“People always need a place to live.” This was a statement made by my real estate investment mentor. He had been a real estate investor from the age of 20; he tried all manner of operations, land to single family homes; commercial store fronts to multi-family housing. Slowly and steadily he weathered the economic climates, and he worked his way to an early retirement at 45.
Countless people are investors in real estate, some small like me who own only seven units, some big who own apartment complexes all over the place. Some passive who have all their properties managed by someone else, some active who play the role of the property manager. Real Estate should be in your portfolio. When held for long times it is steady. When leveraged the return percentages can be very high. When fully paid off they are an amazing constant source of income.
An investment property is one that is purchased with the intent of making money. Your home can build net wealth, but it is not an investment property unless it is multi-unit and you are renting the other units out.
1. Leveraging yourself into a fortune.
Loans are still available at historic lows in the United States, when you compare our rates to the 15% of times past our buying power is stronger than ever. The advantages of using a loan to purchase real estate are you can take a smaller amount of money to purchase a large asset that yields more money and which puts more money in your pocket every month. It allows the little guy to get into the game and get great returns.
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2. Tax Deductions.
There are three ways to get tax deductions on investment properties.
- Operating Expenses, these include but are not limited to property management, water bills you pay for the property, and repair costs.
- Interest on Loans, your loan company will send you a tax form at the end of the year, and it will be a tax deduction.
- Depreciation (Cost Recovery), this is only for investment properties, not your personal residence, this is an incentive from the government. This tax incentive is to help counteract the natural wear and tear your investment receives. They deem the economic life of a property to be 27.5 years; the deduction is the properties purchase value divided evenly over that time per year.
Real Estate does not have a static value, it changes with the market and time, however, over time almost all real estate in the United States has gained a great deal of value. This is a wonderful thing because it means that for long-term property investment keeps up with inflation and has the potential to yield you a great deal upon sale.
Two things of note:
- When you invest only for appreciation short term, you are moving into a different investment strategy of speculation.
- There can be significant capital gains taxes on home sales; please seek advice from a tax specialist for more details on this.
4. Cash Flow.
This is my personal favorite of the four ways I am making money from real estate right now. Cash flow is the reason people call Real Estate investing a passive income, and I would personally call it a mostly passive income. Cash flow is the money that is generated from your asset in excess of the costs. I use a conservative estimate of half of your rent going to losses, repairs, vacancies, and costs. Many people use this to pay off additional on the mortgage, save for another investment, or just fund their life.