Over the past several years, many people have made big profits in the real estate boom-at least on paper, before calculating the capital gains tax owed. Now that the real estate market is leveling off, and even predicted to dip, many property owners are beginning to realize that once taxes are paid, the remaining balance is far less than they anticipated.

However, with strategic implementation of a powerful, tax-efficient selling resource, there is finally a way to sell real estate, including both primary residences and investment properties, and not pay exorbitant capital gains on real estate. The solution is called a Private Annuity Trust, an investment strategy that allows you to not only defer capital gains taxes, but to protect your remaining assets via a trust, transfer wealth to beneficiaries without taxation, and create a lifetime of income from the value in your property.

How a Private Annuity Trust Works

When an individual sells a property, he or she is responsible for paying the capital gains tax on the sale within a number of months. However, the rules are different for a Private Annuity Trust.

By transferring title of your property into a Private Annuity Trust, and having the Private Annuity Trust sell the property to the new buyer, you receive a contract that will pay you lifetime income and are thus able to defer up to 100% of your large capital gain over your entire lifetime.

Through the trust, the capital gains tax is deferred until the time that payments are made to you. Because the Trust issues a regular stream of payments over your entire lifetime, the taxes owed are also divvied up and paid in small increments over time. Additionally, the money in the trust is invested in a conservative, diversified portfolio until the moment it is paid out.

How is the Private Annuity Trust Different from a 1031 Tax-Free Real Estate Exchange?

With a 1031, you must buy another “like-kind” investment property in order to avoid paying capital gains tax. You must name the new property you plan to buy in 45 days, and the new property must cost at least as much as what you sold the old property for. If you choose not to reinvest, the government expects you to hand over the capital gains tax and depreciation recapture tax immediately; meaning you’ll be hit hard right when you’re ready to finally reap the fruits of your real estate investments.

There are plenty of heart wrenching stories about real estate investors who banked their entire lives on retiring with the profits from their investments, only to find that they would not be able to live the lifestyle they envisioned after the taxes were paid.

On the other hand, with the Private Annuity Trust, properties are sold through the trust and capital gains on real estate are deferred. You can use your lifetime income stream to fund your retirement, invest in another property on your own timeline, or use them any other way that you see fit, all while Trust assets have the opportunity to grow, are protected from creditors and lawsuit judgements, and taxes are deferred.

If you’ve spent your valuable time researching investments, fixing up properties, and managing the stress of the real estate game, you certainly don’t want to lose almost a third of your profits to the federal and state government. You’ve most likely planned your future, your goals, and your dreams around the money you thought you’d have when you sold your properties and losing a chunk of it can be depressing, to say the least.

If you’ve been putting off selling your assets in an effort to avoid paying capital gains on property tax, you owe it to yourself to talk to a professional about a Private Annuity Trust and see how this strategy may work with your particular situation.

cle covers six dynamite real estate investing tips intended to help anyone just getting started in real estate investing to successfully launch and hit the ground running with real estate investment property.

1. Develop the Correct Attitude

To stand a chance of succeeding at real estate investing, foremost, you must understand that real estate investment is a business, and you will become the CEO of that business.

As your first order of business, then, it’s crucial to develop the correct mind-set about investment real estate and be able to make this distinction between buying a home and investing in real estate:

“You buy a home to live and raise a family; you buy real estate investment property to pay for the home, live comfortably, and raise your family in style”

As one very successful real estate investor said, “Only women are beautiful, what are the numbers?” In other words, you will not succeed at real estate investing until you acknowledge that it’s not curb appeal, amenities, floor plan, or neighborhood that should turn you on or off to the investment opportunity; what counts most is the property’s financial performance.

2. Develop Meaningful Objectives

A meaningful set of (realistic) objectives that frames your investment strategy is one of the most important elements of successful investing. Yes, we may all desire to make millions of dollars from real estate investing, but fantasy is not the same as expressing specific goals and a method on how to achieve it.

Here are some suggestions:

How much cash are you willing to invest comfortably? What rate of return are you hoping to achieve by making the investment in real estate? Are you expecting instant cash flow, looking to make your money when the property is resold, or merely looking to achieve tax shelter benefits? How long are you planning to hold the property before you dispose of it? What amount of your own effort can you afford to contribute to the day-to-day operation of running the property? What net worth are you hoping investing will help you to achieve, and by when would you like to achieve it? What type of income property do you feel most comfortable owning, residential or commercial, or does it matter?

3. Develop Market Research

If you’re new to real estate investing, you undoubtedly know little about investment real estate in your local market. So, do market research to learn as much as you can about income property values, rents, and occupancy rates in your area. The better prepared you are, the more likely you are to recognize a good (or bad) deal when you see it.

Here are some good resources:

(a) The local newspaper, (b) A local appraiser, (c) The county tax assessor, (d) A qualified local real estate professional, (e) A local property management company

4. Run the Numbers

I can’t stress enough the importance of running the property’s cash flow, rates of return, and profitability numbers. Remember, real estate investing is a business, and as the CEO of your investment enterprise, you’ve got to know what you’re buying, especially if you’re trying to determine which of several investment opportunities would be the most profitable.

You have two options:

(a) Invest in real estate investment software. This will enable you to discover for yourself the investment property’s cash flow and rates of return, and create your own analysis reports. Plus, by running the numbers yourself, you gain a broader understanding of real estate investing nuances, and in turn might be less likely to fall victim to the wiles of someone with little concern about how you spend your money.

(b) At the very least, work with a real estate professional that has invested in real estate investment software and can calculate, present, and discuss the property’s financial data with you.

5. Develop a Relationship with a Qualified Real Estate Professional

Working with a qualified real estate professional is a great way for beginners to get started with rental property investing because an astute professional can acquaint you with local market conditions, recommend a property that meets your investing objectives, and discuss strengths and weaknesses about specific property performance.

Here’s a warning, however: Work with a real estate person who understands investment real estate.

Be sure the agent has a firm grip on key financial measures inherent to real estate investing, knows how to measure profitability and rate of return, has the ability to present the data you need to make wise investment decisions, and, most importantly, shows a genuine interest in how you spend your money. The last thing you want to do is to get involved with a real estate agent that would throw you under the bus just to make a commission.

Here’s a good way to interview for an agent. Ask them for the property’s cap rate and then request an APOD. If their response (even to these basics) is to stand there looking at you like a deer into the headlights of a car, find another agent.

6. Start Investing

Hopefully, this has given you some insight into real estate investing, highlighted a few things to make you a more prudent real estate investor, and perhaps alerted you to a couple of things that should be avoided.

Okay, that does it for us, now it’s time for you to get started. Here’s to your success.

Whenever I get asked by anyone how to invest in property, I respond with a series of questions:

• What are your financial aims? In other words what are you after? Are you seeking an income, capital or both?

There is a big difference between wanting to retire in 2 years so you can live off your investment income and wanting to help your children with tuition expenses in 12 years.

• Will you need to borrow money and how much risk are you willing to take?

• Will you consider investing overseas, and if so, where will you invest – Europe, the Far East or the Middle East.

• What level of risk are you willing to take?

• What happens if you need your money back quickly?

Remember, liquidity is a major problem in property investment. If you invest in the stocks and share market, you can pick up the phone and sell in minutes. That’s liquity. Just try doing that with property and you’ll see that it’s a completely different story.

• What about your tax liability and what would happen if it all went wrong?

• Do you want to invest in commercial or residential? Do you even know the difference?

These are the type of questions you should be asking yourself before you dive in and invest in property. It’s very helpful to write down your reasons for wanting to invest in property. You can always revise your list if you change your mind about your investment motives. But I guarantee you won’t be sorry for spending a little time up front making the list. On the other hand, if you’re unable to come up with any motivating factors for investing, you’re also setting yourself up for failure.

This may seem like a lot of work, but it’s a crucial part of the process if you want to succeed. Remember: buying property BEGINS with a well thought out plan for your exit strategy!

You should also be aware of the intense marketing hype of many online estate agent sites; they often prey on gullible, uninformed individuals. Be careful not to fall for the hype regarding the off plan deals marketed in nearly every country. Media such as glossy overseas magazines that advertise second homes for sale as investments are often very misleading.

Another word of caution – don’t be fooled or conned by the promises of “get rich quick” property schemes. Property is a long-term investment. It’s easy to lose sight of this as you hear any number of different, new and possibly more exciting property investment strategies that appear to be making money NOW. Years ago you could purchase reasonably-priced property, rent it out and make good money in a relatively short period of time. However, times have changed and this is no longer the case.

Not all real estate agents will be upfront about this fact. Like many others, you may mistakenly assume that your real estate agent is determined to help you obtain the best possible return for your money. Unfortunately, this is often not the case. The main goal of real estate agents is to sell property – period. Do you think it is in their best interest to convince you to make long-term property investments? Definitely not!

Media resources can also hamper your property investment opportunities by writing bad or good reports about property investments that simply aren’t true. Property-related journalists are being paid to write, not to conduct research about the real estate market or lucrative investment opportunities.

Advertising is big business and journalists may be paid to write a scathing or glowing report about various overseas or local investments that is completely false. Hence, it’s best to ignore the majority of what you read in the magazines and conduct some solid market research on your own. After all, it’s your money so you want to invest it wisely!

Fortunately, there are some reliable resources available to help you learn about current trends in the property market. Start by consulting one of the following websites before you invest in any of your hard-earned cash:

Collierscre – One of the leading worldwide real estate consultancies

Knight Frank – Residential and commerical property professionals

The Royal Institution of Chartered Surveyors – Leading source of information relating to construction, the environment, property and land

Estates Gazette – Magazine offering detailed information about commercial property trends

Also be sure to talk to local real estate agents as well as some reliable rental management companies. They can discuss some of the more successful local invesment property strategies. Don’t forget about members of your local business community and shop owners in your community. They can prove to be invaluable sources of information when it comes to local property invesmtent.

If you establish clear investment targets, you can focus only on the relevant types of property. I don’t recommend choosing more than two property types if you’re an inexperienced property investor. Given the vast amount of possible investment properties, this small step can save you a lot of wasted hours.

You should also limit the cities you’re considering to one or two. You can then determine the best and worst investment areas of a specific city by analyzing various factors such as crime and employment statistics.

The bottom line is don’t rely on only the latest investment fads to determine where to invest your money. This can prove to be a very costly mistake, especially if you are new to property investment. Spend some time determining your motivating factors for investing, ask yourself several important questions and narrow your target area to one or two cities. These steps will greatly improve your chance of success. With a little planning and advice, you can develop a clear investment strategy and avoid the most common property investment mistake.