Investing

Trading Quick Wins for Lasting Fortune: The Delayed Gratification Dilemma in Real Estate

Let me ask you a question. Take your time to answer this question as truthfully as possible.

Here is a real-life example of a property we purchased in Chattanooga, TN about 3 years ago.

My options when placing it under contract were as follows:

Wholesale the contract to another buyer for a $25,000 profit
Purchase then flip the property for a $40,000 profit
Hold onto the property, place a tenant and cash flow $500 per month. This would require a down payment of $50,000 to be held with the property until I decided to sell.

Given these three choices, what would YOU do? I am very curious about your answer so if you could email me your response, I would greatly appreciate it.

Ok, let’s play out these scenarios really quick.

You have zero money out of pocket and zero risk and you are $25,000 richer. Take 30% for taxes out and you are $17,500 after you pay your lifetime partner (IRS).

You took on the risk of buying the property, fixing it up with about $30,000 of your money and most likely you got a private loan or hard money loan for 90% of the purchase price so you had to put $50,000 of your money into the deal along with the risk of possibly losing that money but in the end, after all expenses and negotiations, you walked away with $40,000 / 30% for taxes so you now have your $50,000 back in your bank account along with $28,000. That only took you 4-5 months to get an ROI of 80% on your money (before taxes).

You place $50,000 into this rental property. The rental rate is roughly $2,000 a month. Net operating income is $17,409 with a cash on cash return of 12.06%. Net of $6,000 a year so you have roughly $44,000 LESS in your bank account at the end of the year…But the tax becomes a lot less obvious on that money you made. I will explain.

Now that I have spelled those options out in more detail, which one is more appealing to you? Has your answer changed from the beginning? I want to know!

Here’s the thing. If you asked me this question over the last decade of my life, the only hesitation that I would have is option 1 or 2.

All joking aside, let me show you how incredibly simple investing can be in the hopes that you do not make the same mistakes.

The case for Option #3 explained:

If you take the quick cash and sell the property, it is the same thing as if you had a dairy cow to feed your family for years to come and after it produced milk for a few months, you shot it in the head. Sure you made back your money and then some…But now you have to go find another cow (and explain why you sold your cow to your hungry family).
The IRS is telling you exactly what they want you to do when you invest in real estate. They are telling you that you will be PENALIZED for taking the short term gain by up to 50% depending on where you live in the Country. (Sorry California & New York).
Sticking with the IRS, when you buy a residential income property, the IRS says you can depreciate the asset and income over a 27.5 year period. HOWEVER, should you choose to take all 27.5 years and compress it into 1 year, you can do so (if you are considered a real estate professional). TALK TO YOUR CPA ABOUT THIS
Remember the 4 pillars of real estate investing? If not, here they are for a refresher:

a. Leverage: You use the bank for 75-80% of the purchase price. You bring the rest.

b. Appreciation: Real estate is one of the most sure bets on the planet for appreciation. DO NOT bet against the champ. You will lose every single time over a 5-10 year period especially.

c. Cash flow: You place a tenant in the home to pay YOUR mortgage for you, while also keeping any leftover money and placing it in your bank account each month.

d. Taxes: The IRS is pleading with you to invest in real estate. Keep in mind, politicians are greedy people and they write the tax code in a way to benefit their bank accounts…This is why you will be hard-pressed to find a politician that does not have a large portfolio of real estate!

This graph is for all of you visual learners out there:

I personally know a handful of real estate investors who earned over $250,000 a month in revenue from real estate each month (which is wild in and of itself) but when you ask them how much they paid in taxes, trust me, you will not see a bigger smile.

What is holding you back from investing in real estate? Our purpose at Propety Rush is to remove all of the barriers to entry for our investors which include: