Real Estate Investing for Self-Employed Entrepreneurs: Tips and Pitfalls to Avoid

Self-employment, such as freelancing or owning a small business, is growing increasingly popular: over 37% of the American workforce is freelancing in some capacity, while 10.7% are self-employed as small business owners. 

While this is an excellent way to make money, providing you with freedom and flexibility, it can also make it difficult to build wealth; the median income for a freelancer is $34,571, which is over $6,000 less than those working for an employer. This makes investing and wealth building of critical concern to the self-employed, and real estate investing is one of the best ways to do so. Today, we’ll discuss how you can get started with real estate investments to grow your wealth and ensure you’re comfortable for the long term.

Choose Your Specialty

Firstly, be aware that there are numerous different specialties for real estate investors, including apartment complexes, single-family homes, and commercial real estate. You need to determine the level of involvement you’re comfortable with, such as renovating a home or being involved in property management, as well as how much money you can pay upfront to secure the property. 

Pick the Right Mortgage

Not all mortgages are designed for the self-employed; lenders tend to be leery of freelancers and other borrowers who do not have an income from a company, as they worry that any loss of income will directly affect whether the borrower can pay their mortgage. 

As such, you should consider loans that are based on the property’s income potential rather than your own, such as a debt service coverage ratio loan (DSCR). These loans divide the property’s income by the debt service to create a ratio, showing whether the rental is making enough money to satisfy your mortgage and other obligations, like property taxes. 

A DSCR loan doesn’t require showing income information: you only need to give your credit score and information on the property to access these loans. It makes it much easier for freelancers and self-employed individuals to join the investing world through rental properties, though you’ll still need to carefully manage your funds in order to ensure that you can cover mortgage payments in addition to your own tax obligations as a freelancer.

Choosing a Rental Real Estate Agent With Foreign Rental Properties

When it comes to renting out your real estate investment in a foreign country like Singapore, choosing the right realtor is essential for a smooth and successful experience. With the thriving rental market in Singapore, there is no shortage of potential tenants eager to find their dream home. However, finding a reliable and trustworthy Singapore rental real estate agent who understands your needs as an international investor can be a daunting task.

One crucial aspect to consider when selecting a realtor is their local market knowledge. A knowledgeable realtor will have valuable insights into the current rental trends, pricing dynamics, and legal regulations specific to your chosen foreign country. By understanding these factors, they can help you determine an optimal rental price that ensures attractive returns while remaining competitive in the market.

Another critical factor that sets apart great realtors from just good ones is their ability to effectively communicate with both landlords and tenants from different cultures and backgrounds. Renting out your property in another country requires effective communication channels to address any concerns or issues promptly. Look for a realtor who has experience working with international clients and demonstrates exceptional communication skills.

Remember, choosing the right realtor is about more than just signing up with the first person you meet; it’s about building a long-term partnership based on trust and professionalism. Take the time to research potential candidates thoroughly, read reviews from previous clients, and ask for recommendations within your network of fellow investors. By doing so, you’ll be well on your way to maximizing the rental potential of your overseas investment property while minimizing stress along the way

Calculate Your Return on Investment

As with any business deal, you need to decide whether your purchase is worth it through identifying the return on investment. You can do this using a rental property investment calculator, which can help you see what the property is worth in relation to how much you’ve spent on it. These calculators can also assist you in seeing what you would be making per month after all expenses have been accounted for based on a projected rental income. 

It’s important that you determine what profit margin you’re comfortable with; of course, you’d like to have the highest return on investment possible, but you need to be realistic and do your research. Choose a baseline percentage that would be acceptable to you, such as 7% per year, and then remove properties from your list of possibilities if they fall below that level.

Be Aware of Tax Obligations

If you’ve been self-employed for more than a year or two, you’re familiar with how complicated tax returns can be: you need to input all of your 1099s, itemize your deductions, and pay all of your contributions out of the money you’ve saved up for this purpose. However, you should know that should you choose to invest in real estate, you must include this in your tax returns.

Your tax obligations differ depending on whether it’s passive income or a business; if you’re simply renting a property out to others, you’ll need to pay real estate income tax, while if you’re managing any property that provides services, such as a bed and breakfast, you’ll need to pay business taxes. You’ll also have to pay capital gains tax should you sell your investment, so it can be worthwhile researching what are capital gains on rental properties to ensure that you’re not in for a shock if and when you put your property on the market.

This can get quite complicated, especially when considering your other tax preparation needs and deductions, so you may find it helpful to work with an accountant who can help you gather all of your information and ensure that you’re in compliance.

Conclusion

If you are self-employed or a freelancer, you need to consider how to build your wealth to help cover your expenses should you lose a client or suffer a drop in business, and real estate investment is one of the best ways to do so. However, it requires careful research, calculation, and a strong understanding of the tax system – as well as the right mortgage. If you’re ready to dive in to the world of real estate investing, rely on solid advice from seasoned investors and accountants who can help you navigate the pitfalls and ensure you get a great return on investment that will supplement your hard-earned money.

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