The content in this blog post comes from Karen Conrad on episode 65 of The WealthBuilders Podcast, Frequently Asked Real Estate Questions and Answers.
At WealthBuilders, people constantly reach out to us with real estate questions. After all, real estate investing can be intimidating, and having an expert in your corner can provide you with the extra confidence you need. On our last free webinar, Karen Conrad shared a lot of good information on fix and flips–and our viewers responded with a lot of good questions, too! So, in this blog and episode of The WealthBuilders Podcast, coaches Karen Conrad, Mike Davis, and Frank Pulley answer your real estate questions.
Qualifying for the Real Estate Professional Designation
“My wife and I own a single-family rental that became vacant after 20 years in June 2021 (same renter). I was always a passive investor as a full-time W-2 employee BUT I worked only 1 month in 2021 due to a layoff with a financial package. I believe we can qualify as a Real Estate Professional (to use losses to offset my ordinary income) since we worked primarily on our rental for over 6 months to perform extensive maintenance & repairs, including a kitchen renovation.”
Do the hours driving from California to Maryland (5-6 days) count towards material participation, and assuming they do, would it be 8 hours or 24 hours per day?”
You can acquire a real estate professional designation if you work in your real estate portfolio more than any other for at least 750 hours a year. Having a real estate professional designation is beneficial because it allows you to take tax deductions over the $25,000 limit.
Regarding real estate questions above, it would be wise for the investor to contact their accountant. Typically, it is difficult to acquire a real estate professional designation with only one investment property (though not impossible.) Driving to and from the properties would count as hours towards their license (pending accountant approval), and they could count travel costs toward their tax deductions.
Collateral for a Commercial Property Purchase
“I have several parcels of land. how can I use them as a collateral to secure a loan for a commercial property?”
First, find the right lending institution. One bank may be unable to fulfill that request, whereas another would be more than willing. If you don’t have luck at a big commercial institution, try a local bank. Having a relationship with a lender is invaluable. They can help you best structure your loan. The bank would configure the value of those parcels of land and use that to collateralize a commercial property.
Finding Good and Reasonable Contractors
“How do you find good and reasonable contractors? One thing we found is that a contractor was charging an additional 15% fee for using subcontractors. It really increased the price!”
Do your research and ask other investors who they use. Ask to see photos of their work before you hire contractors. In addition, be sure you know their pricing before you sign a contract—and do not pay them upfront.
As far as the 15% fee goes for using subcontractors—that’s pretty normal! Generally, contractors will add a 10-20% fee for using subcontractors. Contractors earn that percentage, as they are the ones who schedule, manage, and pay subcontractors.
Bidding Wars
“They are having bidding wars in my area on homes. People are giving 20-30 more than what the seller is even asking! It’s seems that you would be upside down when the market shifts. My heart is set on an RV park. I want to start my own, but I don’t know the best way to start with the money my husband and I have.”
In our current market, real estate questions surrounding bidding wars are increasingly common. In many areas, paying over asking price has become the norm! However, homes are appreciating rapidly, too. . (In the last 75 years, the real estate market has appreciated 5-7% each year.)
Whereas it may not make sense to go as much as $30,000 over asking price for an investment property, it can for a personal home. For investment properties, stay within the boundaries of the formulas that work for you. Check out this blog to view the formulas that WealthBuilders recommends for buy and hold investment properties: https://www.wealthbuilders.org/investment-property-financing/
As far as RV parks go, we wouldn’t recommend building one from scratch. That requires a lot of electrical, sewage, landscaping, and other technicalities to get it going. You can buy them, though! At any given moment in time there are RV parks for sale—look online and see if purchasing one is feasible with your budget. They are very valuable! If it can cash flow, look into it.
Land or Investment Property?
In 18 months, our property value will be $283,000 more than the price we originally purchased it for. We live in northern Idaho, and on average, our home’s value has gone up an average $9,000 a month. This is our first house. We really want to use a HELOC or cash-out refinance to buy land. However, would you suggest using that money for two more regular properties? Do you think the market will still be going up 2 years from now, how about 4 years?
If you can purchase two properties from the equity you have in one, that’s incredible leverage! If you have the option to do so, spread out your equity into as many investment properties as possible.
Wholesaling or Fix and Flips?
How do you compare the benefits of fix and flip with Wholesaling for someone who is just starting out? Do you typically recommend one over another for beginners?
It really depends on how much money you have. If you have the time and money to do a fix and flip as a beginner, they are more lucrative than wholesaling (if you do them right.) A good rule of thumb is to not spend more than 70% of the after repair value minus the cost of repairs. On the flip side (pun intended), wholesaling provides you with chunks of cash—often between $5,000-$10,000 at a time—and has low risk/low cost of entry. It can be a good way to boost your capital so that you can get into a fix and flip or buy and hold property.
If you want to view a recording of our last free webinar, click here:https://www.youtube.com/watch?v=zy_CgJ276E0
Do you have any real estate questions of your own? If so, drop them in the comments!