why should you invest in real estate
You work hard for your money, but does your money work hard for you? When you store your cash under your mattress (or in a bank if you aren’t a weirdo), it will produce next to nothing. However, when you put money into an investment, your dollars go to work for you.
Investing in rental real estate is drawing more interest than ever. When you read or watch on TV about fix & flip investors, they’re often selling those homes to rental investors. The successful rental home investor may have dozens of homes in their portfolio. They are sharp investors, or they wouldn’t be raking in cash flow from that many homes. You’ll want to be able to understand and discuss the “numbers” with them. Let’s take a look at the benefits of rental property investing.
The depreciation deduction is a valuable component in our property analysis. For people in high tax brackets with other investments, it may even allow reducing the profits from other investments. Of course, contact an accountant about this. However, when the costs plus depreciation actually are more than the profit number for taxes, you have leftover losses to use against other investment income.
Investors make money immediately.
Depending on the type of real estate investment and the method with which it is acquired (i.e., with or without financing), real estate investors may begin earning cash flow immediately. For example, when you purchase a turnkey real estate investment, the property is completely renovated with a quality tenant in place. You receive your first rent check at the end of the first month.
You can deduct the property taxes for income tax purpose. If your business owns real property, you must pay property tax on this property. In the same way, as individuals pay property tax on the assessed value of their homes, businesses pay property tax on the assessed value of their real estate (land and buildings). If real estate is sold, the tax for the year is distributed between the previous and new owners, based on how much of the year they owned the property.
Rental real estate is a forced retirement plan. Americans are terrible savers. We lack the self-discipline to put a monthly deposit into our IRA, SEP or 401k as small-business owners. However, buying a rental property is a significant commitment that you are required to commit to and maintain. You will always be grateful in the long-run when you don’t give up on it and build future cash flow and wealth.
1031 Tax Deferred Exchange
You can, under very strict rules, sell a property at a profit and roll the proceeds into another property without having to pay capital gains tax. Here’s what the Internal Revenue Code, Title 26, Section 1031 says: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” Property of like kind simply means other real estate and does not require a land-for-land or office-for-office exchange.
The far majority of us will never get rich overnight. It takes long-term investing and a diverse portfolio to build true wealth. Don’t forget real estate as an important part of the equation.