How to Protect Yourself from Hidden Debts and Costs in Investment Properties

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

Tread Carefully: Hidden Debts in Property Investments Can Cost You

Real estate investments have long been hailed as a dual-benefit venture, offering the immediate allure of cash flow and the promise of long-term wealth. Whether you’re delving into the world of fix-and-flips or banking on the steady income of a rental property, the potential returns from real estate can be truly transformative for investors. Yet, in the rush of excitement and the prospect of profits, some investors leap before they look, bypassing crucial due diligence steps that can be costly.

From overlooked tax bills to undisclosed liens, the landscape of property investment is riddled with potential pitfalls. Lured by the promise of quick gains, investors can unwittingly take on these hidden burdens, turning a promising venture into a financial sinkhole. While many assume that the standard closing process will uncover any latent liabilities, the reality is often more nuanced and requires a deeper dive.

Understanding Property Taxes as a Smart Investor

Property taxes, though often begrudgingly paid, play a pivotal role in supporting our communities. From fire departments to schools and local law enforcement, the funds gathered are channeled into vital public services. Essentially, these taxes strengthen our federal, state, and local governments, enabling a solid infrastructure with cultivated services that benefit every citizen. For those navigating the home buying process, property taxes might seem straightforward – a mere annual financial obligation; however, delving deeper reveals a myriad of local regulations that can muddy the waters.

The inception of property taxes can be traced back to approximately 3000 B.C. in ancient Egypt, where funds raised were funneled into iconic projects such as building the pyramids. Fast forward to ancient Greece and Rome, taxes fueled the construction of structures that still captivate us today. In America’s early colonial days, taxation practices varied, but it’s notable that some of these funds bolstered the fight for freedom during the Revolutionary War. The 18th century ushered in a significant shift, with states like Illinois, Missouri, and Tennessee pioneering a taxation approach based on property value – which marked the dawn of ad valorem taxing.

In contemporary society, property taxes predominantly serve local needs and improvements and are commonly collected at the municipal level, reflecting the localized nature of the services they finance. The extensive list of local taxing authorities encompasses cities, counties, school districts, community development districts (CDDs), special taxing districts, villages, townships, and other governing jurisdictions. The funds dispersed from these taxes bolster our education system, libraries, infrastructure, law enforcement, public transport, and an array of other community-centric services.

Today’s property tax calculations are more nuanced than their ancient counterparts and calculated with 3 methodologies:

1. Sales Evaluations: Determines a property’s market value by comparing it to similar recently sold properties, considering unique attributes and current market conditions.

2. Cost Method: Estimates the expense of rebuilding the property at today’s prices, subtracting any depreciation due to age or wear and tear.

3. Income Method: Used primarily for investment properties, this method gauges potential rental income, subtracting operational costs and considering the return on investment.

Diving into the realm of property taxes can be complex, but all taxes fall into 2 essential classifications:

1. Ad Valorem Taxes: These taxes are based directly on the value of a property or transaction.

Example: If a home is appraised at $300,000 in a county with a 1% ad valorem tax rate, the homeowner would owe $3,000 in taxes for that year.

2. Non-Ad Valorem Assessments: These are charges tied to specific services provided to the property, irrespective of its value.

Example: A flat $50 monthly fee imposed by a homeowners’ association for community landscaping and security, regardless of the home’s market value.

Understanding how property taxes are calculated and where they are applied is crucial for savvy investors to protect themselves from hidden costs and ensure a sound financial property investment.

Leveraging Tax Tactics for Protection

Taxes underpin the support systems of governments at the national, state, and local levels. When these remain unpaid, taxing authorities will act decisively to recover their dues. For investors, navigating this space requires an understanding of tax lien certificates, tax deeds, and the importance of tax certificates as they offer potential strategies to safeguard against hidden costs.

3 Tiers of Taxing Authorities:

1. Federal
2. State
3. Local

When property taxes go unpaid at any of these levels, authorities can put a lien against the property in question. The title might then be auctioned with its associated liens. If the situation escalates to a Tax Suit, it could result in structured repayments, bankruptcy, foreclosure, or a tax sale. Certain thresholds of debt on homesteaded property might see the tax collector directly issuing a certificate to the county, which can lead to a judicial sale, clearing all taxes, liens, or mortgages tied to the property.

Tax Lien and Tax Deed Certificates: How They Protect Investors

Understanding the difference between a tax lien certificate, a tax deed, and a tax certificate is crucial for investors aiming to protect their investments:

Tax Lien Certificate: Acquiring a tax lien certificate means buying the right to collect the unpaid taxes on a property, not the property itself. If the original property owner wants to reclaim their property, they must repay the owed amount, plus any interest, to the certificate holder. For investors, this represents a potential return on investment as the interest can be substantial. By holding a tax lien certificate, an investor safeguards their investment. If the property owner fails to settle their dues within the redemption period, the investor can move forward to acquire the property, often at a fraction of its market value, thus reducing hidden costs of direct property acquisition.

Tax Deed Certificate: Purchasing a tax deed is an indirect method of acquiring property. Instead of buying the property outright, an investor buys the unpaid taxes, which often comes at a much lower cost than the property’s market value. If the original owner fails to reimburse the investor (including the owed taxes and accrued interest), the investor becomes the property’s rightful owner. This strategy minimizes hidden costs because investors are essentially purchasing properties at significantly reduced prices.

Why You Need a Tax Certificate: Not to be confused with a Tax Lien or Tax Deed Certificate, a Tax Certificate is a comprehensive document that outlines the individual taxing authorities for a property and its history of taxes. It provides property assessment details, the current tax rate, and a summary of the amounts for the current tax year. Such a certificate will show any unpaid balance with local taxing authorities and any tax liens on the property. Obtaining a Tax Certificate is crucial for investors to determine what taxes they will pay, verify taxing districts, understand municipal utility providers paid through property taxes, uncover potential unrecorded debt, and ascertain any tax liens. For investors, acquiring a tax certificate is a pivotal strategy to uncover potential tax delinquencies that often go unnoticed in standard title searches.

By understanding and leveraging the mechanisms of tax lien and tax deed certificates, as well as a comprehensive tax certificate, investors can unlock invaluable strategic advantages. These tools not only present opportunities for profitable returns but also serve as shields against the pitfalls of hidden costs. While the path of property investment is riddled with complexities, with the right knowledge and approach, proper tax tactics can pave the way for more secure and informed decisions. As every state wields its unique set of rules and perimeters, investors can benefit significantly from seeking counsel with local tax professionals to maximize their protection and potential gains. In essence, when used judiciously, tax-based strategies can transform challenges into opportunities for the discerning investor.

Navigating HOAs and COAs for Investment Properties

When purchasing an investment property, it’s crucial to understand the role and reach of homeowners’ associations (HOAs) and condominium owners’ associations (COAs), which oversee around 53% of U.S homes. These organizations, while beneficial in maintaining property standards, come with guidelines and financial obligations.

If your purchased property falls under a HOA or COA, it may be beneficial to utilize either of these two tools to uncover potential fees and hidden costs:

Association Estoppel– known by various names depending on the state, this legal document highlights the property’s standing with the HOA or COA. An estoppel reveals any outstanding dues, violations, special assessments, and more, providing a transparent picture of any future costs or obligations.

Association Identification– An efficient service tailored for companies that prefer direct communication with associations or management firms but lack the bandwidth for extensive preliminary research. Identification can provide basic property information.

By leveraging these tools, investors can confidently navigate the intricate dynamics of HOAs and COAs, ensuring they make sound and well-informed property investment decisions.

Utilizing Best Title Practices & Post-Closing Procedures

In the real estate sector, title defects represent a discrepancy or irregularity in the ownership or description of a property; these issues can range from liens against the property to documentation errors. Recognizing these defects early is crucial, as they can lead to disputes and even litigation, which can be costly. Establishing open channels of communication between stakeholders, such as lenders, sellers, and buyers can preempt many of these issues.

These staggering statistics emphasize the importance of a thorough title inspection and a comprehensive post-closing process:

– 30% of land titles have defects, which means 1 in 3 closings will require curative work.

– 30% of title issues stem from survey or boundary issues.

– 10% of post-closing recordings have issues, many of which can result in title claims.

– 17% of all properties contained code issues.

– 18% of all properties had a building issue.

– 30% of all properties had overdue utility bills.

– 61% of researched properties have issues that could become the responsibility of an unaware buyer.

To initiate the best title practices and ensure a proper post-closing procedure, it’s critical to be vigilant at every step. Here are the most prudent actions you can take to ensure your title is clear and your closing is finalized without the possibilities of issues down the road:

1. Comprehensive Title Examination: Hire only highly experienced title examiners covered under Errors and Omissions Insurance to safeguard against potential title issues. Utilizing standardized procedures ensures consistent quality checks and minimizes the chance of oversights.

2. Inspect Records: Merely relying on indexes can be insufficient. Accessing documents directly from land records helps in unearthing any underlying discrepancies, ensuring a title free from potential county clerical errors.

3. Thorough Historical Review: For properties with long-standing histories, it’s crucial to search beyond the state’s standard timeframe. This ensures all title-related documents, even those from long ago, are accounted for, providing a clearer picture of the property’s title lineage.

4. Court Proceedings & Documentation: Titles can have legal complexities. By scrutinizing court proceedings related to title rights and meticulously reviewing schedule B and lender documents, potential defects in the title chain can be spotted and rectified early on.

5. Proactive Title Defect Solutions: Navigate the complexities of potential title defects with preparedness. For instance, to prevent issues from invalid tax sales, carefully review all associated notices. Also, confirming the marital status of sellers and borrowers is crucial in preempting any future spousal title claims.

6. Conduct Municipal Lien Searches: Not all liens are immediately visible in public records. A comprehensive municipal lien search brings to light unpaid utility bills, outstanding code violations, and building issues, offering a more transparent view of any potential encumbrances on the property.

7. Get a Land Survey– A survey provides a detailed and accurate representation of a parcel of land, depicting its boundaries, features, and other critical elements, preventing unforeseen disputes and costly rectifications later. While often perceived as an additional expense for buyers, a survey is a safeguard for investors, ensuring the integrity of a transaction and minimizing unexpected closing delays.

8. Guarding Against Mechanic’s Lien: Mitigate the risk of a mechanic’s lien filed during or after closing by acquiring property permit histories and securing lien waivers from owners or contractors.

9. Post-Closing Diligence: Despite advancements in digital record-keeping, the real estate and title industry often grapple with outdated methods prone to human errors. Simple mistakes, like number transpositions on a mortgage satisfaction document, can result in challenges for homeowners during resale. Be sure to track/verify all post-closing documents are accurate.

By prioritizing these practices, property investors can confidently secure their assets, ensuring long-term stability and minimizing unforeseen risks.

Knowledge & Due Diligence: Your Best Protection Against Hidden Fees and Costs

In the intricate world of property investments, due diligence is not just recommended, it’s imperative. The realms of title practices, property taxes, and homeowners’ associations conceal pitfalls that can quickly turn a promising investment sour. Understanding and navigating tax strategies, title defects, and HOA/COA obligations are pivotal to safeguarding one’s assets and financial interests.

Knowledge truly is power in the real estate domain, which is why investors need to be educated and equipped with the right tools to make informed, secure, and profitable decisions to ensure success with their property investments.

For a deeper dive into protecting yourself from hidden debts and costs in investment properties, download our comprehensive whitepaper.

Harnessing the Power of Real Estate through Equity Trust Self-Directed IRAs

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

In the vast landscape of investment, real estate has continually emerged as a steadfast beacon for astute investors. This allure isn’t just due to its tangible nature, but also its historical stability and potential for impressive returns. For individuals fortunate enough to manage an Individual Retirement Account (IRA), there’s a potent, often underutilized avenue for amplifying their investment prowess—Equity Trust real estate investments. This comprehensive guide aims to shed light on this exciting confluence of IRA and real estate, opening doors to potentially transformative opportunities.

Decoding Equity Trust in the Universe of IRAs

At first glance, Equity Trust may appear as just another name in the vast financial sector. However, delve a bit deeper, and its monumental role in the IRA-based real estate investment domain becomes palpable. Equity Trust represents a seismic shift from the norms, advocating for a synergy that allows investors an opportunity to step outside the confines of conventional assets. Instead, they’re ushered into a world where the tangibility of real estate intersects with the benefits of an IRA.

Traditional vs. Roth IRAs: Navigating the Dual Powerhouses

Understanding the dual dynamics of IRAs is pivotal. Each offers unique advantages that can be tailored to individual financial objectives:

  • Traditional IRA: Rooted in the principles of tax-efficient investing, the Traditional IRA permits tax-deductible contributions. Furthermore, it defers tax implications until the time of withdrawal, acting as a strategic ally for those eyeing long-term real estate ventures.
  • Roth IRA: The Roth IRA stands apart, emphasizing post-tax contributions. Its crowning feature? The assurance that once your real estate assets bear profits and meet qualifying criteria, they’re inherently tax-free.

Weighing the merits and potential drawbacks of each, especially in the context of Equity Trust real estate investments, is vital. It not only influences your immediate financial strategy but also impacts long-term wealth accumulation and tax implications.

The Structured Path to Real Estate Mastery via Equity Trust IRA

Embracing the world of Equity Trust real estate investments necessitates a methodical approach. Here’s a step-by-step guide:

1. Initiate with the Right Custodian: Begin by engaging with a Self-Directed IRA Custodian, specialized in real estate. Their proficiency in Equity Trust transactions will be invaluable in your journey.

2. Transition Seamlessly: Migrate funds from your existing setup to the newly chosen self-directed IRA. It’s imperative these funds align with the stringent Equity Trust standards.

3. The Art of Property Selection: In real estate, the mantra ‘due diligence’ reigns supreme. It’s about immersing oneself into rigorous property valuations, meticulous inspections, and acquiring an in-depth understanding of property market dynamics.

4. Sealing the Transaction: One cardinal principle to remember during the acquisition phase is that the property title resides with the IRA. This mandates that every financial transaction—be it income or expenditure—related to the property flows through the IRA.

5. Guided Investment Management: The eventual profits from your real estate venture flow directly back to the IRA, ensuring the continuity of its preferred tax status.

Unraveling the Advantages of Equity Trust Real Estate Investments

The blending of IRAs with real estate under the Equity Trust banner offers investors a suite of compelling benefits:

  • Diversification Redefined: Real estate acts as a formidable hedge, shielding portfolios from the whims and caprices of market volatility.
  • A Dual Revenue Stream: Real estate stands out, thanks to the twofold income potential of capital appreciation and potential rental inflows.
  • Tax Leverage: Both the Traditional and Roth IRAs come equipped with distinct tax benefits, providing a significant boost to your overall returns.

Anticipating and Overcoming Challenges

Every investment avenue comes with its set of challenges. Here’s how you can prepare:

  • Liquidity Dynamics: Unlike the near-instantaneous liquidity of stocks, real estate requires strategic planning. A long-term vision can mitigate potential liquidity crunches.
  • Understanding UBIT: If leveraging borrowed funds via your IRA for property acquisition, be prepared to navigate the UBIT (Unrelated Business Income Tax) landscape.
  • Deciphering Fees: Given the specialized nature of Equity Trust real estate IRAs, fees might be slightly elevated. However, considering the potential benefits, these can often be viewed as a worthy investment.

Carving Your Niche in Real Estate with Equity Trust

The proposition of leveraging Equity Trust for real estate investments via an IRA is both tantalizing and promising. But success in this domain requires more than just enthusiasm; it mandates precision, expertise, and a keen market sense.

Enter IRA Title Pro. Here, we don’t merely offer services—we redefine them. Our commitment is reflected in our track record, enabling investors to finalize deals 11 days ahead of the industry norm. With a seasoned team that specializes in IRA real estate closings, we ensure each transaction resonates with efficiency, compliance, and rapidity.

Keen on catapulting your real estate endeavors to the next level? Let us be your trusted ally. For any questions, our experts are just an email away at Closing@IRATitlePro.com. In the world of real estate investment, let us be the compass that guides you to uncharted successes.

Tax Strategies for Real Estate Investors to Maximize Profits

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “Tax Strategies For Real Estate Investors” with BJ Cottrell from Cottrell Tax & Accounting LLC in Naples, Florida. Click here to watch the episode.

For individuals who are just starting their career in real estate investing, being proactive by speaking with a tax accountant initially can help ensure their record keeping is accurate and that they aren’t overpaying in some facets. Whether it is investing in an active rental property or a passive REIT (Real Estate Investment Trust), these types of investments are structured differently from a tax perspective than publicly traded stock, so it’s imperative investors get informed about the tax strategy that is best for their investment type to protect profits.

A new investor in the market could save thousands of dollars by hiring an accountant up front to overlook the proper tax planning strategy and help mitigate potential long-term losses.

Choosing the Right Tax Strategy for Your Real Estate Investment

Determining the best tax strategy for a real estate investor depends on the investment type. An experienced tax accountant would first need to understand the investor’s objective to advise accordingly. Common questions your tax accountant would want to know are:

1. What is the time frame for holding the property? This provides insight on potential capital gains and depreciation for deductions. Holding onto a property for at least a year can help mitigate taxes.

2. Is this a short-term rental or long-term rental? This prepares an investor for other taxes besides federal. For example, in the state of Florida, short term rentals (six months or less) must pay sales tax, which is 6%. The second tax that will have to be paid the tourist tax, which can be around 6-7%. Preparing for these taxes allows an investor to incorporate fees into the monthly invoice for their tenant, allocating funds for the investor to fulfill payments come tax time.

3. Is this a fix and flip? For investors who are engaging in fix and flips, their tax accountant will want to portray their real estate ventures as purely investments to alleviate Social Security and Medicare taxes and reap the benefits from the capital gains rates, depending on which bracket the investor falls under. If the IRS detects that an investor is engaging in fix and flips as a full-time venture, A.K.A “dealing,” investors can be hit with ordinary income tax as well as self-employment tax. To avoid being categorized as a “dealer,” it is recommended for an investor to have a job on a W2 and to never have more than one fix and flip property occurring at a time.

Whether an investor is buying and holding a property lot for a few years or owning several properties at a time, when it comes to the IRS, it’s recommended for an investor to be taxed at an individual level and pass-through to the personal tax return because of capital gains rates. Investors can take up to $25,000 of losses from a rental property to offset ordinary income on a personal tax return, which can’t be done with other passive investments because passive losses can only be offset by passive gains.

Another key factor when it comes to tax strategies is whether a business entity is involved. Whether it is an LLC, partnership, a corporation, or INC, each legal structure has a different designation on how they are taxed by the IRS. Most tax professionals and attorneys advocate for the LLCs because they’re more flexible and can be taxed as a single member LLC, which is disregarded if there’s two or more members; the default is to be a partnership, which is a pass-through entity. An S-corporation is also a pass-through entity as well, meaning the business does not pay income tax of its own; its income, losses, credits, and deductions all “pass-through” to each business owner’s personal tax return, where profits are taxed according to each owner’s individual income tax rate, giving investors the best tax treatment.

Make Depreciation Work in Your Tax Favor

One of the smartest ways real estate investors can keep more money in their pockets during tax time is taking advantage of depreciation. It’s common amongst hesitant investors when they hear about potential losses associated with depreciation to be discouraged about real estate investing all together. Understanding how to benefit from these referenced “losses” is how investors can get bigger deductions and maximize profits.

To fully grasp the concept of depreciation and how it can work for investors when it comes to taxes, let’s look at a hypothetical example:

– An investor buys a rental property for $275,000.

– The IRS requires the investor to depreciate the property every year for up to 27.5 years, which means every year, the investor takes a $10,000 deduction in depreciation.

– This depreciation goes on the investor’s tax return as an expense, reducing the basis. This allows the investor to write off $10,000 to offset rental income or even ordinary income from a W2 job because it is passing through to the individual tax return.

– Looking at the same investment in the long-term, if this same investor keeps this rental property for the next seven years, taking a $10,000 loss each year, and then goes to sell the property for $400,000, instead of a $125,000 gain, because the investor took $70,000 in expenses that went to ordinary income on the tax return, the investor will now have a $195,000 gain.

This example of depreciation shows how an investor with a rental property theoretically takes a loss on paper but capitalizes on cash flowing and building equity on the property. Because the intricacies of real estate can be extremely complex, to ensure you’re following the best tax strategy, it is critical to consult with a licensed tax accountant for proper guidance.

Pro Investor Tips for Bigger Tax Benefits

For investors looking to truly maximize deductions on their real estate properties each year, there are several recommendations to ensure optimal tax treatment:

Set Up a Business Entity- Creating a business entity for holding your real estate not only provides asset protection and limits liabilities but also lets investors run their rental properties like businesses, keeping personal and business funds separately. Whether it is a single member or a husband-and-wife single member LLC, or even a partnership depending on the circumstances, an investor forming an LLC receives an EIN number (a social security-type number for the business) and can open a separate bank account for the business. Having a separate account for the real estate business is crucial for investors because they can avoid comingling payments and expenses for tax purposes while also minimizing personal liability if a suit is ever filed against the LLC. It is also suggested to utilize this bank account or a single credit card for all property-related payments and expenses for complete transparency.

Investors who are looking to fix and flip multiple properties are strongly encouraged to set up an S-Corp (S corporation) to place all their real estate properties under. This type of business structure offers several tax benefits for investors, allowing them to write off all their expenses (cell phones, cars, computers, home interest, etc.). And while investors will be subjected to an ordinary tax rate as well as Social Security and Medicaid at a 15% self-employment tax, an S-Corp entity allows investors to pay themselves a salary while drastically reducing the amount of self-employment tax they will have to pay.

Save Receipts- Expenses related to properties add up over the course of the year, and if investors aren’t saving receipts or tracking their spending, they could miss opportunities for deductions on their taxes. The IRS will need to see verifiable proof of a business expense to claim a deduction, so saving receipts is vital.

Get Organized- Managing a real estate operation requires an organized system to run smoothly. Because running a real estate venture like a business is multi-faceted, investors need to keep track of their records, bookkeeping, expenses, and other documentation as efficiently as possible, especially when it comes time to extract this data for tax purposes. Software such a QuickBooks or even a simple Excel spreadsheet is highly recommended to ensure all your pertinent information is stored and easily legible.

Staying organized with your operation is essential, especially if the goal is to scale your rental business. Ambitious investors who are looking to expand their operations are highly encouraged to consult with a licensed tax accountant who can sign and assist with creating an official P&L (Profit and Loss Statement), which is a requirement if an investor wants to obtain a loan from a bank for further real estate ventures.

Partner with the Pros for Your Next Real Estate Transaction

Investors looking to close on a real estate property are encouraged to check out IRA Title Pro, a full-service title company that focuses exclusively on IRA real estate closings. Enjoy faster closing times and an experienced closing team that also understands fractional IRA interest in the property.

Why Creating a Business Entity is Crucial for Real Estate Investing

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “ Creating The Right Business Entity for Real Estate Investing” with Mr. Jeffrey Grant, a real estate attorney from the law firm of Grant, Cottrell & Miller-Myers in Naples, Florida. Click here to watch the episode.

Investing in stocks and bonds has always been considered the smarter, more prudent strategy for generating long-term profits while real estate was always stigmatized as the riskier venture for investors. But over the past few years, the industry has seen a momentous shift in investment approaches. Whether it is global impact or common market volatility, stocks and bonds are shaping up as the more precarious investment strategy.

While individuals are seeing drastic fluctuations in their retirement portfolios when it comes to stocks and bonds, reporting as high as 10% returns to as low as 20% losses, investors holding real estate are experiencing consistent positive returns with no impact from outside influences. As uncertain times continue to surround the markets, real estate has emerged as the more shrewd, beneficial investment strategy, yielding bigger, more steady returns with less risk.

Protect Your Real Estate Investment with a Business Entity

While investing in real estate is clearly becoming the smarter strategy, investors looking to purchase properties in their names should strongly consider against it. From succession planning to asset protection, investors are encouraged to explore a business entity for real estate to keep their investments protected. Let’s look at a few ways investors could make themselves susceptible to liability without a business entity, putting personal assets in jeopardy:

1. Injuries sustained by tenants or guests- If a tenant or guest(s) of your tenant experiences an injury or accident on your property, you could be subjected to a lawsuit for compensation.

2. Hiring unlicensed contractors- If your tenant hires an unlicensed contractor to make repairs to your property, it could cost you more money for repairs to be done correctly or other fines and fees, especially if an accident/injury occurs due to the improper work completed.

3. Dispute with tenants- If a dispute occurs between you and your tenant(s) over the condition of your property, the lease, or an eviction, without a business entity in place, you could be responsible for fees associated with settling these disputes.

Placing your property in an LLC (Limited Liability Corporation) is the perfect, most cost-effective solution to protect your real estate investment. This type of business entity ensures that investors (company owners or members) are not personally liable for the debts and liabilities of the entity, offering a much-needed layer of protection from these hypothetical situations. Forming an LLC allows investors to separate their personal and business assets and liability as well as obtain an operating agreement.

An operating agreement lets investors open a bank account for their LLC, which they can use to deposit their received rent payments, eliminating the possibility of comingling funds while creating an official business operation for their rental property. Investors who operate their real estate investment under an LLC can manage their properties more professionally and effectively with an aura of anonymity, implementing office policies for late payments and other stipulations they set forth.

Not Hiring a Licensed Real Estate Attorney Could Cost You

It’s common for first time investors to commit oversights when it comes to forming an LLC on their own. Whether it’s skipping out on hiring an attorney to ensure the LLC is created correctly or failing to open a bank account in the name of the LLC and comingling payments, when investors try to cut corners, it can cost them financially. Many investors may believe hiring an attorney for creating an LLC is too costly, but that’s a misconception. Without an expert attorney, investors could lose their asset protection all together, even if they completed some of the steps successfully, resulting in significant losses and liabilities.

For example: If a tenant gets sick on one of the properties owned by an LLC due to mold growth, but the property owner functioned as the handy man for repairs, the bookkeeper, and accepted checks under a personal name, a lawsuit could be brought against the property owner personally, sidestepping the LLC due to improper practices.

Another common mistake investors make who form an LLC on their own is failing to conduct the annual filing. This can result in the state dissolving the business entity altogether, making all signed contracts void, and any filed lawsuits go against the individual property owner. If this is the case, all the assets that the property owner has, whether it’s additional properties, bank accounts, wages, and more, if a judgement is entered against the individual, all assets are in jeopardy. If a lawsuit is brought against an LLC and the LLC was formed correctly, then only the assets owned by the entity would be at risk, not the assets owned by the individual who owns the LLC.

Other complications derived from an improper filing of an LLC arise when attempting to sell the property. While it’s much easier for an investor to purchase a property when first forming an LLC without using a licensed attorney, it becomes much more cumbersome when it’s time to sell the same property and steps were missed. Common issues occur when a title company needs to verify who has the right to sign on behalf of the entity, especially if there are multiple people listed on the LLC. This major dilemma can prevent investors from unloading their properties and is extremely costly to fix.

LLC rules and regulations vary state by state, not by federal laws, so it’s critical to consult with an attorney based on this fact alone. For individuals looking to invest in real estate, the smartest thing investors can do to protect their investments and assets is to hire a licensed real estate attorney to form an LLC for their property(ies).

Choosing the Best Business Entity for Your Real Estate Investment

Not all real estate investors will have the same objectives for their properties, which is why it’s important to understand which business structure is best for your type of investment. From fix and flip to buy and hold, not all real estate ventures are the same, nor are the recommended entities for holding your properties.

For a fix and flip scenario which will see a lot of people through a short-term basis with the goal of unloading the property, it’s recommended to hold all these type of investments under one LLC. For individuals looking to buy and hold properties, it’s suggested to hold each property under a separate business entity, aka series LLC, where the holding company owns the buy and hold properties and the fix and flips LLCs.

Fix and flips should be looked at differently from an investment perspective and set up differently than a buy and hold from a tax perspective as well, which is why speaking with a licensed real estate attorney is the smartest thing an investor can do.

Prepare for Your Family’s Future with Succession Planning

It’s imperative for investors who hold real estate in their LLC to be proactive with their properties to ensure a smooth transfer upon death. Oftentimes, when someone who owns real estate passes away, even if that individual has a will, there will still be probate. To avoid the onerous probate process, it’s suggested to set up a revocable trust (living trust) in which all assets are titled, making the distribution of assets simple.

To avoid filing fees and deeding of properties, individuals who own multiple properties in an LLC can set up a revocable trust so that when they pass away, the membership interest is easily transferred without probate. This type of careful planning can make a difficult time for your family a bit easier, especially when it comes to distributing assets accordingly and mitigating disputes.

Partner with the Pros for Your Next Real Estate Transaction

If you’re searching for a knowledgeable, highly recommended licensed real estate attorney in the Naples, Florida area, contact Jeffrey Grant of Grant, Cottrell & Miller-Myers at (239) 649-4848.

Investors looking to close on a real estate property are encouraged to check out IRA Title Pro, a full-service title company that focuses exclusively on IRA real estate closings. Enjoy faster closing times and an experienced closing team that also understands fractional IRA interest in the property. Find out more at iratitlepro.com.

The Ultimate Guide to Property Management for Real Estate Investors

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “A Guide to Property Management for Real Estate Investors” with guest David Puskaric, property manager and real estate agent from Parkline Realty in Naples, Florida. Click here to watch the episode.

Investing in real estate is one of the smartest, quickest ways to grow your wealth. Whether it’s generating a steady source of cash flow, benefiting from tax breaks, or building equity, investing in real estate is the best strategy to create long-term profits. While investing in real estate is an exceptionally prudent tactic, it’s also a major financial decision that comes with significant responsibilities for an investment to be successful.

When it comes to operating a fruitful real estate venture, property management is paramount. For investors to maximize their investment’s potential and ensure the longevity of their property, it’s crucial for property management to be conducted efficiently. It’s easy for new investors to gloss over the necessity for scrupulous property management, and many times this neglected component can result in losses on their investments.

Top 3 Mistakes Investors Make When it Comes to Property Management

While the stress of owning real estate property can seem overwhelming at times, real estate investors need to understand the importance of adequate property management for the overall health of their investment. Let’s look at the 3 biggest mistakes investors make when it comes to managing their properties:

1. Being Too Nice- The adage goes, “People mistake kindness for weakness,” and that testament still reigns true today, especially when it comes to business. Many real estate investors who are too nice to their tenants often get taken advantage of: whether it’s allowing rent to be paid late or overlooking major red flags in a tenant’s application, being too nice can become a major setback for investors looking to maximize their investment potential. Benevolence with boundaries is the best approach when it comes to operating rental property to ensure investors aren’t losing money and their properties are generating steady revenue. Some people will look for opportunities to capitalize on the kindness of others, so it’s always great to be aware, making sure you’re not being cheated.

2. Trying to Manage on Their Own- Oftentimes, investors try to take on too much responsibility when it comes to managing their properties. It’s easy for investors to become too attached to their investments, where they can’t separate ownership from management, resulting in answering every single tenant complaint immediately, running to answer every single call and make even the most remedial of repairs. This type of managing can wear down an investor, especially if they own more than one property, making overseeing an almost impossible task to keep up with. It’s recommended to hire a team to handle your property management, especially if you’re new to investing in real estate, to ensure your investment(s) are getting the supervision needed without demanding too much of the investor. Putting a team together, working with a local agent, realtor, a property manager, and learning the local market is the most effective way to manage your property.

3. Not Properly Screening Applicants- Many investors are self-managing their properties, which leaves room for error with screening applicants. It’s crucial for investors to ensure they are maximizing the questions on their applications; confirm if your tenant has ever been convicted of a crime (misdemeanors or more severe charges) and verify credit scores and income; ensure your tenant can afford to live in the residence. If an investor isn’t asking the right questions on the application, there is a higher risk that a potentially problematic tenant could be selected, resulting in issues down the road that could lead to net losses.

It’s highly recommended that owners create a manual for tenants, outlining their maintenance responsibilities for living in the unit, such as switching out filters or cleaning vents. It’s also helpful to provide instructional videos to confirm each task is executed properly.

Protect Your Investment with a Property Management Company

While the throes of owning a real estate property may keep some investors up at night playing catch up, hiring a property management company is the smartest thing to do to protect your investment. Let’s look at the top reasons investors should utilize an accredited property management company:

1. Understanding Local and State Regulations- It’s not enough to just maintain a property, it’s also imperative that all rental properties abide by local and state regulations. Renting out a property in Ohio can be very different than a state like Florida based on the state regulations. Whether it’s registering the property to abide by local regulations, being ADA compliant, or aligning with the Fair Housing laws, not having a thorough understanding of these rules and regulations can be costly for an investor. A qualified property management will ensure your property is compliant with all regulations, mitigating investor risks.

2. Managing Security Deposits and Prepaid Rent- Another common issue with those self-managing their properties is improperly comingling tenant security deposits and prepaid rent; these need to be held separately as funds allocated for damage and the first couple of months’ rent. It’s easy for investors to misappropriate this money at some point, which can lead to legal issues. Hiring a property management company as a third party eliminates the investor liability while ensuring there are no conflicts with the usage of these funds.

3. Complete Organization and Oversight- While many investors may resort to taking mental notes or creating their own spreadsheets and documents, the chances of making accounting errors, overlooking red flags, and committing other omissions increases dramatically. Most accredited property management companies utilize streamlined software that handles all aspects of overseeing a property, from functioning as a repository for official documents/applications and complete expense reports, eliminating any tracking mistakes while providing complete clarity on the rental operation. A professional property management company will also guarantee you’re selecting the right tenant for your unit by making sure all the necessary questions and checks are being conducted during your screening process.

Working with a knowledgeable property management company not only makes managing rental properties easier, but it also minimizes risks and liabilities so investors can focus on other pressing matters while attaining peace of mind.

Increase Your Annual Percentage Yield by Using a Property Management Company

Whether it’s your first rental property or you’re a veteran in the real estate realm operating multiple properties for profit, it’s critical that property owners utilize a property management company to maximize the rate of return on their investment(s). Based on the latest data[1], investors that hire a property management company to oversee operations net a 7% annual yield differential, meaning investors stand to make more money by having the right property management company in place.

Efficacious property management is a crucial aspect to ensuring profitable real estate investments. If you’re looking to invest in real estate using your self-directed IRA, IRA Title Pro helps investors through the entire closing process, from start to finish. Whether it’s buying or selling, IRA Title Pro offers a plethora of helpful tools, resources, and guides for interested investors to gain insight and make it easier for investors to close on real estate properties, offering a quicker, seamless closing experience.

Start investing today and close 11 days faster than any other company by using IRA Title Pro: Click here

[1] Gettleman statistic on using a property management company

An Inspection Can Make or Break Your Return on a Real Estate Investment

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “How to INSPECT a PROPERTY BEFORE BUYING + MISTAKES to AVOID for New Real Estate Investors” with guest Josh Jensen, Co-Founder of Inspectify. Click here to watch the episode. Click here to head over to Inspectify, where you can book an inspection anywhere in the country in just a few minutes.

When it comes to buying real estate property, it’s critical for new investors to be informed on the many facets that go into ensuring a viable investment. One of the most crucial tools for assessing a property’s potential return is the home inspection. Recommended for not just investors in real estate but also anyone looking to purchase a home, whether it’s for financial gain or as a residence, the home inspection can provide insight into the possible principal loss or gain on a property, forecasting extra costs for fixes that may be required down the road.

While an inspection should be a major step in the transaction process and play a major factor in determining whether a property is worth purchasing, it’s easy for investors to make mistakes when it comes to the specifics surrounding the inspection.

The 3 Biggest Mistakes Investors Make When It Comes to the Inspection

While inspections can be the single largest source of stress and anxiety when it comes completing a real estate transaction, an inspection report can provide critical information about your real estate investment, becoming one of the most significant aspects of the entire buying process.

Let’s look at the 3 biggest mistakes investors are making with inspections:

1. Not Getting an Inspection– Without completing an inspection on a property, investors are taking an incredibly big risk with their money. Not having any sort of insight into the condition of a roof, foundation, electrical components, major appliances, and so much more could turn an investment into a liability and a potential money pit. Having an inspection completed by a licensed inspector will ensure there’s no conflict of interest and provide all the information investors will need to know when it comes to estimating how much they can stand to make or lose on a property, factoring in the necessary repairs they’ll have to make immediately and in the long term.

2. Underestimating the Costs- After completing an inspection and reviewing the data, it’s imperative for investors to understand the severity of costs for fixes/repairs. Some repairs can be trivial and super easy to complete while others, like replacing old knob and tube wiring to ensure safe electrical outfitting, may require additional spending to remedy. Smart investors should take notes on the recommended repairs and their priorities while also calculating the estimated costs associated with completing them to see if the costs are manageable.

3. Spending Too Much- While having an inspection completed is extremely important prior to purchasing, it’s also smart to ensure investors aren’t spending too much too soon or purchasing extraneous specialty inspections. It’s recommended to delay the inspection until you’re further along into the transaction process, at least until a written contract has been created or a Purchase and Sale Agreement is received because if an investor is converting 50% of the time on deals and they’re spending $400 an inspection, they’ll be spending more money than needed, and possibly wasting cash. It’s also smart to utilize the initial inspection as a filtering process for the specialty inspections. Instead of conducting additional mold, sewer, roof, and, etc. inspections, first see what has been identified as a possible concern in the initial inspection before shelling out more money for inspections that may not be necessary. For example, if you notice a foundation issue during the first inspection, then it would be smart to pay for a specialist to come take a deeper look.

Using Your Inspection as a Guide for Negotiation

Besides using the inspection as a catalog to assess the projected life spans of major appliances, structural elements, and other mechanical systems, it’s also a great report to determine what your concessions will be to finalize your purchase contract. If you’ve discovered major issues, like serious plumbing problems, electrical elements that could lead to a fire, or other legacy mechanical system concerns, you’ll know right away what needs to be addressed and negotiated on if you still want to proceed with the purchase.

While inspections are a valuable tool in calculating imminent costs and negotiating factors, they’re also proving to be an extremely helpful metric on assessing whether an investment will overall be profitable or not, which is why it’s essential all investors conduct an inspection on a property before finalizing any real estate transaction. An inspection is the best option for determining whether your real estate investment will be worthwhile or not.

Protecting Your Rental Property with Move-Out Inspections

Not only are pre-purchase inspections becoming critical, but the industry is also seeing a rise in the number of move-out inspections as well. As a property manager or investor owning a rental property, having an inspection completed before the tenant moves out is extremely helpful in determining accurate damages that may have occurred during occupancy and what other concessions can be made from the deposit. Whether it’s new holes in the drywall or an appliance that’s been destroyed, the quickest way to hold a tenant accountable is during this inspection.

Having a licensed third-party inspector conduct the inspection to ensure there is no conflict of interest makes it much easier for property managers and investors to catch potential issues that could become major concerns down the road. Whether it’s a water heater on the fritz or the early stages of mold development, the best way to stay on top of property maintenance to ensure the longevity of the unit and the reduction of possible long-term costs for bigger repairs is to complete a move-out inspection after your tenant leaves. This will also ensure the property is ready to be rented by new tenants.

Make Inspections a Staple in Your Buying or Owning Real Estate Journey

If you’re in the process of buying real estate or currently own a rental property, it’s more important than ever to use an inspection service you can trust. The cost of not having an accredited inspection could be disastrous, not only resulting in significant loss on your investment but also the overall deterioration of your unit over its life span.

Investors in need of an inspection are encouraged to check out Inspectify. Trusted by leading real estate brokerages and investment institutions, Inspectify is a platform dedicated to helping anyone with their inspection needs. With a click of a button, this ultra-convenient, streamlined service lets users instantly book an inspection with a licensed professional.

If you’re looking to begin your investment journey into real estate using your self-directed IRA, IRA Title Pro is here to make it easier for investors to navigate through the entire closing process, from the property purchase contract to the inspection and closing. Users can expect to close 11 days faster than any other service out there, giving investors an edge on the competition.

Make the smart decision to invest; get started today on your next real estate transaction.

 

The Truth About the 2023 Housing Market; Is a Crash Imminent?

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “Economist Explains the TRUTH about 2023 Housing Market Crash! | US Economy + Real Estate Break Down” with guest Simon Caron of the Uneducated Economist YouTube Channel, available on YouTube right now. Click here to watch the episode. Check out Simon Caron’s channel here.

For 2023, there are many questions surrounding the housing market. Pundits and economic experts range in their suggestions; factors such as inflation and low housing inventory are used liberally to espouse either an anticipated crash or correction. While the industry is shrouded in uncertainty and worried investors continue to sit on the sidelines, it’s also important to consider that a record high number of investors who bought properties from 2009 to 2015 with self-directed IRAs have sold those properties in the last several months.

This means that while many have missed out on opportunities, there’s also a substantial number of investors who have capitalized, harvesting profits that have flowed back into their tax-free self-directed retirement plans. As we navigate through a high-inflationary environment, it’s more imperative than ever for investors to deploy their capital in meaningful ways. 

Looking at the Price of Lumber to Predict What’s Next for the Housing Market 

To get a better understanding of micro- and macroeconomics and its impact on the housing market as well as foresight on the upcoming year, perhaps one of the best examples of a commodity experiencing similar unpredictable fluctuations in recent years is lumber. Starting with a rise prior to the 2020 pandemic, the price of lumber peaked at $1,700 per thousand board feet in May of 2021, surging over 50% in a year. While there were indications in late 2019 of an impending rise in price with mill closures, mill curtailments, and overall inventory depletions, all signs pointed to a supply chain breakdown as the major impetus and not so much the Fed printing more money, even though they went from $850 billion on their balance sheet to $4.3 trillion.  

Entering the pandemic, we saw the price of lumber start to shoot up. After people started spending their stimulus checks on lumber to build new decks, fences, and remodel their homes, there was a sharp depletion in inventory, very much like the low inventory rates seen in the housing market. As a response to the sharp decline in lumber inventory, mills began firing up, pumping out loads of lumber, only to see the price dip back down to $400 per thousand and then back up to $800 as the industry attempted to keep up with supply and demand. With lumber production being a multi-faceted operation, it’s difficult to see where the demand should be according to the inventory levels.  

Areas across the U.S. are seeing inconsistency with lumber inventory as some pockets are adequately supplied while others are not. Until inventory can be fulfilled evenly across the country, it’s expected that these fluctuations in prices will continue before an equilibrium is found. 

Now juxtaposing the housing market with the lumber industry, you’ll see a similar trajectory as the demand for homes increased; we witnessed a huge jump in home prices, which also started climbing as the 2020 pandemic ensued, reaching epic rates into 2022. But as mortgage rates continue to rise and builder sentiment falls, just as the price of lumber starts to come down, the cost of homes will follow, creating a more opportunistic landscape for investors in the real estate industry.  

Signs of a Housing Correction, Not a Crash 

With builder sentiment falling and existing home sales down around 15% compared to last year, there’s major concern regarding the future of the housing market. Many builders do not wish to get stuck on a project that will result in selling for less as construction costs rise, which can then contribute to low inventory rates. Most speculate that this overall disposition indicates a looming crash, but the most critical component of a pending crash is an increase in foreclosures. For foreclosures to take place, the economy would have to see a rise in unemployment, which would be a major catalyst for people being unable to make mortgage payments. But even in the current economy with talk of a pending recession, we are not seeing a rise in unemployment, which is currently at 3.5%, nor are we experiencing a jump in foreclosures. Foreclosures in general are still relatively low. 

A more realistic outcome for the future of the housing market would be a downturn in home prices. Homes that saw an increase in price of over $100,000 this past year could see their purchase tag reduced by $60-$70,000, which theoretically wouldn’t be a crash but more of a return to normal. Even with a third of homes being purchased by all cash buyers, as mortgage rates teeter around 7%, it’s reasonable to believe buyers will be deterred, resulting in the eventual reduction in home prices. Especially since mortgage rates are no longer increasing at the exponential rate as they were before, it’s more likely to estimate that a reduction in house prices is inevitable, pointing to an eventual housing market correction. 

The Federal Reserve’s Role in the Housing Market 

One of the key strategies implemented during the financial crisis of 2007 to 2009 and the start of the 2020 pandemic was called quantitative easing. The Fed purchased longer-term securities on the open market, including U.S. Treasuries and mortgage-back bonds. The perfect metaphor for a mortgage-backed security is if a bunch of mortgages are thrown into a box and that box is sold off to an investor; everybody’s paying their mortgages and the investor receives the capital investment back plus interest. Because this practice nets significant profits, the Fed created a huge demand in the market for these types of securities, given that it’s guaranteed a buyer and there aren’t concerns about who to sell to. This results in the mortgage rates climbing, security prices falling, and the yields rising, which increases overall mortgage payments due to the interest rate jump. 

These mortgage-backed securities (MBS) are not the toxic asset that they once were; there was a time when people received these mortgages when they really shouldn’t have: either they didn’t have a job, any viable income, or they owned more than one property. Today, these borrowers are much more qualified, making these types of investments much safer. 

The Federal Reserve’s Impact on Inflation 

As the Fed influences interest rates, they also seek to control inflation by raising rates to slow the economy and bring inflation down. Beginning in 2018, the Fed began looking to set an average inflation rate. The biggest misconception surrounds the 2% target; many confuse the 2% average inflation rate with a 2% target rate. It’s anticipated that we will see interest rates low when they shouldn’t be, and we will also see them high when they probably shouldn’t be as well. But it’s a 2% target inflation rate over time, meaning that monetary policy can be adjusted to a lower or higher rate, but over time, the Fed is still aiming for that 2% average inflation rate.  

Interest rates were artificially low for a significant amount of time, causing asset prices to rise dramatically, like the housing prices. This practice is carried out so when prices do drop or when interest rates rise, the Fed can bring those asset prices back down to where they should have been prior to the artificially restricted interest rates to control inflation. 

Based on this information, it’s plausible to believe we’re going to see interest rates stay elevated for a longer than anticipated amount of time. Even after the inflation comes down, the interest rates will stay high to achieve the average inflation rate of 2%. 

Smart Investing in a High Inflationary Environment

As interest rates continue to tick upwards and inflation weighs on the economy, the pressure is on investors to make heathy, safe investments. Many people are still cautious, waiting for a good opportunity to deploy their capital, whether it’s in stocks or real estate. The most challenging aspect for investors is knowing when to engage, finding the right entry point into any market. It may seem like the safest option is to save your dollars, especially since the U.S Dollar Index is the highest it has been in 20 years, but holding onto money over time results in erosion, reducing purchasing power. It’s not unreasonable to predict a deflation scenario as the demand for dollars could explode. On the contrary, it’s also not irrational to predict that over time the dollar could completely lose its value; either way, investing right now is the smartest thing to do.  

One of the benefits of a real estate investment over others, like a stock at $100, is having control of your investment strategy. With real estate, chances are if you have a good tenant, you’ll be getting paid over the next few months. And even if you purchased recently, over time, you’ll be able to increase rent which changes the financials of your return on investment, allowing you to stretch your money even further. Whether it’s high yield mortgage-backed securities or simply a rental property, it’s more imperative than ever for investors to get into the game and deploy their money for long-term gains. 

Explore Resources, Gain Insight, and Make a Better Investment

Whether it’s understanding markets, intrinsic value metrics, or the ins and outs of the real estate industry, smart investors are turning to IRA Title Pro for all their needs. If you’re using your self-directed IRA to buy and sell real estate, then you NEED to know about IRA Title Pro and their countless programs, tools, and educational sources that can help take your investing to the next level. 

Our amazing closing team and national title company provide incredible resources for investors every step of their journey, whether they’re buying, selling, or lending. Our title company caters to self-directed IRA transactors so they can close real estate transactions faster in a streamlined fashion. 

Get in touch with us today if you’re serious about getting off the sidelines and making smarter investment decisions. 

The Latest Real Estate Guide to Investing in the U.S. Housing Market

(Disclaimer: The content of this article is not intended as financial or investment advice but rather information for educational purposes only.)

This article is based on the episode of the Building Equity podcast “What’s ACTUALLY Happening in the US Housing Market | A New Real Estate Investors Guide in 2023” with guest Jason Hartman, CEO of Empowered Investor and Real Estate Tools, available on YouTube right now. Click here to watch the episode. Check out Jason Hartman’s work here.

Investing in real estate may be tough for some to consider with asset prices being so high. It can be extremely discouraging when potential investors see the costs associated with completing a real estate transaction, so much so that it may deter people and they miss out on an incredible opportunity to generate long-term profits.

It’s crucial to understand the metrics behind real estate investing when looking at both cash flow and asset prices versus other hard assets, like investing in gold and silver as well as notes and mortgages that are secured by real property investments in private businesses. It’s tough to grasp the worth of an asset without getting perspective on how valuable it actually is when compared to others.

Understanding the Current Economic Climate as it Relates to Real Estate Investing

Recent data suggests that we are on the cusp of a recession. While the Federal Reserve is trying the best they can to stop inflation for our centrally planned economy, had they raised interest rates sooner and at a more gradual pace, the idea of a soft landing might have been more plausible.

While inventory in the housing market is higher than it was before, it is still historically low. As of February 2023, there’s about 625,875 homes for sale in the United States. Experts suggest that a normal market would contain anywhere from 2 to 2.5 times that amount, leaving the current market with approximately 6 months left of inventory at current absorption rates. This isn’t the only deviation; we’re also seeing current property owners with incredibly cheap mortgage rates.

Many homeowners with mortgages have rates far below today’s level, and recent data reveals that 37% of all homes in the United States are paid off, meaning overall, people are not under financial duress with mortgage obligations. To technically have a “crash”, there should be both distressed owners and distressed sellers.

Note: At the time of this writing, we are seeing consumer credit card debt and subprime auto loan delinquencies surge. How this affects the 37% of homes that are free and clear we don’t know, but figured it worthwhile to include as it seems likely we are transitioning.

Based on current data and trends, it’s safe to assume that the rest of the country also has relatively low existing mortgage rates, so there is no evidence or indicators of an imminent crash as of right now.

The Biggest Mistake Investors Make

The first mistake that most investors make is that they don’t invest. People find all types of justifications and reasons to avoid investing in real estate, whether it’s overall hesitancy or attempting to time the market. However, as with any asset class, market timing has historically been proven to be an ineffective strategy. The most successful investors are those that make smart, value-oriented decisions, buying and holding their assets.

A perfect example of this is the great recession of 2008: this was an anomalous instance, an occurrence that happened once in seven decades, and as the economy rebounded, prices began to rise and people began to worry, thinking the metaphorical “bubble” was on the verge of bursting any minute. As many people anticipated this being the peak of the market, they waited for a cool off period, preserving their cash for a “right time” to invest, creating even more doubt and missed opportunities. Had people remembered that we are in a centrally planned economy, they would have had more confidence to capitalize.

As the central planners react to the market, it’s not just a matter of supply and demand or basic economic fundamentals. When things get bad, the Fed makes changes and specific adjustments while the government does the same. During the COVID-19 pandemic, when many chose not to invest or change their current investment strategy, some lost out on appreciation. And that’s the thing about investing, you actually need to invest if you want to reap the benefits.

Furthermore, research has shown if people hold onto their money without investing, it is guaranteed they will lose 9% a year just to inflation.

Using the Right Measuring Stick to Understanding Intrinsic Value

Many people may have trouble assessing value because they’re using the wrong measuring gauge; they compare the price and the value of real estate to one thing: the U.S. dollar. The U.S. dollar is a moving target, meaning it’s constantly being debased by inflation, which makes this metric a huge mistake in terms of determining value. It’s smarter to compare with other commodities and asset prices to understand the concept of intrinsic value.

In November 2022, the National Association of Realtors is claimed valuations could rise, year over year by 1%. Yet larger institutions like Morgan Stanley and Goldman Sachs  are predicting 5-10%, claiming over 2023, we’ll be seeing a 5-10% drop in valuations.

Looking at a country as large and diverse as the United States is, there are almost 400 MSAs (Metropolitan Statistical Areas). There are 50 states with over 3,100 counties and 9,000 cities, meaning lumping these all together is not the correct metric for an accurate assessment.

To get a more precise estimate, the Hartman Comparison Index (HCI) was created by Jason Hartman. This tool compares the price of real estate over the last 52 years to other commodities with intrinsic value that people need to live that are not attached to any one currency.

Commodities such as lumber, concrete, copper, and petroleum products all have intrinsic value, meaning it doesn’t matter what currency they’re being traded in because they’re traded worldwide. They’re needed by everybody.

Hartman Comparison Index (priced in gold)

This HCI example compares the prices of homes to gold. Billions of people consider gold to be money, and up until 1971, the United States operated on a gold standard. But let’s look back to 1970 for some insight when the median price house was $23,000 and gold was $35 an ounce. If you wanted to buy the median price house, you would need 654 ounces of gold. Just 10 years later, as we experienced inflation from the 80s, the median price house tripled to almost $63,000. The gold price went way up to $653, and it would only take 97 ounces of gold to buy the median price house.

Fast forward to 2010 as the country is coming out of the Great Recession; the median house price for a home is $171,000, and gold is almost at $1,100 an ounce. It would take 158 ounces of gold to buy the median price house. Today, the median price of a house is $390,000, and gold is about $1700 an ounce. It would take 227 ounces of gold to buy the median price house.

Priced in gold, housing is certainly not the cheapest it’s ever been, but it’s also not the most expensive it’s ever been either.

Hartman Comparison Index (priced in oil)

Looking at oil, arguably one of the world’s most important commodities, back in 1970, the $23,000 median price house priced in oil was at $4 a barrel, so it would’ve cost 6,400 barrels of oil to buy the median price house. Ten years later in 1980, the house prices almost tripled, and oil was up to $37 a barrel, meaning it would’ve taken 1700 barrels of oil to buy a house.

Looking at today, the median price of a house is $390,000, and oil is at approximately $94 a barrel, meaning it would require 4,100 barrels of oil to buy the median price house.

When assessing whether housing in oil is cheaper or more expensive, it’s clear that it’s not the cheapest it’s ever been but certainly not the most expensive either.

Hartman Comparison Index (priced in rice)

We can look at other popular commodities like rice, which is the food stock of more than half the world, and priced in rice, housing is rather cheap today. And we can keep going.

Hartman Comparison Index (priced in shares of S&P)

We can price it in shares of the S&P 500 index. Priced in the S&P, housing is relatively cheap; it’s only 98 shares of the S&P to buy the median price house. According to the chart, back in 1970, it cost 249 shares of the S&P to buy the median price house, and in 2010, it was 136 shares, meaning price in shares of the S&P for housing is rather cheap, not the cheapest it’s ever been but still affordable.

The best way to comprehend the measurement of what an asset is worth is by comparison/relation to other hard assets. Understandably, most people don’t denominate their lives in gold or oil or any other commodities in the Hartman Comparison Index, but they have a choice, a major one that involves their money and, essentially, their future wealth. When people get paid every two weeks or every month, they do something with their extra money; they either put it in the bank or in a savings account, or they buy stocks or commodities, and they decide on a way to store their wealth until they save enough for a down payment on a house. If people save it in dollars, they can expect that over time because of inflation, they will lose money. Based on these revelations and empirical data, it’s clearly smarter to have money invested in things rather than currency units to maximize their IRA potential.

For more information on the Hartman Comparison Index or any of Jason Hartman’s teachings/strategies, visit his YouTube channel(https://www.youtube.com/@JasonHartmanRealEstate), JasonHartman.com, or listen to his podcast Creating Wealth(https://www.jasonhartman.com/tag/creating-wealth-show/). Investors are also encouraged to check out his Empowered Investor Pro membership(link) and his formal coaching program(link) for further guidance.

Start Getting Serious About Investing Before It’s Too Late

Whether it’s understanding markets, intrinsic value metrics, or the ins and outs of the real estate industry, smart investors are turning to IRA Title Pro for all their needs. If you’re using your self-directed IRA to buy and sell real estate, then you should know about IRA Title Pro and their countless programs, tools, and educational sources that can help take your investing to the next level.

Our closing team and multi-state title company provide incredible resources for investors every step of their journey, whether they’re buying, selling, or lending; we can close up to 11 days faster than any other service out there. Get in touch with us today if you’re serious about getting off the sidelines and making smarter investment decisions.