Strategies REI Hub
Welcome to the hub for strategies for Real Estate Investors!
We’re going to go through simple ones first and then more complicated ones later.
We’re going to start with buying strategies that are simple.
Cash strategies
This can be your cash or private lenders cash or hard money cash or joint venture partner cash.
You need to find a deal that you can make money with either to:
- You can buy with your own cash or you can buy with your IRA money or you can buy with private lender money or you can buy with joint venture money or you can buy with hard money
Why should you bother knowing the FHA loan limits where you live or where you’re investing? It’s important to know them because if you’re buying and reselling, FHA is generally the easiest financing to get for the buyer. See this link for FHA 2024 Loan Limits
A – Z List Advanced Strategies
100% LTV means 100% Loan to Value meaning there’s no equity.
So most of the time we use what’s called “subject to” or “subject to the existing financing” when we deal with Low Equity houses or No Equity houses.
The important thing is that it better cash flows whatever the PITI payment (Mortgage, Insurance and Taxes) is compared to the Monthly rent it better cash flow!
If you were serious about real estate investing you need to understand 1031 exchanges which is using the tax code to roll your profits and when you sell into another property, which defers tax. Think of it like your 401k or your IRA, you get a tax deduction when you contribute, and when you make a profit you don’t pay any tax on it because it’s deferred. Deferring tax and real estate is important.
https://www.law.cornell.edu/uscode/text/26/121
https://www.irs.gov/taxtopics/tc701
The Section 121 Exclusion is an IRS rule that allows you to exclude from taxable income a gain of up to $250,000 from the sale of your principal residence. A couple filing a joint return gets to exclude up to $500,000. The exclusion gets its name from the part of the Internal Revenue Code allowing it. To get the exclusion, a taxpayer must own and use the home as their main residence for a period adding up to two years out of the five years before it is sold. Consider working with a financial advisor to ensure you’re getting all the credits, exemptions and deductions you’re entitled to.
Income Tax Strategies 121 and 1031
With very careful and proactive income tax planning, it is possible to combine the benefits of the 1031 exchange with a 121 exclusion.
There are three (3)possible scenarios when combining a 1031 exchange with a 121 exclusion, which are outlined below.
1 Rental Property Converted to Primary Residence (No Prior 1031 Exchange)
2 The second scenario is virtually identical to the first scenario except that you acquired the investment property as your like-kind replacement property in a prior 1031 exchange transaction.
3 Primary Residence Converted to Rental Property
This overlooked option can help you hedge against future tax changes
In the 11 years since Roth 401(k)s were first launched, these accounts have become a standard option in most plans—nearly eight out of 10 of employers now offer a Roth 401(k), according to a soon-to-be released survey by Alight Solutions, a benefits consulting firm.
Yet so far workers have largely ignored their Roth accounts. Only 13 percent use a Roth 401(k) in plans where one is offered, up only slightly from 12 percent in the previous year, Alight data show.
That’s a missed opportunity. Roth 401(k)s offer one of the best options for building a tax-free stash of savings.
A Roth 401(k) Could Make a Difference in Retirement
Contributions to these accounts are made with after-tax dollars; those to traditional 401(k)s are made with pretax dollars. You can contribute to both 401(k)s at the same time, but the combined amount can’t exceed the current limits of $18,000 a year ($24,000 if you’re 50 or older).
Roth (401)k plans, like traditional 401(k) plans, have no income limits. They also are eligible for your employer match, which is typically 50 cents for each dollar you contribute up to 6 percent of salary.
Don’t confuse a Roth (401)k with a Roth IRA. Though both are funded with after-tax dollars, Roth IRA contributions are limited to $5,500 a year ($6,500 for those 50 and up). Roth IRA contributions also begin to phase out for single filers earning $118,000 or more in 2017 ($186,000 for those married filing jointly).
Why aren’t more people choosing a Roth 401(k)? For starters, many people are confused by the tax rules, as a recent Harvard study found. Inertia and lack of awareness about the Roth are also factors.
“Most workers are auto-enrolled into pretax accounts, or they signed up years ago, so they may not have looked at their plans since then,” says Jamie Hopkins, retirement income program co-director at the American College of Financial Services. “And many people prefer to have an immediate tax deduction rather than wait for a future benefit.”
It could be time to take another look at your plan. A Roth 401(k) is a great deal, especially for younger workers with low incomes, because they are likely to be in a higher tax bracket at retirement. But a Roth 401(k) is a valuable option for retirement savers of all ages and income levels. Here are three key reasons to consider one:
1. Your Savings Will Be Worth More in Retirement
When you make a contribution to a pretax 401(k) account, your taxable income is lowered by the amount you put away. That gives you an immediate tax break, and your money grows tax-deferred. But when you eventually make withdrawals, you will pay taxes on the amounts you take out, which will reduce your retirement income.
By contrast, you put away after-tax dollars in a Roth 401(k), so the growth and withdrawals are tax-free. That means you have the full balance of the account available to spend in retirement.
“It’s harder to fully fund a Roth account, since you have to pay taxes first, but there’s a bigger reward at the end,” says William Bernstein, an investment adviser and author of “The Four Pillars of Investing.”
2. You Are Likely to Save More
“The switch to a Roth is tied to getting more serious about saving,” says Rob Austin, director of research at Alight Solutions. Workers who contributed to a Roth 401(k) saved 9.7 percent of pay on average, which is 2 percentage points more than the average 401(k) saver, the Alight survey found.
Alight also analyzed the data from 25,000 employees who switched to a Roth from a pretax account in 2016. Two-thirds of those in this group raised their contribution rate from 8.2 percent of pay to 10.6 percent.
The survey did not ask workers why they increased their contributions. But the decision to move to a Roth may have spurred employees to improve their overall retirement plan, including hiking their savings rate, Austin says.
3. You Benefit From Tax Diversification
For many savers, using a Roth seems dicey. You’re giving up a tax break today for future tax-free withdrawals, but you don’t know whether you’ll come out ahead because you can’t predict your tax bracket in retirement.
But there’s a simple workaround:
- Split your 401(k) contributions between your Roth and pretax accounts.
- “By holding both pretax and after-tax savings you have the advantage of tax diversification,” says Mike Piper, a CPA who runs ObliviousInvestor.com.
- “That way, you are hedging your bets if you guess wrong about your future tax rate.”
The amounts you put in your pretax and Roth accounts should be geared to your financial goals and overall portfolio.
If you’re just starting out, you might consider funneling the bulk of your savings into a Roth, because you are more likely to end up in a higher tax bracket than you are now, Piper says.
You will still have tax diversification, because employer matches are made with pretax dollars.
Midcareer investors might stash 60 percent of their 401(k) savings in a pretax account and the rest in a Roth. Because you will give up some of your pretax money to taxes, your retirement portfolio will be more or less evenly divided, in spending terms, between pre- and after-tax savings.
At retirement, you can roll over your Roth 401(k) into a Roth IRA, which means those funds are no longer counted in determining how much you must take starting at age 70½. Those distributions might otherwise push you into a higher tax bracket, and it leaves you more flexibility in retirement.
And the ability to tap tax-free savings can also help retirees avoid triggering taxes on other benefits, such as Social Security income or healthcare subsidies for those not yet receiving Medicare, Piper says.
Abandoned houses create a problem for an owner. There s generally no income coming in, taxes and insurance need to be paid, and many times a mortgage needs to be paid. Usually a vacant or abandoned house is much more apt to have vandalism or squatters.
So abandoned houses really offer an opportunity for Real Estate Investors to make a difference in the neighborhood especially. Think of the neighbors directly across from the street and next door, they really don’t want a vacant house in their neighborhood.
Agreement for Deed
Agreement for deed especially in certain States of the United States is it really good tool for Real Estate Investors.
This is where to buy on agreement for deed, you can put some money down, and make monthly payments and then have a balloon payment generally Within 1 to 5 years, and refinance the agreement for deed into permanent financing.
We use agreement for deed to buy. They have other terms such as land contracts or contracts for deed or bonds for deed or installment land contract.
AITD All Inclusive Trust Deed (aka Wrap)
Every state in the United States has a different terminology with a a wrap around transaction. AITD stands for all inclusive trust deed.
An All Inclusive Trust Deed (AITD) is a new deed of trust that includes the balance due on the existing note plus new funds advanced;
also known as a wrap-around mortgage.
A wrap-around mortgage, more-commonly known as a “wrap”, s a form of secondary financing for the purchase of real property The seller extends to the buyer a junior mortgage which wraps around and exists in addition to any superior mortgages already secured by the property.
Under a wrap, a seller accepts a secured promissory note, an AITD, from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance.
Many states are trust deed states:
- Alaska: A deed of trust state
- Arizona: A deed of trust state
- California: A deed of trust state
- Colorado: A deed of trust state
- Idaho: A deed of trust state
- Illinois: A deed of trust state
- Mississippi: A deed of trust state
- Missouri: A deed of trust state
- Montana: A deed of trust state
- North Carolina: A deed of trust state
- Tennessee: A deed of trust state
- Texas: A deed of trust state
- Virginia: A deed of trust state
- Washington: A deed of trust state
- West Virginia: A deed of trust state
ALTERNATIVE FINANCING
Background and Purpose
In a stable economic environment (i.e., one involving low inflation and relatively constant market interest rates), the long-term fixed-rate mortgage is the typical financing vehicle for the purchase of residential real property.
Uncertainty regarding future inflation and interest rates can complicate matters for both lenders and borrowers. As people continue to build, sell, and purchase homes, the terms of home mortgages reflect economic realities and expectations and the periodic reluctance of lenders, investors and borrowers to accept long-term fixed-rate loans.
Loans that involve balloon payments, interest reset options, shared appreciation at resale, etc. have ramifications that are not readily apparent to most people. This section discusses some of the alternatives to the fixed-rate loan.
Graduated Payment Adjustable Mortgage (GPAM)
A GPAM provides for partially deferred payments of principal at the start of the loan term. There are a variety of plans. Usually, after the first five years of the term, the principal and interest payments increase substantially to pay off the loan during the remainder of the term (e.g., 25 years). This loan may be appropriate for borrowers who expect salary increases in the coming years. A GPAM involves negative amortization (i.e., increase in principal) in the early years of the loan. Thus, early sale of the home could require that the borrower repay more than the original amount of the loan. This could be a problem if the property has not increased in value.
Adjustable Rate Mortgage (ARM)
An ARM is a mortgage loan which provides for adjustment of its interest rate as market interest rates change. Thus, an ARM is called a fluctuating or floating rate mortgage.
An ARM’s interest rate is linked to an index that reflects changes in market rates of interest. A variety of published indexes are used: e.g., the Cost-of-Funds Index published by the Office of Thrift Supervision, and the Federal Reserve Discount Rate.
Because ARM rates can increase over the term of the loan, ARM borrowers share with lenders the risk that interest rates will rise. This sharing permits the lender to charge a lower initial interest rate than would be charged for a fixed-rate mortgage.
Renegotiable Rate Mortgage (RRM)
An RRM is a long-term mortgage (up to 30 years) comprised of a series of short-term loans. The loans are renewable after specified periods (e.g., every three years, every four years, or every five years). Both the interest rate and the monthly payment remain fixed during periods between renegotiation/renewal.
Any change in the interest rate, limited by law, is based on changes in an index. If the borrower declines renewal after any period, the remaining balance is due.
Shared Appreciation Mortgage (SAM)
A shared appreciation mortgage (SAM) gives the lender the right to an agreed percentage of the appreciation in the market value of the property in exchange for an initial below-market interest rate. These loans are usually not available in markets where properties are not appreciating in value.
Rollover Mortgage (ROM)
The ROM (currently used extensively in Canada) is a renegotiated loan wherein the interest rate (and, hence, the monthly payment) is renegotiated, typically every five years. Consequently, the mortgage rate is adjusted every five years consistent with current mortgage rates, although monthly payments are amortized on a 25 or 30 year basis. Monthly payments are calculated in the same manner as a conventional mortgage, with the term decreasing in increments of five years to permit full payment at maturity specified at loan origination.
Reverse Annuity Mortgage (RAM)
Elderly homeowners often face the reverse problem of young families in that their incomes are relatively low and, although they own their homes free and clear, they must move in order to utilize their equity for living expenses. Under a reverse annuity mortgage, the lender pays the borrower a fixed annuity, based on a percentage of the value of the property. The borrower is not required to repay the loan for 15 or 20 years or until a specified event such as death or sale of the property, at which time the loan is paid (e.g., through a probate sale). In effect, a RAM enables a retired couple to draw on the equity of their home by increasing their loan balance each month. No cash payment of interest is involved, as the increase in the loan balance each month represents the cash advanced, plus interest on the outstanding balance.
Summing up. Alternative mortgages are not suitable to everyone. It is very important that those who recommend such plans, or who contemplate using them personally, have a good understanding of the potential risks and drawbacks as well as the benefits. A temporary solution to a financing problem may turn out to be a long-term detriment to the borrower and/or lender.
Real estate licensees should use caution when advocating the use of innovative financing techniques and be prepared to explain benefits and risks to their clients. Furthermore, innovative financing techniques generally should not be pursued without the advice of legal counsel. Alternative financing is not something that a licensee and his or her principal should learn together through trial and error.
EFFECTS OF SECURITY
Having subjected property to the lien of a trust deed or mortgage, the debtor must further submit to various incidents or effects of this security arrangement.
Some of the more important effects refer to:
- assignment of the debt by the creditor.
- transfer of the property by the borrower.
- satisfaction of the debt.
- lien priorities; and
- acceleration due to default.Toggle titleToggle Content
Apartments – Multis
It’s hard not to confuse apartments with multifamily, but in some ways they’re different lies in their financing,
My favorite way to buy small apartment buildings or multifamily is seller financing where the seller allows payments for their Equity over time.
Many times there is a fear of Taxation, capital gains taxation, what kind of Bill am I going to have if I sell the multifamily or the small apartment building?
The IRS lets you sell and installments, it is called an installment sale plan.
See https://www.grfcpa.com/resource/installment-sales-can-be-a-win-win-for-buyers-and-sellers/
