Common Pitfalls for a Rewarding Real Estate InvestmentCommon Pitfalls for a Rewarding Real Estate Investment

How to Avoid the Common Pitfalls for a Rewarding Real Estate Investment

Investing in real estate is similar to any other career you choose or a business you run. It requires expertise and will take time to learn it. There are many who get into real estate and get frustrated so easily and give it up halfway, but this is not just the case of real estate but in all professions.

For someone who is planning to succeed in real estate, it is important to learn in-depth about the process, understand the industry, and the specific areas which you are interested in investing.

In this article, we are trying to discuss some very common real estate strategies which helped the real estate career seekers to succeed with lesser mistakes made. In between, we will have a quick look into the Mortgage Forgiveness Debt Relief Act also, which many of the real estate investors are confused about.

Real estate investor’s success tips

#1. Maintain a property analysis spreadsheet

For rental properly analysis, it is essential to maintain a professional spreadsheet to analyze the possible deals. You may not be simply buying the very first properly you come across this year. You may start with the right FMV (Fair Market Value), money down, and the mortgage cost. Next, move it through expected rental income and calculate the other expenses in order to calculate the ROI figures.

Whichever property you come across, make use of the spreadsheet to scrutinize each. On finding the ROI not reassuring after putting the figures into the corresponding columns, then drop the deal and move on to next. This way, you become more objective and analytical than taking decisions based on assumptions.

#2. Remember that you are buying numbers

It is found that many investors, especially fresher, act emotionally about the real estate purchases than trying to envision themselves living in the property they are considering. This is a big mistake to make. In such a situation, the investor overestimates the property and invests far too much time or funds, which ultimately blows out their ROI.

So, never view you’re your rental property in terms of granite or counter­tops, but as a real-estate investor professional, evaluate a considering by counting on the numbers you buy. What the dollars you invest in getting you in terms of dollars in return. Simply shelling out more money into any property to get a higher rental than normal may backfire.

Some key facts to know about mortgage debt forgiveness and taxes on it

If you are experiencing a whole lot of heel with the mortgage you owe, having at least a part of it getting written off by the lender may be a blessing. In fact, it is possible. However, the forgiveness of such a debt is considered as a taxable income. If you don’t expect it, you will be confused when you get a tax bill.

Back in 2007, the US Congress enacted a bill named ‘Mortgage Forgiveness Debt Relief Act.’ This was to extend the tax exemption to those struggling homeowners who got benefited through mortgage debt forgiveness. This was later extended to 2013. So, someone got your mortgage debt written off in 2012 may get benefited from this.

However, the regulations around debt forgiveness and its taxes are a bit confusing and complex indeed. Based on the request of many questions we get at NationaldebtRelief, further, we will try to clear up this confusion.

Which all debts are forgiven are excluded?

Only those debts which are availed to build, buy, or substantially improve the principal residence of an individual, which later forgiven by the lender are excluded from counting as the taxable income. This means that the canceled debt from the original mortgage on your main home will not be counted as the taxable income. However, if you have used the mortgage money to buy a second home or invest in a vacation home, the written off debt amount will surely be counted as your taxable income.

Let’s look at a case study to understand it better:

  • An individual takes $125,000 in the year 2000 to build his or her primacy house, which is worth $150,000. IN 2012, they owed $99,000 as their debt, but the factual value of the house had fallen to $90,000. Being faced with a debt situation, they weren’t able to further make the mortgage repayments and then made a forced short-sell of the house or $85,000. This will leave the person with a debt of $14,000, and the lender forgives the debt upon short sale done. This $14,000 in 2012 will not be counted as taxable income.

Similarly, any mortgages taken for the renovation of the primary house including any cash-out refinance may also qualify as the same under this Act. Let’s explore a case for this scenario also:

  • Someone takes a cash-out to refinance in the year 2005. They did $30,000 cash out of their property’s equity in order to renovate the kitchen, which further boosted the value of their home. However, after 5 years, in 2010, they were underwater, and the value of mortgage was $50,000. They negotiated with the lender for a mortgage restructuring and got $25,000 of the debt forgiven. As the entire debt was for the purpose of renovation, they got this exempted from taxable income.

However, if any of the amount from cash out for home improvement was spent for any other purposes as to pay off other existing debts or for a vacation, then the forgiven debt may not be qualified for any tax exemption.

#3. Do proper research

While investing in real estate, it is important to do your baseline research. The big mistake beginners make is that they buy the very first rental they come across. Don’t be in a hurry. Take time, gather as much information about the property as possible, understand the marketing conditions locally, and then property answer the questions related to “why should I get it?’. Get the numbers to prove it for you to commit for it.

In fact, most of the expert in real estate investment career comes through experience and by practice. This naturally takes some time to mold someone into an expert. So, it advisable to start playing small to learn the game and then go big.

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