If you’ve considered diving into real estate investing, you’re in good company.
A significant percentage of home sales in the first half of this year were driven by investors rather than by people who planned to live in the homes.
In the first quarter of the year, investors accounted for 20.1 percent of homes that were bought, and in the second quarter that still held strong at 19.4 percent, according to a report from Redfin, a real estate brokerage.
Q2 2022 hedge fund letters, conferences and more
For perspective, in the pre-pandemic days of 2019, investors’ share of quarterly homes sales hovered around 15 percent.
Clearly, plenty of people see real estate investing as profitable. But here’s something worth knowing.
Tips For Investing In Real Estate
While buying a single-family home or a multi-family complex as an investment and watching the rent money come in is certainly a viable option, there are other ways to invest in real estate, some of which may not come immediately to mind for the average investor.
Let’s take a look at three:
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Traditional Rental Property
One reason operating an Airbnb is worth considering is the tax advantages it brings. With traditional rental property – such as single-family units – you cannot take losses from your real estate and offset them against the income you generate from your W-2 job.
Something called passive loss rules prevents this. An Airbnb is different, though, because the people who rent space from you aren’t staying for the long haul as they do with a six-month or one-year lease.
Typically, an Airbnb stay is seven days or less, which means the Airbnb is considered an active business. Without getting into all the legalities here, what that means is that most likely you will be able to deduct your losses for depreciation and for the initial cost to furnish and equip these places. That can mean substantial tax deductions and savings.
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House Hacking
This is sort of a case of having your home and renting it, too. With house hacking, you purchase a house with multiple dwelling units—either apartments or individual rooms—and you live in the property while letting tenants pay most or all of your costs.
The rent you bring in from tenants pays your mortgage. And while you’re paying down the mortgage, of course, you can borrow the equity back out to buy another property.
House hacking is an especially nice strategy for younger investors who are making their first foray into real estate and don’t have the money needed to buy investment properties.
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Mobile Home Investing
One of the key differences between mobile home investing and investing in traditional housing is that with mobile homes, the land and the home do not necessarily go together.
Some mobile home investors own the land and don’t own the trailers. The tenants bring their own and rent the pads. In other cases, such as in my own mobile home property, we own both the pads and the trailers, and we rent both out to the tenants.
But for business purposes, we separate them. The pads are in one limited liability company, which also owns the land. We put the trailers in a different LLC. Then we lease both of them to an operating company, which deals with the tenants.
The reason we do this, of course, is that we want to separate the land from the trailers and from the tenant. If anything happens, we’ve minimized our overall risk exposure.
Conclusion
Each of these options could be a great investment for you, but all of them come with their own set of legal questions, such as how best to structure your business and what might result in a tax deduction – and what doesn’t.
Before you get started – and potentially make mistakes you’ll likely regret – seek assistance from an attorney skilled in the ins and outs of real estate investing. Then dive in. Real estate investing can be lucrative for those who come to grips with how to best manage it and profit from it.
