We all know the Johnsons on Oak Street. They retired early and seem to take two or three amazing trips a year. The rumor is "they own property." We naturally are jealous of their relaxed lifestyle, as we have the mortgage, BMW lease, and credit cards providing our daily panic attacks. We rationalize that they must have received inheritance from her family, but the truth is that many years ago they bought one rental property, then a few more. They forewent the spending beyond their means on consumables (Amazon) and depreciating assets (new BMWs), and put this amount into appreciating investments (such as simple real estate). Now, they have a positive net worth (Assets minus Liabilities) and are not living paycheck to paycheck, which is better than most of the rest of us Americans.
Keeping it simple today, which it truly is, you can start by purchasing a 3-bedroom, 2-bath renter-friendly home for little down, and at low current fixed mortgage rates. You can then receive maybe $100-$200 positive net cash flow a month, and thanks to the large interest and depreciation tax write-offs, you will also get a nice check back at tax time (or increase your W-9 allowances at work to get more in your paycheck every two weeks).
Then, after you feel comfortable with your new knowledge, you can go get a few more. In the mean time, your monthly mortgage is slowly building equity in the property, and the property value is also growing at a historical-average +4% per year. Make sense?
Don't be intimidated by investments, or say you were never good at math. This truly is easy stuff which only takes a commitment to "Just Do It!" You will be able to overcome your excuses of bad credit, down payment cash, or "Jersey Shore" is on MtV tonight!
Once you get started, you will be surprised at all of the expenses you may deduct. Always remember that the Government designs the tax code to motivate you to do what they want you to do. The Government wants you to provide affordable, quality rental housing to American citizens, so it makes the tax code beneficial for those who provide this service.
You may deduct (write-off) expenses in Advertising, Auto and Travel, Cleaning and Maintenance, Commissions, Depreciation, Insurance, Legal and Tax Prep Fees, Management Fees, Mortgage Interest, Points, Repairs, Taxes, and Utilities. Order online the free IRS Publication 527 and in 3-4 days you will have this well-written, simple description to explain each category. Remember the JAM VIEWS mantra to do your own taxes and then take them to a professional to review. At a minimum, you will then understand how it works, and you can maximize the investment even more next year. Simple stuff.
Normally this net loss is what they term "passive," so it can only be used to offset other passive income (real estate or from a company in which you own a small part), but the tax laws now, if you handle the property yourself, let you even write this loss off against regular "active income" (your salary). If your income (MAGI) is under $100k, you can deduct this rental loss up to $25k against regular income, and this deal phases out gradually over $100k. This makes the reward "doubly-easy." The IRS gives you an example. "The rental loss was from the rental of a house Mike owned. Mike had advertised and rented the house to the current tenant himself. He also collected the rents, which usually came by mail. All repairs were either made or contracted out by Mike. Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income." What's our excuse now?
My father, Don, self-taught himself to buy small rental properties by reading the books and attending a few seminars. I was cheap labor for moving lawns and painting houses in return for Domino's Pizza and, of course, the best motivation, "This is how we pay for our summer Florida vacation!" When he wouldn't let us go out to dinner, Mom and I would harass him with "Oh, but we have real estate!" But, he was right. He and Mom lived a much better life than his civil service income alone would have ever provided.
I tried to follow his example by never selling our homes when we moved, but by continuing to to own and rent these properties - an easy way to collect a small portfolio of properties. Beyond nice travel in retirement, the equity in your properties will pay for college educations (refinance and pull the equity out tax free), the ability of one spouse not to work 9-5, and much more freedom and flexibility.
Teach your teenager to purchase a small house and learn about capitalism. Instead of going back to work once the kids enter school, build a small portfolio of real estate.
Don't forget the vacation home which you can rent and still enjoy yourself while building more equity. Basically, you can personally enjoy the home for 2 weeks a year while allowing other renters to make your mortgage payment throughout the year (see Pub. 527 for these rules also). We enjoyed a magnificent beach house in the Outer Banks, North Carolina, for many years with a mortgage I would never have been able to cover without allowing others to also enjoy this magical property.
Stop living paycheck to paycheck. Stop having a panic attack in the middle of the night over your debt. Build equity. Be an owner.
"Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires." - John Steinbeck
** The above is not legal, tax, or investment advice and you should consult your own professional advisors.
** For more information on Jeff's Books, Blog, and Legal Challenge, please visit www.jeffmartinovich.com.
** To access JAM Views directly please visit jeffreyamartinovich.blogspot.com
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