Using real estate to secure your financial future isn’t for the faint of heart, but if done right, it has a lot to offer. USA TODAY
Adam Ailion’s father likes to joke that his son started investing in real estate in the womb.
As a third-generation realtor, Ailion, 30, knew that real estate had the potential to generate wealth if he purchased wisely at the right time.
“I started investing at age 19 while still in college,” says Ailion, a Realtor at RE/MAX Town and Country in Marietta, Georgia. “I paid $16,000 for a duplex in South Atlanta in May 2009 before I moved out of my parent’s basement.”
Renovations on the fixer-upper cost $15,000-$20,000. Within four weeks, he rented each unit in the duplex for $550 a month.
“That rental property was generating enough cash flow to pay the mortgage of my first primary residence, which I purchased for $63,000 in 2010, and later sold for $158,000 in tax-free profit,” he says. “It’s a tax-free gain on the sale of a primary residence if owned and occupied for two of the past five years.”
It may be one of the most generous offerings in the tax code, and he took full advantage of it.
Ailion has bought and sold 20 properties over the past 10 years, some of them sight unseen, and some from distressed sellers who were motivated to sell at a significant discount.
“As the saying goes, ‘If you can find the right deal, finding the money for it should come easy,’” he quips.
Now, he owns five residential rentals, a commercial medical office building, and is working on flipping two properties. His real estate investment portfolio is currently worth $650,000.
He also dabbles in the stock market, but he’s not fond of it.
“As soon as I buy a stock, it tends to tank,” he says. “I started a Roth IRA when I was young, and, after some tax consulting, I opened a Solo 401(k) to help offset some of the large tax burdens from real estate flips.”
A Solo 401(k) is a type of retirement savings account for self-employed individuals. Money can be invested in stocks, funds, and bonds, and you’re not limited to a small basket of mutual funds as with most corporate 401(k) plans.
Also, participants can choose to make contributions on a pre-tax or post-tax basis. What’s more, the contribution limits tend to be the highest of all of the retirement plans. For instance, since entrepreneurs serve as both the employer and the employee, they can make both contributions. It offers additional savings for the future, something the husband to Natalie, 30, and soon-to-be father contemplates often.
Despite the tax advantages, Ailion keeps his stock market portfolio light.
“While I have about $65,000 in the stock market right now, I try to steer clear of it,” he says. “If a significant market correction occurs, I may be willing to gamble more with stocks,” he says, referring to a sharp decline in stock prices that would make them cheaper to buy.
Currently, his rental investments yield 11%-15% while the flips net significantly more. His 401(k) holdings show a 4% gain and his Roth IRA is growing about 9%.
He advises other Millennials of something else his father always said: “‘It takes money to make money,’ so always save and reinvest your savings to grow your nest egg.”
Carlos Dias Jr., a wealth manager and financial adviser at Excel Tax & Wealth Group in Orlando, Florida, says there’s nothing wrong with investing in what you know. But he is concerned that Ailion is top heavy in real estate. For Millennial moguls building a portfolio concentrated in one area, he offers this advice:
• Diversify your investments. “What worries me is that everything — his career, house flips, source of income — relies solely on real estate,” Dias says. In addition, investors concentrated in one area should think about selling off some of the assets, so if a recession happens, the impact is minimized. Then consider investing in another business.
• Identify tax shelters. “Since Adam has a Roth IRA and a Solo 401 (k), he could open up a self-directed real estate IRA, meaning the IRA can buy property outright,” Dias explains. In other words, you can buy, sell, and exchange without the tax consequences that come with individual ownership.
• Protect your assets. With a child on the way, Ailion needs to make sure that his wife and their newborn are protected. “One life insurance policy should be personal to protect his family while the other policy, such as key man insurance, should cover the liabilities of his business,” says Dias. He may even want to look into disability insurance, which offers coverage to help pay for expenses if he ever becomes totally disabled due to sickness or injury and can’t work.
• Evaluate your risk. Dias advises real estate investors to sit down and think about how they would fare if the value of real estate went away tomorrow. That would give Ailion a good idea of whether he needs to shift some investments around.
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