I invest in real estate for the massive tax benefits.
In fact, the massive tax benefits are one of the four main reasons why I invest in real estate. The other three reasons are cash flow, appreciation, and debt pay-down.
I’ve previously written about how I earn rental income and legally pay close to nothing in income tax on my rentals each year.
How is that possible? Am I some type of tax wizard?
Of course not.
But, I do have a tax wizard on my real estate team.
OK, more accurately, I have a Certified Public Accountant (CPA) on my real estate team.
Your accountant is so integral to your financial success that he is the next person you need to have on your real estate team.
Why is it so important to have an accountant on your team?
The federal government has long encouraged investment in real estate. People need places to live, work, and socialize. The government long ago decided to reward investors who take on the risk of providing these opportunities.
These incentives come largely in the form of tax benefits.
The challenge for real estate investors is to actually take advantage of all these tax incentives.
That’s where your accountant comes in.
Because I work with an accountant, I don’t have to be a tax expert. I just have to know enough to have intelligent conversations and make decisions when the time comes.
My accountant makes sure I get all the tax benefits for owning rental properties.
Before talking further about accountants, let’s review the first three members that you’ll want to have on your real estate team.
Your Spouse is the Most Important Person on Your RE Team
The most important person on your real estate team is your spouse. Make sure you each understand the financial, time, and emotional commitments involved.
Owning rental properties should not be a solo adventure. The entire experience is better when you have someone to share it with.
Isn’t that true for most things in life?
If you’re considering your first rental property, don’t fool yourself into thinking you’ll be earning passive income.
Before you buy a rental property, I encourage you to talk to your spouse first. Make sure you both are on the same page.
No, you do not have to have an equal division of labor.
Yes, you each have to commit to the good and the bad that comes along with owning rental properties.
If you both can make that commitment, you have the best shot at owning your properties for a long time and reaching that ultimate goal: financial freedom.
Build Out Your RE Team Starting with a Five-Star Broker
Once you and your spouse are on the same page, it’s time to start building out the rest of your real estate team.
Start building your real estate team by finding a great broker. Your broker is like a five-star hotel concierge who can make your entire experience so much better.
During your search for a great rental property, a good broker will:
- Educate you about the market you’re investing in.
- Send you properties that match your goals.
- Tour properties with you to help identify any red flags.
- Negotiate on your behalf to ensure you get the best possible price.
- Connect you with other key members of your team.
- Steer you away from making poor choices.
But, you don’t just want a good broker. You want to work with the best brokers as a rental property investor.
The best brokers will do all of things for you during the acquisition process. But, that’s just the beginning.
The best brokers are in it for the long run and will help you navigate challenges as they pop up. That might mean helping with marketing and showing your property.
More importantly, that means continuing to give you advice and tutelage as you learn to be a landlord.
How to Evaluate a Great Mortgage Broker for your RE Team
With a five-star real estate broker on your team, it’s time to find a great mortgage broker.
A great mortgage broker is like a tour guide who is the local expert and knows the ins-and-outs of the neighborhood. She has an intimate knowledge of the local food scene based on years of experience.
She’ll show you the hidden gems and recommend what to order at each restaurant based on your personal preferences. She can educate you as to what’s in certain dishes and why you may like to try them.
She’ll also steer you away from the tourist traps and prevent you from going to the wrong places to ensure you have the best experience possible.
Recommendations? Education? Preventing mistakes?
Love all those things.
And, this is exactly what a good mortgage broker will do for you.
A good mortgage broker will:
- Recommend the best loan for your goals.
- Stop you from borrowing more than you really can afford.
- Help get your loan approved.
- Explain the numbers.
- Not let you refinance until the time is right.
Take your time finding a good mortgage broker. It’s important to work with someone who does more than just promise the best rates and terms.
With your spouse, a five-star real estate broker, and a great mortgage broker on your team, it’s now time to fill out the rest of the key positions.
Seek out an accountant with real estate specific experience.
I mentioned earlier that the key way the government incentivizes real estate investors is through tax deductions.
To accomplish its goal, the government allows real estate investors to deduct certain rental property expenses from their income.
When you earn rental income, you must report this income on your tax return. Rental income is treated the same as ordinary income.
However, the major difference between rental income and W-2 income is that there are a number of completely legal ways to deduct certain expenses from your rental income.
The key is to work with someone who has significant experience specific to rental property investing.
The truth is there are numerous tactics and strategies that apply to real estate investors that don’t apply to all businesses.
An accountant who may be ideal for a restaurant owner or law firm might not be a good fit for real estate investors.
This is not a knock on accountants, either. In this day and age, professionals in all industries tend to specialize in niche areas.
For example, I am a lawyer who specializes in helping people with mesothelioma. You wouldn’t hire me to represent you in a divorce.
If you broke your foot, you wouldn’t go see a brain surgeon.
You get the idea.
When seeking out an accountant, be sure to work with one who has experience specific to real estate investing.
How can you tell if an accountant has experience specific to real estate investing?
When my wife and I were searching for an accountant, it became very clear to us that not all accountants work with real estate investors.
For instance, most accountants are well-versed in common rental property expenses. These common expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.
We met with plenty of intelligent accountants who understood these basics.
But, we wanted more than just basic help. We wanted help in crafting a long-term strategy for achieving financial freedom through real estate.
When you start meeting with accountants, ask them how many real estate investors they work with. Ideally, you’ll find an accountant who works with a number of investors similar to you.
You’ll also want to find an accountant whose style matches yours. Some accountants are more aggressive and some accountants are more conservative.
For example, say you own a vacation condo that you rent out sometimes and use personally other times. You may get different advice from two accountants on what counts as a rental property deduction for that condo.
It’s ultimately up to you to find an accountant that matches your style.
Find an accountant who answers your phone calls.
Maybe this goes without saying, but you want an accountant who answers the phone when you call. As investors, we never know when an opportunity may pop up that we need timely advice on.
You might be surprised how many real estate investors don’t have an open line of communication with their accountants. I think it’s a mistake to only consult your accountant after you’ve gone ahead with a decision.
As one example, a few years ago, I thought about buying an 8-unit apartment building with a number of partners. It seemed like a good way to earn some cash flow with only a small amount of my own money in the deal.
Before I moved ahead with the deal, I called my accountant. We had a long chat about all the additional complexities involved from a tax perspective.
He took the time to educate me so I could make a good decision. In the end, I walked away from the deal.
If I didn’t have a good relationship with my accountant, I might have made a big mistake.
A good accountant will help you reap the massive tax benefits of investing in real estate.
As a real estate investor, you don’t have to be an expert in every part of the business.
There’s no better example than when it comes to taxes.
Find a good accountant who is willing to educate you and strategize with you. You want more than just someone to prepare your tax returns.
When you have a good accountant on your real estate team, you’ll move that much faster towards financial freedom.
What other traits should real estate investors look for in a good accountant?
Let us know below.