Real estate is an excellent tool to build and accumulate wealth. There are four benefits to real estate that can make it more appealing than other investment opportunities.
Maximizing as many of these benefits as possible will help you on your way to retirement freedom.
Cash Flow Before Taxes
When you own a rental property the goal is for the rent on that property to pay all of the property expenses so that nothing comes out of your pocket. Any income from rents above expenses is cash flow.
Yes, owning real estate does have expenses. If the property is financed, you will owe the lender payments of principal and interest. Uncle Sam wants his cut and demands property taxes. The property will need insurance, it may need repairs over time, and property management. Other possible expenses include utilities, landscaping, accounting, and legal fees.
Principal Reduction
If your rental property is financed with a traditional mortgage that combines payments of principal and interest, each payment will increase your equity in the property. This is probably best illustrated by the formula below.
Property Value – Loan Principal = Owner’s Equity
All things remaining equal, as the loan’s principal balance is reduced your equity in the property increases.
The benefit is realized when it is time to execute a sale according to your retirement strategy.The sale will realize a higher proceeds for you to roll into your next investment.
Depreciation
The IRS defines depreciation as:
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
The IRS allows you to deduct wear and tear of your rental property.
This is what might be called a “phantom” expense. The IRS allows you to deduct it from income taxes, although you may never have to actually pay for anything with cash.
This deduction can be used to offset other income. (Disclaimer: You should contact a tax attorney, CPA, or tax professional to see how this deduction would affect your personal situation.)
Appreciation
The final benefit of real estate is appreciation. Appreciation is the increase in value of a property.
All investments have a risk that they may go down in value. Real estate is no different. The current market proves that.
Jokingly some have said that, “God isn’t making any more dirt.” While it may not be entirely accurate, the prinicple is true.
There is a limited supply of real estate in the world, nation, state, county, city, and school district where you live. Scarcity tends to drive prices higher. Real estate has historically risen in value as a longer term investment.
An Appealing Investment
Investing in real estate has four benefits of cash flow before taxes, principal reduction, depreciation, and appreciation that set it apart from other investment vehicles.
If you are tired of being subject to the whims of the stock market, real estate investing may be for you. Real estate offers you a measure of control over your investments and the outcome of the results.
Leave a Reply