THE BENEFITS OF OWNING REAL ESTATE
Let's take a look at the huge advantages offered by real estate investing. One of the most important benefits is leverage. As a real estate investor, it is possible to use 20% of your money together with 80% of a bank's money to buy an investment property.
Appreciation then has a multiplying effect on your invested dollars. For example, if you put $20,000 into a $100,000 investment property, the bank will put up $80,000. However, if the property appreciates 5% ($100,000 x 5%= $5,000), then the investor makes $5,000 on his $ 20,000 invested capital- a 25% return.
There are also 5 main tax benefits you can get from the government when you invest in real estate:
First, the income you receive in the form of rent is not subject to Social Security of self-employment taxes as the money you earn working is. This break alone gives you very favorable income tax treatment.
Second , each year you can deduct a portion of the cost of buildings and personal property from the income you receive from renting the property. This is called depreciation and may be deducted even though the buildings are probably going up in value.
Furthermore, if the property shows a loss after deducting operating expenses, mortgage interest, and depreciation, within limits, you may be able to use this loss to offset taxes on money you earn on your job.
Third , if you decide to sell the property you can defer paying income tax on your profits by using them as part of a 1031 tax free (Starker) exchange; to purchase another real estate investment within certain allowed time frames.
Fourth , you can actually avoid paying taxes altogether on the profits if you live in the property as your primary residence for two of the five years prior to selling it.
And fifth , if you sell a property you have owned for 12 months or more and just want to keep the profit, it is taxed as a long-term capital gain at a rate of 20% or less. When you compare this with rates as high as 35% on money you earn from your job, it is a tremendous tax break.
Not only does leverage allow you to show some incredible returns on investment, but also the tax benefits allow you to keep a much greater percentage of the money you make.
Another great advantage of real estate is that it's a terrific hedge against inflation; in fact, it may well be the best hedge. That's because its value always increases at or above the inflation rate. Let's say you buy a property today for $100,000 cash. It may appreciate in value 5% a year for 10 years, during a time when inflation averages only 3%. If this happens, the property will be worth over $163,000, when another investment that matched the inflation rate would be worth only about $135,000. Your real estate investment would have beaten inflation by $28,000. By the same token, if you had put the $100,000 under your mattress, your cash would buy only about 65% of what it will buy today.
What if, instead of paying cash, you paid down and financed the balance. You would start with $10,000 in equity. If you rented the property so that your tenants covered all of your expenses, in 10 years your $10,000 equity would have grown to $73,000 and that's before you add the thousands of dollars by which you paid down the mortgage. If it only paid down $27,000, your equity would be $100,000 or 1000% of your initial $10,000 investment. Are you beginning to see the picture? Can you see how buying just one investment property like this a year can make you a millionaire before you know it?
The beauty of it all is that the higher inflation rate, the greater your growth in value and equity. But there is still more! While the value of the property is going up, so is the monthly rent. As the rent increases and the mortgage pays down, you get to start enjoying the extra cash flow this produces. Now can you see how owning real estate is the best hedge against inflation that you'll ever find?
Here's another thing to think about. Every month, on every property you control, you will be slowly paying down the mortgages. Since you will make your payments from the rent you receive, your tenants will actually be paying off the mortgages.
REMEMBER : TAX LAWS ARE ALWAYS CHANGING, SO CHECK WITH YOUR ACCOUNTANT BEFORE YOU TAKE ANY TAX DEDUCTIONS.
This report is provided as an informational tool. Always consult your tax professional.
