ing mistakes.)

Bad choice number two: Paying an experienced tax practitioner perhaps a $1000 a year or more to make sure you don’t foul yourself up. This of course pretty much eats up the extra profits you hoped to get from real estate. Which means that while you will have the satisfaction of doing your tax accounting right, only your accountant and real estate agent make money.

My advice to you? Learn how the real estate tax laws work and how to do real estate accounting before you start investing. Then, after you truly understand this stuff and do start investing, do as much of your own accounting as you possibly can.

I really don’t think you’ve got any other good choice as a small real estate investor. Sorry.

Summing Up

As I said in the first paragraph of this little essay, real estate can be a good investment. But the investment is way trickier than most new

Let me start by saying that, sure, real estate can be a good investment. Real estate provides a hedge against inflation. And real estate often amounts to a forced saving plan. But most of the people who’ve jumped onto the real estate investment bandwagon over the last few years are going to fail. Here’s why:

Ignoring Returns on Investment

When you compare bank accounts, you know that 5% interest means more money in your pocket than 2% interest.

Similarly, you know that a mutual fund with a track record of 11% annual returns has made more money than a fund with a track record of 8% annual returns. Duh.

One picks investments and evaluates investment performance by looking at the return on the investment. This rule is true for stocks, bonds, and everything else—including real estate.

Which means that investors who can’t or don’t know how to calculate the return on a real estate investment—and almost all amateur real estate investors fall into this category— fly blind.

To be fair, real estate return on investment calculations get tricky fast.

First, consider how easy something like a bank CD. If you buy a bank CD for $100 and a year later receive $105 back, the return on investment calculations are pretty easy. Divide $5 by $100 and you get 5%. That’s the return on investment.

But what about a real estate investment that requires a $50,000 down payment and then negative monthly cash flows of $500 for 43 months. If you sell the property in month 44 and net $85,000 in cash, have you really made money with your real estate investment?

You can’t truly know whether this imaginary real estate investment is a good deal unless you compare its annual return to your other options.

It turns out, by the way, that the imaginary real estate investment is a slightly better deal than the imaginary CD—something you need a spreadsheet program like Microsoft Excel to determine. Programs like Microsoft Excel include rate of return calculation tools like the IRR function which you can and should use to estimate returns on investments with complicated cash flows.

Ignoring Real Estate Tax Laws

Here’s another reason that real estate investors fail. Real estate investments dramatically complicate your income taxes. For example, the passive loss limitation rules mean that you typically can’t use depreciation tax deductions except in special circumstances until you sell the property.

Schedule E (which you use to report your real estate investing to the IRS) requires you to prepare profit and loss statements by real estate investment—a bookkeeping requirement that pretty much forces you to use a full blown accounting system like QuickBooks.

Finally, rampant misunderstandings about Section 121 of the Internal Revenue Code mean that while most people shouldn’t have pay taxes on the profit from selling their home, many do pay taxes.

And don’t even get me started on dealing with the unrelated business income tax you’ll pay if you use a self-directed IRAs for real estate. Or on the pitfalls of creating a daisy-chain of like-kind exchanges. Or about depreciation recapture if you segregate property costs into real and personal property components.

Here’s the reality sandwich. For many small investors, real estate so complicates your income taxes that you’re faced with two bad choices. Bad choice number one: Winging it on your tax return or relying on some infomercial, the real estate agent, or your brother-in-law for accounting and tax planning. (This approach means you’ll make all sorts of expensive tax accounting mistakes.)

Bad choice number two: Paying an experienced tax practitioner perhaps a $1000 a year or more to make sure you don’t foul yourself up. This of course pretty much eats up the extra profits you hoped to get from real estate. Which means that while you will have the satisfaction of doing your tax accounting right, only your accountant and real estate agent make money.

My advice to you? Learn how the real estate tax laws work and how to do real estate accounting before you start investing. Then, after you truly understand this stuff and do start investing, do as much of your own accounting as you possibly can.

I really don’t think you’ve got any other good choice as a small real estate investor. Sorry.

Summing Up

As I said in the first paragraph of this little essay, real estate can be a good investment. But the investment is way trickier than most new

real estate investment—and almost all amateur real estate investors fall into this category— fly blind.

To be fair, real estate return on investment calculations get tricky fast.

First, consider how easy something like a bank CD. If you buy a bank CD for $100 and a year later receive $105 back, the return on investment calculations are pretty easy. Divide $5 by $100 and you get 5%. That’s the return on investment.

But what about a real estate investment that requires a $50,000 down payment and then negative monthly cash flows of $500 for 43 months. If you sell the property in month 44 and net $85,000 in cash, have you really made money with your real estate investment?

You can’t truly know whether this imaginary real estate investment is a good deal unless you compare its annual return to your other options.

It turns out, by the way, that the imaginary real estate investment is a slightly better deal than the imaginary CD—something you need a spreadsheet program like Microsoft Excel to determine. Programs like Microsoft Excel include rate of return calculation tools like the IRR function which you can and should use to estimate returns on investments with complicated cash flows.

Ignoring Real Estate Tax Laws

Here’s another reason that real estate investors fail. Real estate investments dramatically complicate your income taxes. For example, the passive loss limitation rules mean that you typically can’t use depreciation tax deductions except in special circumstances until you sell the property.

Schedule E (which you use to report your real estate investing to the IRS) requires you to prepare profit and loss statements by real estate investment—a bookkeeping requirement that pretty much forces you to use a full blown accounting system like QuickBooks.

Finally, rampant misunderstandings about Section 121 of the Internal Revenue Code mean that while most people shouldn’t have pay taxes on the profit from selling their home, many do pay taxes.

And don’t even get me started on dealing with the unrelated business income tax you’ll pay if you use a self-directed IRAs for real estate. Or on the pitfalls of creating a daisy-chain of like-kind exchanges. Or about depreciation recapture if you segregate property costs into real and personal property components.

Here’s the reality sandwich. For many small investors, real estate so complicates your income taxes that you’re faced with two bad choices. Bad choice number one: Winging it on your tax return or relying on some infomercial, the real estate agent, or your brother-in-law for accounting and tax planning. (This approach means you’ll make all sorts of expensive tax accounting mistakes.)

Bad choice number two: Paying an experienced tax practitioner perhaps a $1000 a year or more to make sure you don’t foul yourself up. This of course pretty much eats up the extra profits you hoped to get from real estate. Which means that while you will have the satisfaction of doing your tax accounting right, only your accountant and real estate agent make money.

My advice to you? Learn how the real estate tax laws work and how to do real estate accounting before you start investing. Then, after you truly understand this stuff and do start investing, do as much of your own accounting as you possibly can.

I really don’t think you’ve got any other good choice as a small real estate investor. Sorry.

Summing Up

As I said in the first paragraph of this little essay, real estate can be a good investment. But the investment is way trickier than most new

stment is a slightly better deal than the imaginary CD—something you need a spreadsheet program like Microsoft Excel to determine. Programs like Microsoft Excel include rate of return calculation tools like the IRR function which you can and should use to estimate returns on investments with complicated cash flows.

Ignoring Real Estate Tax Laws

Here’s another reason that real estate investors fail. Real estate investments dramatically complicate your income taxes. For example, the passive loss limitation rules mean that you typically can’t use depreciation tax deductions except in special circumstances until you sell the property.

Schedule E (which you use to report your real estate investing to the IRS) requires you to prepare profit and loss statements by real estate investment—a bookkeeping requirement that pretty much forces you to use a full blown accounting system like QuickBooks.

Finally, rampant misunderstandings about Section 121 of the Internal Revenue Code mean that while most people shouldn’t have pay taxes on the profit from selling their home, many do pay taxes.

And don’t even get me started on dealing with the unrelated business income tax you’ll pay if you use a self-directed IRAs for real estate. Or on the pitfalls of creating a daisy-chain of like-kind exchanges. Or about depreciation recapture if you segregate property costs into real and personal property components.

Here’s the reality sandwich. For many small investors, real estate so complicates your income taxes that you’re faced with two bad choices. Bad choice number one: Winging it on your tax return or relying on some infomercial, the real estate agent, or your brother-in-law for accounting and tax planning. (This approach means you’ll make all sorts of expensive tax accounting mistakes.)

Bad choice number two: Paying an experienced tax practitioner perhaps a $1000 a year or more to make sure you don’t foul yourself up. This of course pretty much eats up the extra profits you hoped to get from real estate. Which means that while you will have the satisfaction of doing your tax accounting right, only your accountant and real estate agent make money.

My advice to you? Learn how the real estate tax laws work and how to do real estate accounting before you start investing. Then, after you truly understand this stuff and do start investing, do as much of your own accounting as you possibly can.

I really don’t think you’ve got any other good choice as a small real estate investor. Sorry.

Summing Up

As I said in the first paragraph of this little essay, real estate can be a good investment. But the investment is way trickier than most new

QuickBooks.

Finally, rampant misunderstandings about Section 121 of the Internal Revenue Code mean that while most people shouldn’t have pay taxes on the profit from selling their home, many do pay taxes.

And don’t even get me started on dealing with the unrelated business income tax you’ll pay if you use a self-directed IRAs for real estate. Or on the pitfalls of creating a daisy-chain of like-kind exchanges. Or about depreciation recapture if you segregate property costs into real and personal property components.

Here’s the reality sandwich. For many small investors, real estate so complicates your income taxes that you’re faced with two bad choices. Bad choice number one: Winging it on your tax return or relying on some infomercial, the real estate agent, or your brother-in-law for accounting and tax planning. (This approach means you’ll make all sorts of expensive tax accounting mistakes.)

Bad choice number two: Paying an experienced tax practitioner perhaps a $1000 a year or more to make sure you don’t foul yourself up. This of course pretty much eats up the extra profits you hoped to get from real estate. Which means that while you will have the satisfaction of doing your tax accounting right, only your accountant and real estate agent make money.

My advice to you? Learn how the real estate tax laws work and how to do real estate accounting before you start investing. Then, after you truly understand this stuff and do start investing, do as much of your own accounting as you possibly can.

I really don’t think you’ve got any other good choice as a small real estate investor. Sorry.

Summing Up

As I said in the first paragraph of this little essay, real estate can be a good investment. But the investment is way trickier than most new

ing mistakes.)

Bad choice number two: Paying an experienced tax practitioner perhaps a $1000 a year or more to make sure you don’t foul yourself up. This of course pretty much eats up the extra profits you hoped to get from real estate. Which means that while you will have the satisfaction of doing your tax accounting right, only your accountant and real estate agent make money.

My advice to you? Learn how the real estate tax laws work and how to do real estate accounting before you start investing. Then, after you truly understand this stuff and do start investing, do as much of your own accounting as you possibly can.

I really don’t think you’ve got any other good choice as a small real estate investor. Sorry.

Summing Up

As I said in the first paragraph of this little essay, real estate can be a good investment. But the investment is way trickier than most new investors realize. And in order to make a decent return, I think you must understand way more finance, tax and accounting than the typical real estate investor.