Real Estate Investing 101 Quotes

“The basic premise of 1031 exchanges is the asset swap: you’re essentially trading one asset for another. To qualify here, the assets have to be real estate and be “like-kind.” Here are some examples of real estate assets that you could swap and benefit from the 1031 rules: • Single-family rental property • Multi-family rental property • Apartment building • Office building • Strip mall • Self-storage facility • Hotel • Raw land”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“What would make the IRS consider you a dealer instead of an investor? • You’ve flipped multiple homes during the year. • Most of your work time is spent on flipping homes. • A large percentage of your income is earned flipping houses. • Your house-flipping business is active. You may have noticed that those factors are vague; that’s not an accident. The IRS hasn’t published specific guidelines, so it’s possible to fight dealer classification (especially if you have an experienced tax accountant). Remember, under the current tax law dealers may get to use the 20 percent deduction, which could result in a lower tax bill.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“flipping business counts as a business for tax purposes (even if you’re just doing it as a side gig). All of your profits will be taxed at ordinary rates and be subject to self-employment taxes.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“When your asset counts as an investment, it’s not subject to self-employment (Medicare and Social Security) taxes of 15.3 percent, which comes on top of ordinary income taxes.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“If you owned the house for one year or less, gains get taxed at ordinary rates (which range as high as 37 percent). If you’ve held the asset for more than a year, capital gains rates kick in (0 percent, 15 percent, or 20 percent depending on your overall income level).”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“For example, let’s say you bought a rental house five years ago for $300,000 and rented it for three years. When your tenant moved out, you and your spouse moved in and stayed there for two years. You just sold the house for $400,000, a $100,000 capital gain. You can exclude two-fifths of that gain ($40,000) from taxes.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“When you’re ready to sell your rental property, you may be in for a very large windfall. That could produce a substantial tax bill, unless you take some steps to reduce that tax burden. There are three main ways to do that with rental properties: • Sell off some losing assets (like stocks that have plummeted) to offset the gain • Structure a special deal called a 1031 exchange • Turn the property into your primary residence for a couple of years before you sell”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“To get this special exemption from the passive loss rules, you (or your spouse) have to meet both of these requirements: 1. Spend more than half of your total working hours for the year in real estate activities 2. Spend more than 750 hours in real estate activities where you “materially participate” (which means you are regularly, continuously, and substantially involved)”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“If you qualify as a real estate professional under IRS rules, there’s no limit on the amount of rental losses you can use to offset other income. As you’d expect, this exception”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“If you “actively participate” with your rental properties, you may be able to deduct $25,000 of rental real estate losses against your other income.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“If you qualify for one of these exceptions (and most landlords can), you’ll be able to deduct at least a portion of your rental property losses against all of your other income. The two exceptions cover landlords who “actively participate” and real estate professionals. Both of those come with some strict IRS definitions, so make sure you really qualify (your CPA will be able to help if you’re not sure) before you take the deduction.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“As an investor, you pay lower capital gains taxes on any property sale profits. As a dealer, you pay higher ordinary income tax rates plus self-employment taxes (Social Security and Medicare). If you do get stuck in this dealer category, you’ll probably be eligible for the 20 percent deduction, so check with your tax preparer.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“Whenever you sell a capital asset for a gain or loss, that sale gets reported on Schedule D. The gains and losses are sorted based on timing: short-term for assets held for one year or less and long-term for assets held longer than one year. That timing matters because gains on short-term holdings are taxed at ordinary rates rather than the more favorable capital gains tax rates (0 percent, 15 percent, or 20 percent depending on your income). Capital gains can be used to offset capital losses, and you only have to pay tax on your overall net capital gains. If you end up with a net capital loss, you can deduct up to $3,000 of it against your other income; the rest gets carried forward to the next year.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“Depreciation gets special IRS attention, and requires Form 4562. To fill out this form (whether you’re doing it with DIY software or providing info to your accountant), you’ll need to know the basis of your rental property. The basis for depreciation is different than the overall basis because land does not get depreciated, and may change over time if you make improvements to the property. To get started you’ll need to know: • The original purchase price of the property • The list of closing costs (most closing costs get added to the basis) • Land value, which you can find on the most recent property tax assessment paperwork • Additions or improvements you made that will add value for more than one year (think replaced roof, not repainted rooms) • The date the property was “placed in service,” meaning made available for rent The”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“Unlike the house you live in, practically every expense attached to your rental property counts as a deductible business expense for tax purposes. Expenses to deduct include: • Mortgage interest • Property taxes • Insurance • Homeowners association dues • Advertising (to fill a vacancy) • Utilities • Repairs and maintenance • Pest control • Landscaping • Trash pickup • Depreciation What doesn’t count as an expense? Any major repairs or renovations you perform count as capital expenditures that get added to the cost basis of the property, effectively reducing your taxable income when you eventually sell.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“Landlords need to keep track of ongoing rental income and expenses along with anything that changes the cost basis of their property. The easiest way to do that: QuickBooks. It’s simple to set up and use, and provides all the information your accountant (or your tax software) will need at the end of the year.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“The TCJA created a tax treasure for pass-through business owners, such as landlords set up as sole proprietorships, LLCs, and partnerships. Any profits earned through the rental properties get “passed through” to your personal income tax return. If your rental properties qualify as a business for tax purposes—and they almost always do when you actively participate in the business—the new tax law lets you deduct 20 percent of your net rental income from your taxable income. That can translate into huge tax savings, freeing up more money so you can beef up your investments or pay down some debt.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“The TCJA also offers an added “bonus depreciation.” Before TCJA, business owners were limited to bonus depreciation of up to 50 percent of the cost of a new asset in the year it was purchased. Now bonus depreciation has been expanded to 100 percent and can be used for existing assets as well. I know it sounds like Section 179 and bonus depreciation are the same, but they have two very important differences: there’s no annual limit on bonus depreciation (unlike the $1 million limit under Section 179), and bonus depreciation is not limited to the profits (meaning it can create a net loss). These deductions can be tricky to maneuver, so talk to a pro.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“There’s a special tax provision called Section 179 that lets business owners deduct 100 percent of the cost of personal property (such as desks and computers) in the year it was bought instead of having to depreciate it over time. In the past, rental property owners weren’t allowed to use this provision for personal property (such as appliances, carpets, and furniture) in their rental units. The Tax Cuts and Jobs Act (TCJA) removed that restriction, and now landlords can take full advantage of Section 179 deductions, up to a total of $1 million (but the deduction can’t create a net loss).”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“One common complaint among real estate investors is the lack of liquidity, especially with direct or unlisted property investments. Blockchain tokens bring liquidity to real estate investments, because they can be more easily traded on secondary markets, rather than having to wait for a building to be sold to cash out.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“To get in on the green real estate trend without holding properties, look at REITs like: • Camden Property Trust (CPT) • Prologis (PLD) • Digital Realty Trust (DLR) • Macerich (MAC)”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“The most common certifications include: • LEED (Leadership in Energy and Environmental Design), an internationally recognized green building rating and certification system • HERS (Home Energy Rating System), a nationally recognized rater of a building’s energy efficiency • Energy Star, a US government-backed symbol for energy-efficient products”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“To simplify your foreign property purchase, work with an experienced international broker, a real estate company with offices around the world. Two of the most prominent international real estate firms include Sotheby’s International Realty and Christie’s International Real Estate.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“Solid global real estate ETFs include: • Vanguard Global ex-US Real Estate ETF (VNQI) • WisdomTree Global ex-US Real Estate Fund (DRW) • iShares International Developed Real Estate ETF (IFGL)”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“Buying an investment property in a country you want to visit extensively or live in gives you a double helping of benefits. Through rent and property appreciation, your global getaway pays for itself and provides pre-relocating cash flow. Then, when you’re ready to be there, you already have a substantial holding and history in the country.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“MBS can be harder to buy and sell than other types of bonds, as they’re bought mainly by institutional investors. Many MBS are issued and sold in large denominations (like $25,000 minimums), but some are issued at $1,000 (like most other types of bonds). You can trade MBS through specialty bond brokers, which you can find at most major brokerages (like Charles Schwab or Merrill Edge). The easiest way to invest in MBS is through specialty mutual funds or ETFs. Though technically MBS are not fixed-income investments (because the payments can vary monthly), they’re usually included in that category (because they’re bonds).”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“MBS face all of the regular risks (changing interest rates, for example) linked to bonds and other fixed-income securities, and two that are unique to them. These special risks are tied to the underlying mortgages: homeowners could default (stop making payments, substantially more likely with private-label MBS) or pay off their loans early, either of which would affect investor yield and cash flows.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“The three main players in the MBS market are: • Government National Mortgage Association, or GNMA (pronounced “Ginnie Mae”), is backed by a federal agency and guarantees mortgage payments on loans issued through federal loan programs (like the VA and the FHA). Unlike other MBS, bonds guaranteed by GNMA are backed by the full faith and credit of the US government, just like Treasury bonds. • Federal National Mortgage Association, or FNMA (“Fannie Mae”), is a private corporation that buys mortgages from large commercial banks, repackages them into bonds, and sells those bonds to investors. FNMA is not backed by the federal government (even though the government created it), so these bonds carry higher credit risk (the risk that you won’t get your money back). • Federal Home Loan Mortgage Corporation, or FHLMC (commonly called “Freddie Mac”), works almost the same way as FNMA. It buys up mortgages from smaller lenders, like savings and loan banks or credit unions, then packages them to create MBS. Freddie Mac bonds are not backed by the US government.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“MBS are bonds that use pools of mortgages for collateral. The bond issuer buys up thousands of mortgages, and then repackages them into bonds. As payments are made on the mortgages, the bond issuer passes those payments through to the bondholders (minus their fee, of course). That’s why MBS are considered to be “pass-through securities.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate

“The four main factors you’ll want to investigate are: 1. Borrower’s credit: Look for whether they’re paying their bills regularly and on time, how much debt they have in relation to their income (the debt-to-income ratio, or DTI), and the status of the senior lien. 2. Borrower’s payment history: The longer someone has been making mortgage payments, the more likely they are to keep doing so; it demonstrates their commitment to the property. 3. Fair market value (FMV): Find the current FMV of the property, as it affects the equity (ownership stake) in the property; if the property has declined substantially, you may not be able to recover your investment if the borrower defaults. 4. Location: With real estate debt, geography matters for several reasons including state foreclosure laws, local demographics (which can affect future property values), and area economy.”
― Michele Cagan, Real Estate Investing 101: From Finding Properties and Securing Mortgage Terms to REITs and Flipping Houses, an Essential Primer on How to Make Money with Real Estate