blessed, I own twelve properties right now and it’s been a bumpy ride. For a lot of investors, during the first year, you would have to spend money on re-fixing the property. But if you’re patient enough and you have the right team you start seeing some of the income coming in. The fact that if I’m having a slow month because I’m in sales or something happens, I could count on that income coming to pass me through.
Real Estate Investing Team is Important
Rafi: Keyword is team.
Jorge: Absolutely and we have the team, you don’t need to be a pro. You just need to know the right team and we have it here.
Rafi: Right! Now, what’s the third reason why they must invest in rentals.
Jorge: Rafi, it’s Increasing rents over time, therefore, giving yourself a raise over time. It’s almost a given that rents are going up the following year. It’s almost a given that rents are going up in the next year. It’s just what I like about rental properties.
Rafi: We’re not saying that if you have a $1000 rent, you increase it to $1500. Even if you know that the rental market is tagged in that area we always suggest that you bump something. So if it’s $1,000 then bump it $1,005. It’s just $5. We just want that tenant to get used to the actual increase in rent every year. It could be 5$ this year then 10$ the next year, this in a way makes the tenant get used to the rent increasing yearly.
Jorge: They prepare themselves, and they know it’s coming. If you have to adjust your rents because the market now has changed, with a good tenant, you can lower the rent back down again.
Rafi: In the past couple of years in Tampa, it’s been a three to five percent appreciation increase in rent. So that means that if you wait, you lose that three to five percent. Time is your ally, so you want to start investing as soon as possible. So instead of $800 to $840, you start at $840 and you lose that $40 value.
Jorge: You mentioned before that having the right team is important and there are a lot of people that are pretty successful renting properties on their own and there are some people out there that are mediocre. Those people, I bet, don’t have the right management in place. Little things like this might just be miscellaneous stuff but add up at the end. Four or five years down the road you would start asking? “What happened here? Why is my asset doing so badly?” It’s because those are things that you’re not supposed to know unless you have a team.
Rafi: Absolutely! And with those three pieces, you have to make sure that you nail it in terms of a requisition. You have to make sure that the rehab is done through the market specifications.
Because if you put granite and high-end materials in mediocre or low-end properties, you will not get $1000 especially if the market says $700 to $750. It has to be up to the market specifications.
Rafi: The big tip here is that property management has to be part of that rehab design. They have to tell the GC (general contractor) “Hey! Send me the quote because I need to make sure that I can rent this property.” The property manager as part of your team has to be part of the design process in that rehab. Because at the end of the day, the one who’s renting the property is the property manager. That’s something that we have in our team and company that has worked very well.
Jorge: Also as part of the psychology of the tenant, “This is the type of class that they don’t teach in college”. We understand that the tenant is going to need the bare minimum, like carpets. At the same time, you understand what the landlord wants. They do not want to constantly repair things. You need to understand that a tenant’s basis is on the location and type of property you are renting. If it’s a property in South Tampa versus in New York City, it’s going to be different in terms of expectations of what the tenant is going to have. Those are important things that if you’re not aware, you should read up on and get more familiarized with it.
Rafi: Excellent! So let’s go with the four tips
- Generating income.
- Tax advantage.
- Increasing rents over time.
- Availability of investments.
Rafi: So the liability stays here and the rent goes there. Now, percentage-wise that mortgage keeps getting lower and lower.
Jorge: The main reason people got in trouble in 2007 is that they missed number four. That is making sure that they have a stable mortgage that is long enough to bypass any type of issue with the market like a recession. Rafi is a huge advocate of this, having a fixed mortgage with a minimum of seven to ten years. I’ll let Rafi elaborate more on this.
Rafi: Don’t go over 80%, this gives you a 20% cushion if the market goes up and down. it’s very hard for the market to go down more than 20%. That happens every twenty to thirty years. So you have that cushion if it goes down. Even if it goes down 25% you can ride that. The other thing is you make sure that it’s fixed for at least seven to ten years so you can ride some of these variations in the market. Right now the market is going up. We know at one point it’s coming; I always say we’re one day closer to the next Bolt.
Rafi: We have started to see some of these signs, the landing is more flexible than maybe three to five years ago. I think that the market is a little bit more structured and we have a little bit more of a safety net than before.
Jorge: Good way to put it, I like that.
Rafi: But still, you start to see some properties staying in the market for two or three days instead of weeks. On the lending part, it’s key that you have the 80/20, you have the seven to ten years’ approach in terms of length and to please make sure that you vetted that lender. There are some people out there that give you hard money. But I will always go with someone that you have either a good reference from an investor or able to research and know that this is a solid company that we can work with.
Rafi: We were about two years before we started recommending a lender in financing because we wanted to make sure. We had a couple of situations where we were burned. They promised something and didn’t deliver, that cost us money. So once we vet a company and we have done fifteen to twenty transactions with them through the year, then we start recommending them to our investors.
Jorge: Before we go, if you are looking about investing in YouTube, I encourage you to do it now, decide to invest today. It’s not rocket science, all you have to do is make the first step and we will help you with the whole process. It’s doable. A lot of investors started with no knowledge and they are doing very well. Don’t forget to go to our investor profile, fill it out because we have free consultations. We don’t have a problem helping people guiding them through the process.
Rafi: “The easiest way to fail, is not doing anything.”
Jorge: Not trying.
Rafi: Not trying. So you have to go for it and along the way make sure you have a team that can help you. Do your research and don’t have this analysis paralysis where you’re stuck looking for the perfect house with the perfect process. Get into it, find a partner like us that can guide you through it then start and we’ll go from there. Now Jorge, where can they find us?
Jorge: Rafi, they can find us at homes4income.com where you invest…
Rafi: We do the rest!
Jorge: See you Guys!