Hopefully, you’re someone who owns not only their own home, but also another asset that generates cash flow. If you are a real estate investor, you’ll realize many benefits when done correctly. The four pillars of real estate as an investment vehicle are:
- Cash flow: Simply put, if you can rent the home or apartment out for more than it costs to pay the mortgage, keep it in good repair, and account for vacancy (months with no income, but still expenses) you have an asset that is making you money while you sleep. If you want to invest in rental property, having an agent like myself who personally invests & understands the costs are more than (rent) minus (mortgage, taxes & insurance) is vital! Things like vacancy, repair, capital expenditures, and management are important to consider, even if it’s a new home and you plan on self-managing.
- Mortgage pay-down: Simply put, if you’ve answered yes to the previous criteria, your tenants are paying off your property a little bit every month. If you’re on a 30 year fixed mortgage, your payment is the same every month. Initially, most of that dollar amount is going to interest, but as time goes on, more of it pays down the amount you borrowed, called principle which by the end of year 30 will have a balance of zero.
- Tax-favored investment environment: Residential improvement on property is calculated by the IRS to depreciate to nothing in 27.5 years (though the value of the land does not depreciate). That means every year you can write off 1/27.5th of the amount you purchased the home for (minus the cost of the land), as well as the mortgage interest, property taxes, insurance and repairs. Due to new tax law changes, the first 20% of your income is tax free. Meaning if you made $10,000.00 in one year, the basis for taxation begins at $8,000.00 before those other benefits.
- Appreciation: We suggest buying for cash flow not speculative appreciation like so many did in the early to mid 2000’s (especially on Adjustable Rate Mortgages!). However let’s dig a little deeper into how this works, as it is a potential benefit of Real Estate investment. Let’s say you buy an investment property for 25% down; you’re into it for 1/4 of the cost and the rest is financed (with tax-deductible interest). If the property appreciates 5% in one year, the appreciation applies to the entire purchase price, not just the 1/4 of that you paid for in cash. So this means your actual return on cash put down would be four times that. For simple math, lets say your bought something for $100,000.00, put $25,000.00 down, and it appreciated 5% in one year; or $5,000.00. Now that $5,000 is 5% of $100,000.00, but it’s a 20% return (or 4 times that) on the $25,000.00 you put down.
Understand that there is so much more to all of this, and this brief synopsis is only meant to start you thinking. In no way are we offering legal, tax, or investment advice. Please consult your professionals in those areas for specific advice as it applies to your situation. If you’d like to speak with me directly about these or any other real estate related ideas, we’re happy to share more of our personal experience, contacts for professionals, resources & real estate sales experience with you. Reach me directly on our Contact page & let’s speak soon.