Want to start investing in real estate but need help distinguishing the facts from the myths and misinformation? If the answer is yes, you are not alone.
A lot of bad information is being shared by people who do not completely understand real estate.
Every day, we see new influencers and “Real Estate Gurus” claiming they can teach anyone how to invest in real estate with little or no money. While real estate is an excellent investment, gurus have used unfounded claims to steal people's time and money.
Here, we aim to discuss real estate hacks and address the facts from the inaccurate information swirling on the internet.
Real Estate Hack #1: House Hacking; True or False
True! House hacking is an excellent strategy for people who want to get into real estate slowly. It is an investment strategy in which you purchase a multifamily property, live in one unit, and rent out the others to tenants.
The income you receive is applied to your monthly mortgage payment, property taxes, and other housing costs. And yes, you can live rent-free.
This means lowering your expenses and leaving more money in your pocket to reach your financial goals.
Real Estate Hack #2: Start and Grow a Real Estate Portfolio with a 3.5% Down Payment; True or False
True! This hack is a favorite among investors. Federal Housing Administration (FHA) loans allow borrowers to finance houses with down payments as low as 3.5%. The down payment can come from a grant, a down payment assistance program, or a gift from a family member.
FHA loans were designed for lower-income borrowers, but these loans are available to everyone, including those who can afford conventional mortgages. To qualify for a second FHA home loan, you must live in the property for at least 12 months and have 25% equity in your home.
If you’re ready to buy your first investment property, ensure you have your finances in order, and remember that building a real estate portfolio requires careful planning and research.
Real Estate Hack #3: Save Money and Buy a Fixer-Upper with a Renovation Loan; True or False
False! We hate to break it to you, but rehab loans are tedious, complicated, and costly. Rehab loans allow home buyers to purchase a fixer-upper as a primary residence and roll the cost of the property and the renovation into one loan.
These loans sound very appealing, but their strict parameters gave them a bad reputation among Realtors and Brokers.
Borrowers must hire a consultant to ensure special rules and guidelines are followed at every stage, which is an added expense. In addition, some lenders do not provide renovation funds upfront.
Borrowers will need to front the renovation cost until the work has been inspected and approved by the lender. In most cases, a rehab loan is not a good option when you start investing in real estate.
Real Estate Hack #4: Pay Little or No Tax With Tax-Aware Borrowing; True or False
True! Tax-aware borrowing is the process of improving investment performance by employing tax strategies. Interest paid on certain types of personal debt can help reduce the cost of borrowing for U.S. taxpayers.
These strategies are common among the rich and super-rich, who have tax advisors and accountants to help them plan. So how can you take advantage of these benefits?
To qualify as a deduction, interest on personal debt must fall into three categories.
- Mortgage and home equity indebtedness.
- HELOC – Home Equity Line of Credit
- Investment Loan interest
In some cases, a taxpayer can deduct interest on up to $100,000 of principal indebtedness.
Real Estate Hack #5: Build a Real Estate Portfolio with LLCs; True or False
False! While this common technique is used among seasoned investors, it can be difficult to finance real estate in a Limited Liability Company (LLC). Lenders are not comfortable loaning large sums of money to a new LLC and typically shy away from offering this service to customers.
If you find a lender willing to finance your property, they will likely require you to get a commercial loan with a higher interest rate and a down payment between 15% to 35%.
Forming an LLC may seem like a good idea when considering some tax benefits, but if you plan to live in the house and fund your home improvements, there's no point in forming an LLC.
Last thoughts
We hope this "myth-busting" list gives you more confidence as you progress in your real estate investment journey.
Investing in real estate can be highly lucrative if done correctly. It has the potential to produce passive income and stable cash flow.
Before investing, be sure to perform extensive research to learn the full details of each investment strategy and join us on IG @_dearmoney_ for more tips on personal finance, including mortgage and tax hacks.
