Building a Real Estate Portfolio
There are many ways to build a Real Estate portfolio, but building it in the least expensive method and being able to know some loopholes, may make the experience more fruitful. Many wealthy investors simply jump-in, they buy the good deals and accumulate properties. For the typical working person (a standard W-2 employee seeking a few investments), it will take more effort, as large lump sums may not be available for purchases. Additionally, large losses due to lack of good research, may hamper any restart into the venture, altogether.
The tax implications of capital gains could single-handedly sink you if you are not prepared. Always consult a CPA/Real Estate attorney for the latest tax code changes or visit www.irs.gov. Presently, the tax code reads that you may exclude capital gains taxes on an investment property if you have lived in the home for two of the last five years. This verbiage from the code, alone, may spark a light in the minds of entrepreneurs.
Future investors seeking the most affordable rates and terms for this venture should know that Fannie Mae or Ginnie Mae will offer the best financing solutions. There are other lending avenues, but generally Freddie Mac products and non-conforming lenders are more expensive and the terms are less than desirable for our scenario. Utilizing Fannie Mae or Ginnie Mae loans, we are able to obtain financing for up to a four-unit property, with closing costs & rates that are the same as buying a single residence. An additional benefit is that the maximum loan amounts are increased based on the number of units. So, if a four-plex is offered above $417,000, it can still be bought using a Fannie Mae loan.
The most common problem that young investors encounter when attempting to build a Real Estate portfolio, is unacceptable debt-to-income ratios. For loan qualification purposes, in order to use rent payments as income one must have landlord experience covering the last two years on federal tax returns. This is a rarity! It is typical of most young buyers to buy a home for themselves, and try to move upward. At the time the young buyer wishes to build a portfolio, it becomes obvious that the only way to move up is to sell the current property. Thus, thwarting the effort.Continued on the next page