Posted on

Real Estate Investment Reflections for the Holidays

Looking back on real estate 2022

Happy Holidays from your friends at MartelTurnkey! You’re probably getting ready to travel, visit loved ones, eat amazing food, enjoy sparkling lights and winter wonderlands, and send 2022 out with a bang in preparation for a prosperous 2023.  Real estate investment might seem a little far away from the spirit of the holidays, but our status as real estate investors colors almost everything we do. On that note, please join us in some real estate investment reflections for the holidays … 

1. The Importance of Gratitude

It’s easy to get hypnotized by the hustle and bustle. We humans are problem-solvers, so we have a natural tendency to focus on problems. And in doing so, we tend to forget the ways in which we are lucky.

 

There’s a reason every society and religion has holidays — they help us focus on our blessings, rather than constantly fretting over our deficiencies. The holidays are the perfect time to practice gratitude. Gratitude lets us take nourishment from the bounty in our lives … and make room in our lives and our hearts for even more bounty. 

 

Real estate investors have many reasons to be grateful. We listed 5 reasons real estate investors have to be thankful in our Thanksgiving blog if you want to revisit them. Here they are in brief:

 

  1. Passive Cash Flow
  2. Appreciation of Value
  3. Debt Leverage
  4. Principal Paydown
  5. Tax Advantages

2. Helping People

In addition to counting our blessings, the holidays are a time to step outside of ourselves and think about others — especially those less fortunate than us. It’s a time of charity, altruism, and (as the song goes) “good will towards men.” And women, and children.

 

Many people believe real estate investors are money-grubbing Ebenezer Scrooges. Sometimes it’s easy to get seduced by the dollar signs.

 

But real estate investors who are in it for the long term … we know the truth. It’s not about a quick buck. It’s about improving lives. 

 

We like the way Zero Gravity CEO Peter Diamandis put it — “The best way to become a billionaire is to help a billion people.” People who succeed in any business long-term do it by helping people. 

 

Real estate investment is no exception. We turn bare ground into useful structures so people can start businesses and live better lives. We turn decrepit, substandard housing into beautiful homes. We turn crumbling, forlorn neighborhoods into thriving communities. 

 

The spirit of the holidays helps us think not about how much money we have made and expect to make … but about how many people we have helped, and hope to help in the future.

3. The Importance of Family

We’re nothing without the people we love and care for; the people who love and care about us. If we had any holiday wish for anyone, it would be to strengthen bonds, mend fences, and spend quality time with our closest kin.

 

Real estate investment is ultimately about legacy. We dig deep into that concept in this blog. Suffice it to say, it’s about building something that will last … Something that will edify and enrich your successors for generations to come.

 

—————————————————————————————————————

 

Again, best wishes for a happy holiday from the entire MartelTurnkey family! If you want to hit the ground running in the New Year with some brand-new assets in your portfolio, it’s not too late … in fact, we’re just getting started. Drop us a line now and let’s get you your next turnkey rental!



Posted on

Is Your Personal Residence an Asset or a Liability?

Investment Property

Homeownership is part of the “American Dream.” In addition to the pride-of-place, the backyard for the kids and the dog, and the opportunity to “keep up with the Joneses,” one of the first finance lessons many of us learn is that a home is an asset. Many families regard their home as the most important asset in their portfolio. 

Is Your Personal Residence a Liability?

Rich Dad, Poor Dad author Robert Kiyosaki famously lit the financial world on fire by describing a family home as a liability instead of an asset. Heresy!

 

But is he right? Let’s look at the arguments on both sides:

“Yes, your home is an asset!”

A home is real estate. Real estate falls under the category of “real asset” — something that has intrinsic worth. It’s not just valuable on paper. It’s a real thing that you can use, like gold or oil. Sure sounds like an asset.

Balance Sheets 101

A balance sheet is a financial statement you use to calculate your net worth. Assets go on one side, liabilities on the other. Liabilities include any loans, accounts payable, or obligations to pay. Subtract the value of the liabilities from the value of the assets, and there’s your net worth. 

 

On a balance sheet, the value of your home goes in the asset column; the balance of your mortgage goes in the liability column. Unless the market tanks and you’re underwater on your loan, the equity is almost always higher than the mortgage. That means that most homes are a positive contributor to your net worth. Still sounds like an asset! 

“No, your home is a liability!”

If the goal is “retirement” — to work until your golden years — there’s nothing wrong with considering your home an asset. It certainly squares with a narrative that most Americans have bought into … and will fight to defend.

 

Your home starts to look less like an asset and more like a liability when the goal is financial freedom.  

 

Kiyosaki defines “assets” and “liabilities” in the following way:

 

    • Asset — something that puts money in your pocket.
    • Liability — something that takes money out of your pocket.

 

There’s no doubt that a home takes money out of your pocket. Mortgage, insurance, property taxes, utilities, repairs … don’t quit your day job. According to industry estimates, a home costs an average of 4-5% of its value to operate every year. In an environment where the home may only be appreciating 4-5% every year, you’re really running to stand still. 

 

Is there a way to avoid this? Not really. Here’s the rub — our need for shelter is a liability, same as our need for food, water, and oxygen. It’s always going to cost us money to live somewhere, whether in the form of rent or homeownership costs. Because of appreciation, owning real estate is often a good long-term financial strategy … but that doesn’t make the personal residence any less of a liability in the Kiyosaki sense.

 

Is there a way to take that same home and make it put money into your pocket?

 

There is — by moving out of that home and renting it out to a tenant! If the rent exceeds the expenses, suddenly you’re putting money into your pocket … and still enjoying exposure to appreciation!

 

Add enough of this rental income to your monthly cash flow, and you can actually replace your work income with rental income. We call this financial freedom — having enough cash flow to cover all your essential expenses, so you never have to work another day in your life if you don’t want to.

 

This is why we think there’s a real argument to be made for taking that money you would have put into a down payment on a home, and making a down payment on rental property instead. It has all the financial benefits of homeownership … plus the benefit of passive cash flow and extra tax advantages. For a deep dive on why you might want to invest in rental property instead of a home, click here.

 

————————————————————————————————————

 

Whether or not your home is an asset, MartelTurnkey rental properties are definitely assets. We make it easy to add them to your portfolio — without ever having to set foot in them! Click here to see the current assets in our inventory, available for purchase by people just like you. All of them are renovated or in the process of renovation, and many have tenants already in place!

 

Posted on

How to Maximize the Depreciation Tax Deduction
on your Real Estate Investment

As tax-filing season approaches, real estate investors get to face one of the ultimate “high-level” problems — deciding how much depreciation to write off. Most real estate investors are using straight 27.5 year depreciation on their real estate investment. In this article I explain how to lower taxes with accelerated depreciation and bonus depreciation.

 

We dig into how cool depreciation is in this blog, but to sum up — depreciation, i.e. wear and tear of the property, is an “expense” that real estate investors get to declare on their taxes without having to spend money out of pocket … even if the property has gone up in value despite the wear and tear!

 

It’s easy to see why this is awesome … but it can get even more awesome. The IRS says residential real estate can be depreciated over 27.5 years, maximum. Most investors — and, in fact, most tax accountants — just take that at face value. They divide the cost basis of the improvements by 27.5, and deduct that much every year. There’s nothing wrong with this … It’s certainly better than a kick in the pants.

 

But what if you could deduct even more appreciation … or deduct more, sooner? Creative real estate investors and tax accountants can make that happen, while still adhering to the rules set by the IRS.

Lower Taxes With Accelerated Depreciation

Let’s look at two ways we can legally take more depreciation than the standard 27.5-year rule:

 

 1. Filing as a real estate professional

 2. Accelerated depreciation through cost-segregation, aka “component” depreciation

 

NOTE: We are not lawyers, CPAs, or financial advisors. Consult professionals before trying anything you read here.

1. Filing as a Real Estate Professional

Most real estate investors are effectively capped at how much ordinary income they can offset with a depreciation deduction. As of this writing, it’s roughly $25,000. If you try to depreciate more than that, the IRS won’t let you.

 

But there’s an exception — if you qualify as a real estate professional under IRS rules, you can deduct 100% of your depreciation allowance from your ordinary income, without the cap that typical investors face.

 

To qualify as a real estate professional, you must spend at least 750 hours each year in the real estate business. For most people with full-time jobs, this isn’t realistic … but if your depreciation allowance exceeds the cap, it’s worth checking with your CPA to see if you can thread that needle.

 

Of course, you will need to own a lot of rental property to hit that cap … unless you use the second method to increase how much depreciation you are allowed to take from each property.

1. Accelerated Depreciation through Cost-Segregation

That’s a mouthful, right? But it’s actually simple — while real estate improvements (i.e. buildings and structures) must be depreciated on a 27.5-year schedule, certain components on the property may be eligible for faster depreciation schedules. 

 

Here’s the full chart of IRS-approved depreciation schedules:

See it? Even humble rental houses have fences, appliances, carpeting, furniture, etc. … and the IRS allows you to depreciate those assets faster than the structure! 

 

Using this chart to take more depreciation than the 27.5-year schedule is called accelerated depreciation. It’s also sometimes called “component” depreciation since you’re breaking the property down to “components” and using the appropriate depreciation schedule for each.

 

How do you figure out the asset value of each component? Through a process called cost-segregation — taking inventory of everything on the property eligible for accelerated depreciation, determining how much value it contributes to the property, and depreciating that amount separate from the structure. 

Example of Accelerated Depreciation

Let’s do a quick example. Say you bought a rental house for $122,000 in a city like Detroit (one of our favorites right now). The appraisal values the land at $22,000. You can’t depreciate land, so that’s a $100,000 cost basis eligible for depreciation. 

 

If you’re doing basic 27.5-year depreciation, you can deduct about $3,600 per year for this house.

 

But, let’s say you break down the components of the house, and find out that you are eligible for some component depreciation: 

Lower Taxes With Accelerated Depreciation

The total depreciation you can take for the first five years is now $7,181.82 — nearly double the eligible depreciation under the standard schedule! 

 

Of course, after five years the appliances, furniture, and flooring are fully depreciated, so you no longer get to take that extra $4,000 each year. After 15 years, that extra $600 will fall off as well. But many real estate investors don’t keep their assets for 15 years, or even five years — they sell and upgrade to something bigger and better. But in the meantime, they get to take all that extra depreciation up front!

 

———————————————————————————————————

 

Historically, accelerated depreciation has been the province of commercial real estate. Why? Because it requires a professional cost-segregation analysis to avoid trouble with the IRS. These analyses are not cheap, and the tax savings for a single-family home rarely justifies this cost. Only big, multimillion-dollar properties justify the cost.

 

But, MartelTurnkey likes to stay on the cutting edge. We know how to make cost segregation affordable — even for small-portfolio landlords of single-family homes! 

 

If you want to incorporate accelerated depreciation into your SFR investing strategy as early as this year, you know what to do … Call MartelTurnkey today! 

 

Posted on

Happy Thanksgiving! 5 Things Real Estate Investors Can Be Thankful For

To all our friends about to celebrate with friends and family over a delicious turkey dinner, we wish you a Happy Thanksgiving!

 

Thanksgiving is a chance to be with our loved ones, count our blessings and remember all the things we can be grateful for.

 

Real estate investors have a lot to be grateful for. If you own rental real estate, here are five things to be thankful for. Of course, nothing is as crucial as your health and your family. . .  but success in real estate counts, too!

1. Passive Cash Flow

Few investment vehicles offer the opportunity for passive cash flow — money that shows up in your bank account every month without you trading time for money. . .

 

This is because, since time immemorial, the economic potential of real estate has been based on tenancy and monthly rent payments. If those rent payments exceed the expenses, you are — if you’ll pardon the seasonal pun — in gravy.

 

Why is passive cash flow better than income from a job? Because with enough passive cash flow, you can achieve financial freedom — the ability to stop “trading your time for money,” for good. Click here for a deep dive into the concept of “financial freedom.”

2. Wealth Building Through Appreciation

As many property owners get to find out, real estate tends to grow in value over time. As the owner of the property, this means your net worth increases with it. Your net worth is simply the value of your assets minus your liabilities.

 

Real estate, your car, your investment accounts, the cash in your brokerage account, your jewelry and precious metals … these are all assets. Your mortgage, car note, credit card debt, consumer debt, college debt … these are all liabilities.

 

When your property appreciates in value, you have more equity. You are wealthier … but only on paper. You can’t actually take property equity into a store and use it to buy a quart of milk or a Lamborghini. But, you can turn that equity into cold hard cash if you sell or refinance the property.

3. Debt Leverage

Real estate is unique among investment vehicles in that it is easy and relatively low-risk to add leverage to your investment strategy. This means borrowing “other peoples’ money” (OPM) to increase your exposure to the appreciation we mentioned in #2. Of course, the borrowing we’re talking about is the common mortgage loan.

 

Here’s the easy way to understand leverage — if you pay cash for a $100,000 property and it appreciates $20,000, you have grown your net worth by 20%. But, if you only put 20% down ($20k) to purchase the same property, and it still appreciates $20k, you have doubled your money.

 

Of course, leverage always adds risk to an investment. Your cash flow is lower, and if you can’t make the mortgage payment, you’re at risk of default.

 

That’s why a MartelTurnkey property is such a smart investment — we’ve taken a lot of risk out of the equation by doing the renovations for you. The property you purchase already has a tenant in place. Nothing validates the rent potential of a property like someone who is already paying that rent.

4. Principal Paydown

As time passes, your property value is not only getting bigger — your debt is getting smaller. Conventional mortgage payments include interest and principal repayment. The principal paydown starts out small, but gets bigger over time. Regardless, as the debt gets smaller, your equity increases — and with it, your net worth.

 

Every house on MartelTurnkey comes with a complete and accurate financial statement showing you the numbers on a monthly basis and conservative projections for the next 10 years, giving you an even better idea of how much wealth you will build over time with a MartelTurnkey investment.

5. Tax Benefits

Finally, real estate investors tend to be happy campers at tax time. The US tax code includes many provisions that make it easy to reduce your tax bill — even eliminate it entirely. Imagine owing the IRS nothing, or getting your entire tax withholding refunded. With real estate investment, it’s a real possibility. Click here for a more thorough exploration of the tax benefits of real estate investing.

 

If you want even more to be thankful for next year, consider gobbling upanother MartelTurnkey rental property to add to your portfolio. Or, if you’re new to us, consider acquiring your first one!

 

Click here to view our current inventory of available properties in carefully-selected growth markets. You may be surprised by how low the barrier to entry is, and how easy we make it to buy with confidence, without ever setting foot on the property!

 

Until then, from the team at MartelTurnkey, Happy Thanksgiving!