5 More Cheat Codes for Real Estate Investors
Part 2: Self directed IRAs, cash out refis, opportunity zones, and more.
I love sharing real estate “cheat codes” that I discover.
One of my most popular newsletters ever focused on 5 Tax Cheat Codes for Investors.
For the 18th edition of Unfollow the Herd:
Here are 5 More Cheat Codes Real Estate Investors can use to build wealth.
You can find part one here.
1. Self-Directed IRA
Who said your retirement account couldn't work for your real estate ambitions?
A self-directed IRA lets you invest your retirement savings into alternative investments, including real estate.
Here’s how it works:
You open a self-directed IRA with a provider that allows real estate investments.
You then roll over funds from your traditional IRA or 401(k) into your self-directed IRA.
Now, you can use those funds to invest in a multifamily property.
The income from the property (rent, sale proceeds, etc.) goes back into the IRA tax-free.
For example: if you use your self-directed IRA to buy a $200,000 property and later sell it for $250,000, the $50,000 profit goes back into your IRA tax-free.
2. Cash-Out Refinance
This strategy helps investors tap into the equity they've built up in their properties.
With a cash-out refinance, you can refinance your mortgage for more than you owe and take the difference in cash.
Here's how it works:
Suppose you bought a property for $300,000 and its current value is $400,000.
You could refinance the property for $350,000, pay off the original $300,000 mortgage, and take the remaining $50,000 in cash.
This $50,000 can then be invested in another property, effectively using your existing real estate to finance new acquisitions.
3. Vacation Rental Arbitrage
Short-term rentals offer a potentially lucrative alternative to traditional long-term leases.
In vacation rental arbitrage, you rent a property and then sublet it on platforms like Airbnb. Here’s how it works:
You lease a property in a desirable location.
You then list the property on a short-term rental platform.
The income you earn from the short-term rentals is greater than your lease payment, leaving you with a profit.
For example: you rent a condo for $2,000 a month and list it on Airbnb for $150 a night. If you rent the condo for 20 nights a month, you'd earn $3,000, netting a $1,000 monthly profit.
4. Opportunity Zones
This is a win-win situation for both investors and the communities in which they invest.
Opportunity Zones are a tax incentive that aims to spur economic development in low-income urban and rural communities across the country.
Here's how it works:
You invest in a qualified Opportunity Zone.
You can defer capital gains taxes on the sale of any property - if those gains are reinvested into an Opportunity Zone Fund.
After 5 years, your tax bill on those gains is reduced by 10%. After 7 years, it's reduced by an additional 5%.
And after 10 years, you won't owe any capital gains taxes on profits from the Opportunity Zone investment.
This can translate into significant savings for investors while helping to improve under-resourced areas.
5. Real Estate Syndications
This is an ideal strategy for those who want to invest in real estate but don't want to be a landlord.
Real estate syndications allow investors to pool their money to invest in larger deals that they may not be able to afford on their own.
Investors can earn returns from both rental income and the appreciation of the property, without having to deal with the day-to-day operations.
You can participate in a syndication as a passive LP investor, leaving the property management to the pros (like me) while still reaping the benefits of real estate investment.
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