Understanding Serial Real Estate Investing
Airfare Daily Deals eCigarettes Eyeglasses Hotels Jewelry Online Backup Online Dating Online Printing Online Tickets Skin Care Textbook Rentals Vitamins Web Hosting Weddings
Find thousands of shopping-related forums
SEARCH

Understanding Serial Real Estate Investing

The premise behind serial investing is quite simple. You buy properties, usually single-family homes, one at a time. You buy them regularly, perhaps one year or one every two years. You rent these properties and you don't sell them, unless you need the money or there's an opportunity to flip and make a big profit.
                                 real estate investment

Image Credit

Do I really understand serial investing?

The premise behind serial investing is quite simple. You buy properties, usually single-family homes, one at a time. You buy them regularly, perhaps one year or one every two years. You rent these properties and you don't sell them, unless you need the money or there's an opportunity to flip and make a big profit. Over time, you acquire many good properties, and after 15 or 20 years you may have dozens or more of them. The tenants slowly pay down the mortgages as your equity rises. As you need cash, you can refinance or sell them. After two decades of serial investing, your net worth can easily exceed several million dollars. And you've made all of this money with relatively little risk and in your spare time. Is it any wonder that so many people have become serial real estate investors?

Do I know the drawbacks of serial real estate investing?

The drawbacks are the same as for any real estate investment. Unlike dealing with stocks and bonds, property is not liquid. In an emergency you may not be able to liquidate quickly and get your money out. Also, if there is an economic decline, or you bought in a poor location, or you simply have bad luck, you could find it difficult to keep the properties fully rented, in which case you'd have trouble making your mortgage payments, taxes, and other expenses. Finally, there's nothing to say that real estate won't decline at some point in the future.

Can I take advantage of the financing benefits?

One of the big advantages of serial investing comes about if you're willing to live in the property you're buying. Owner/occupant mortgages offer the best financing in the world. You may be able to get in for almost no money down, yet get the lowest possible interest rate. Here's how it works. You buy the property not as an investment, but as your home. You move and live in the home for a year or two (or as long as your tax accountant tells you it's appropriate). Then you move out and convert the property to a rental. You, hopefully, rent it for all of your expenses, including taxes, insurance, mortgage payments, and maintenance and repairs. Finally, you go out and find another house to buy and in which to live. You keep repeating the process. Notice that instead of selling one house to buy the next, you keep each house. After several decades, you've acquired as many as a dozen properties or more. And, in each of these, tenants are paying the expenses for you. It all comes about because of the wonderful financing offered to owner/occupants. Note that there could be potential problems. For one, some mortgages explicitly prohibit renting out a property bought as an owner/occupant. Legal experts, however, mixed about whether such a clause is enforceable.

How long must I live in the property before converting?

This is a gray area and one about which you should consult with your tax professional. Some experts say that living in the home for two years before you convert it to a rental should be okay. Others say only a year. And some risk-taking buyers only live in it a month or two. But be careful about not moving in at all. You might argue that your intent was to move in, but your circumstances changed and you were forced to convert the property to a rental. You might get away with it once. But if you did it 10 times in a row, it would be pretty evident that you never intended to move in. And lenders and their federal government overseers can get quite angry at and take legal action against people who blatantly use owner/occupant financing for outright purchases of investment property.

Can I convert back?

Some investors will convert a home to a rental and keep it as such for many, many years. However, before they sell, they then convert it back to a personal residence in order to claim the up to $500,000 capital gains exclusion available to married couples filing jointly. The rule is you must have lived in the property for two out of the previous five years in order to claim the exclusion. If you've previously done a Section 1031 tax-deferred exchange, you must have lived in the property for five out of the previous five years. (Check with your accountant.)

Can I do a tax-deferred exchange?

This is available only on investment property. It, in effect, lets you trade one piece of investment/business property for a "like-kind" other. If the trade is structured properly, there's no immediate tax to pay. Instead, it is all deferred. However, such exchanges can be tricky. Check with your accountant.

 

Related keywords: fannie mae property
Need an answer?
Get insightful answers from community-recommended
experts
in Real Estate Investing on Knoji.
Would you recommend this author as an expert in Real Estate Investing?
You have 0 recommendations remaining to grant today.
Comments (1)

Another informative addition to your real estate investing series.

ARTICLE DETAILS
RELATED ARTICLES
ARTICLE KEYWORDS