Author: Jarod Bona
Our first blog post at Titles and Deeds will examine why you might want to invest in real estate in the first place. Our website is focused on real-estate investors, so it makes sense for us to articulate why we believe real-estate investing is a good idea.
This article will focus more on beginning or basic investing as readers that are already flipping shopping malls or buying and reconstructing large apartment buildings already know why they should invest in real estate.
Before delving into some of the advantages, however, we will be very lawyer-like here and explain that real-estate investing isn’t always successful. It doesn’t always work like you see it on television. You might lose money. In fact, if you are in the game long enough, there is a good chance you will lose money on one or more projects. And real estate isn’t necessarily easy money in the first place.
You might eventually find yourself sipping margaritas on the beach thinking about all the passive income flooding into your checking account as you watch one wave after another splash into the sand. But it will take some smarts and hard work to get there. You will have to supply the hard work, but with this blog we will help to facilitate some of the smarts.
Real-estate Investing Presents Many Options
If you don’t like flipping houses, you can buy and hold apartment buildings, or develop commercial properties, or buy tax liens, or lend private money, or lease vacation-rental properties, or participate in any number of different types of investments.
You might pick one type of investment, learn everything about it, and specialize. Or you could bounce around, depending upon the state of the market and the economy—there is an optimal strategy for every market. Or, more likely, you start with one type of real-estate investment and move on to another as you gain experience. For example, some investors start with a flip to gain cash, then purchase multi-family or apartment buildings for long-term wealth.
Real-estate Investing Offers Unique Financial Benefits
The most obvious financial benefit of real-estate investing is leverage. Leverage is the use of borrowed capital (or some other instrument) to increase the returns of your investment. Using leverage is particularly common for real-estate investments, as most purchases incorporate some type of debt financing.
When it works, the financial benefits of real-estate investing are fantastic. You can often purchase a properly by putting down thirty-percent or less of your own cash. If you have renters in your property and you have invested wisely, the renters will effectively pay your mortgage interest, insurance, and taxes, along with some of the loan’s principal, and leave some cash left over for you or your business.
Over time, if all goes well, the property appreciates. And the increase in value is based upon the entire property, not just the cash you used for the purchase—leverage, remember. Of course, if it doesn’t go well, you might end up owing more on a property than it is worth (remember 2009).
If you have a property that receives income, there is also a good chance that the income and cash flow will increase over time.
The Tax Benefits of Real-Estate Investing
One particularly lucrative benefit that you might not realize unless you are a real-estate investor involves taxes. We are not tax attorneys, so you should consult your own tax professional, but from a tax perspective, real-estate is fantastic.
You probably already know that if you have a mortgage for your own house, you can deduct the interest, up to a certain value.
Depreciation. If you have an investment property, you can deduct a certain amount per year over a period of 20 to 30 years to account for the wearing out of the property. You can learn more about how depreciation works here. This provides you a beneficial tax deduction each year—until the property is fully depreciated—that can reduce your taxes by minimizing your tax income.
1031 Exchange. Another great tax benefit is the opportunity to do a 1031 Exchange. When you sell a property and make a profit, you typically have to pay taxes on your profit. But if you sell the property and purchase a like-kind property within a period of time and follow several specific rules, you can defer the taxes until you sell the subsequent property. And if you do another 1031 exchange on the second property, you can defer the taxes again (and again and again).
The requirements for a 1031 exchange are strict, so you should make sure you are following the rules and doing it under the guidance of a professional that knows how to do them. But they offer an incredible benefit for a real-estate investor that wants to build a property portfolio from the ground into the sky, picking up more substantial properties along the way.
Overall, real-estate investing presents incredible opportunities. But it isn’t as easy as it sometimes looks and it is important that you put together a strong team of advisors, to help you minimize risk and maximize your returns.