It’s a simple question with complex answers. There’s lots of noise out there of how to make money in real estate. Real Estate Deal Talk is the source to cut through the clutter and begin to make sense of it all. Before we dive into how to get started investing in real estate, let’s discuss why real estate could be the best investment vehicle for you.
In order to understand what are the advantages of real estate investing, you first need to understand a few basic principles of how real estate investing works. Creating wealth in real estate happens in a few ways:
Appreciation refers to the gradual increase in property values over time. It’s important to note that there are two different types of appreciation, forced appreciation and market appreciation. Market appreciation is more commonly known and relates to the gradual increase in property values over time. This can be commonly realized by having the right house in an up and coming area. Forced appreciation can occur by improving property. Think of how you can force the value of a home to increase by renovating the kitchen, adding a second bathroom or finishing a basement. This type of activity is called forced appreciation and is how flippers make money in real estate.
Think of purchasing a home that you’re able to buy and your all-in expense of owning that property. Including your mortgage, maintenance, annual repairs, taxes and all the other expenses related to running that property is still less than what you’re able to collect on a monthly basis and rent.
Cash flow is the essential building block for buy and hold real estate investors. With steady returns and the ability to access the capital sooner versus a 401k or other investment vehicles. Cash flowing properties are key to success in real estate investing.
Part of your monthly mortgage payment applies to the balance of the borrowed total. The other portion applies to interest on the loan. The concept of principal pay down means that over time you gain more equity in the property as the principal gets paid off.
- $200 x 12 months = $2400 annually
- 2% annual appreciation
The above displays the power of the principle pay down. For instance you purchase a home for $100k on a 15 year mortgage and renting it out making $200 a month cash flow. In 20 years renters will have paid for your house now worth $131k that was paid for by renters. The loan payoff is a key pillar to building wealth in real estate and is exponentially powerful when combined with cash flowing rental properties.
Always consult your tax professional when dealing with your real estate portfolio to ensure proper guidance as there are many advantages to owning real estate. For every taxable situation there are unique strategies you can use to limit and even your tax burden. The most common ways of reducing your taxable income through real estate are of the common deductions are:
- Property Maintenance and Repairs
Even more advantageous is the ability to avoid or delay capital gains taxes upon sale with the use of:
- 1031 Exchanges
- Publication 523
The more creative you can be with your real estate investment strategy, the greater chance you have of leveraging the tax benefits of real estate to your advantage. Remember to always consult your tax professional when dealing with these situations to ensure proper guidance.