Many people look at real estate investing as a way to escape the daily grind of working for someone else. And while self-employed folks don’t necessarily have a “boss” that they’re trying to get out from under, the idea of sitting at home and opening rent checks as a full time occupation sounds pretty appealing.
So we decided to discuss the what, when and why of going full time.
In the studio for another exhilarating episode of The Real Estate Guys™ radio show:
- Your full time host, Robert Helms
- A man who’s been investing for a lifetime, the Godfather of Real Estate, Bob Helms
(Co-host Russell Gray is playing hooky this week)
Going “full time” and “real estate investing” mean different things to different people. So right out of the gate it’s important to get clear on the definitions.
First, for purposes of our discussion, “full time” really means your MAIN vocation. It’s what you spend most of your time doing and where most of your money comes from.
With that said, the Internal Revenue Service of the United States (the “IRS”) has an additional definition to lump on top of that (just to keep things simple for you U.S. taxpayers ;-)). The IRS says you need to put in at least 750 hours a year to be considered a full-time investor for tax purposes.
Why is that important? Because if you’re full-time, you can use more of your depreciation (phantom loss) to offset positive cash flow (income) and mitigate, if not completely eliminate, tax!
Now please keep in mind that we’re not tax advisors, CPAs or even all that bright. So PLEASE be sure to get qualified professional advice before taking action on anything you read here or hear on the broadcast.
The point is that going full time has tax advantages you’ll want to be aware of.
What about “real estate investing”?
Well, some folks think any activity involving real estate is “investing”. But we disagree.
If you’re flipping houses, wholesaling, doing ground up development, or any other activity where your efforts are adding substantially to the value of the property and your profit stops when you do, then we would argue that you have a BUSINESS.
Now there’s nothing wrong with having a business. In fact, you might like it better than having a job. But your income still depends largely on your daily efforts. We don’t call that “investing”.
We think of real estate investing in terms of acquiring and managing assets that produce passive income. So if you decide to take a month off, you continue to get monthly checks. If there’s enough to pay all your living expenses, our friend Robert Kiyosaki calls this “getting out of the rat race”. It’s the Holy Grail of real estate investing.
So now that we’re clear on the meanings of “full time” and “investing”, the bigger discussion is about when and how to become a full time investor.
Based on the definitions, the “when” should be pretty obvious. You should have enough passive income coming in to fully support your living expenses. Hopefully, you have even more so you can add to your investment fund and acquire more properties.
Of course, when you’re full time, you have more time to look for creative opportunities where you don’t need a lot of cash to acquire that next cash flowing property. Or you may be able to use 1031 tax-deferred exchanges to grow your portfolio through “equity optimization” (see Bob’s Big Boo-Boo in Equity Happens).
So HOW do you get to full time?
A great first step can be to move into a real estate related vocation, such as brokerage, lending or property management. You might even take on some small time real estate development.
Granted, you’re not a full time investor yet (more like a Padawan learner), but you’re much closer to the people, deals and resources you’ll need for your investing.
Another way is to become a syndicator. This simply means your form a real estate investing company and raise funds from other investors who don’t have the time or expertise to invest. You might raise money on a deal-by-deal basis or you could create a fund that works more like a mutual fund, where you buy, manage and sell properties according to a predetermined investment objective. If this is something which interest you, you’ll want to attend our next Secrets of Successful Syndication seminar (under Events).
What’s important to keep in mind, especially in today’s more stringent lending environment, is the value of your paycheck when it comes to qualifying for loans. If you can stomach staying on the job until you’ve maxed out your personal borrowing power, it might be a really good idea to hold off going full time.
Remember, once you’re “self-employed”, you’ll likely need at least two years tax returns to prove your income when applying for residential (1-4 units) loans. And even if you’re going for apartments or commercial properties, the lender will want to see experience, a strong balance sheet, and enough income for you to live on outside of the deal.
Why? They don’t want you to collect the rents, buy your own groceries, and then skip paying them back for their loan. Yeah, that happens. In fact, we’ve seen guys collect as much as half a million dollars before the lender can get control of the property again.
We don’t want you to be tempted to be “that guy” (or gal). So tune into the conversation and consider all the things you need to look at before you leap into becoming a full time real estate investor.
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