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Real Estate is a great investment because it allows you to:
- Buy an Asset for a Percentage of its Market Value. This is otherwise known as your down-payment, which is typically 5% – 20%.
- Borrow the Balance of Your Purchase. Leverage is the ability to borrow a percentage of the value of a piece of property. Real estate, in comparison to other investments, offers a very high degree of leverage. In some cases, one can obtain 95% financing. This allows individuals to purchase real estate with little, if any, of their own money.
- Have Someone Else Pay Off Your Asset for You. Yeah, really. That’s what your Tenant is doing every month. Your tenant pays you rent, which you then send to the bank to pay your mortgage. As you pay off the principal, you owe less than the home is worth. This is your equity.
- Have Your Asset Appreciate as It Gets Older, Not Depreciate. Unlike a car, time is real estates best friend.
- Acquire Equity by Renovating the Property. You can give the property a face-lift or a full renovation or something in-between (depending on your planned use). When you improve a property (through renovations), you force its value higher.
- Receive A Cash flow: Cash flow is the difference between your income and your expenses on a piece of property. It’s what you have after you’ve collected rent and paid out mortgage, taxes, insurance, upkeep, repairs and any management fees.
- Receive Tax Write-Offs:What conversation about Real Estate would be complete without discussing the huge tax advantages of Real Estate?
Let’s talk about those write offs…
- Selling Every 2 Years: If you live in your investment you can fix-up and sell every two years with up to $250,000 ($500,000 for couples) sheltered from tax as long as you actually lived there for two years. Serial renovators tend to do well here, trading up every two years.
- 1031 Tax Free Exchange: Allows you to “exchange your property” and not pay taxes.
- Depreciation: Is an accounting deduction the IRS allows you to take for wear and tear on your building. Over time, your building will deteriorate and need upgrading or rebuilding. The IRS tables now say that for residential property, you can depreciate over 27-1/2 years. So for example, if you bought a residential rental property for $300,000 and the land is worth $100,000 and the building is worth $200,000 and you depreciate the $200,000 building over 27-1/2 years, which works out to a $7,272 annual depreciation deduction.
- Losses: If your rental property shows a loss for the year, you may be able to deduct this loss on your tax return.
- Upkeep: Deductions for monies spent on the property for insurance, maintenance and repairs.
- Travel: Expenses to oversee an out-of-state property.