Detail analysis of real estate investing benefits.

Tax Savings

If you acquire the right properties at a good price and manage them well, your rental properties will generate a positive cash flow, but because of substantial tax write-offs (including depreciation), they might show a paper loss for tax purposes. Thus, you are not obligated to pay taxes on your gains. Let's say a property generates $1,000 a month in positive before-tax cash flow (cash flow before taxes = gross operating income less operating expenses, debt service, and capital additions). You would pocket $12,000 a year. Well, let's assume the depreciation amounted to $15,000 for the same period. Not only would you show a $3.000 paper loss, you'd actually avoid having to pay taxes on the $12.000 gain for that year. Imagine having four or five of these moneymaking machines and not having to pay taxes (or paying a marginal tax) on the gains ... sheer bliss, right? Moreover, if you buy your primary residence and sell the property after living in it for two years (two of the past five years, to be exact), you'll pay absolutely no capital gains taxes on your first $250.000 profit if you're single, and no capital gain taxes on the first $500.000 if you're married. You can use part of these funds to buy another home and the remaining funds to buy more rental properties. There's no better tax incentive. That said, you might want to consider moving every two years.

Cash Flow

A common strategy of many investors is to create a steady stream of cash from each property, as if each building were a separate and distinct business. The initial goal is to create enough sources of revenue so that the total they provide can eventually replace your paycheck. Many investors, including myself, actually live off the income streams from their properties, and the income can be quite significant if you purchased the properties at a discount or if the mortgages are paid off. Cash flow is defined as the amount obtained when annual debt service (mortgages) and capital improvements are subtracted from the net operating income. Stated more simply, it's the amount of money you have leftover after all the bills are paid.

Your tenants pay your mortgages, thus creating an enormous amount of equity in your properties over the course of time. Eventually, they will pay off the mortgages completely, and you'll own the rental units free and clear. Your buildings will appreciate, and your net worth will soar. The positive cash flow you'll receive each month will provide you with a healthy income, so you won't feel obligated to work a traditional job just to survive. Becoming financially independent is statistically more likely in this business than in any other.

Reliability

Since the beginning of time, real estate has been recognized as one of the most reliable assets to own. It is easy to borrow against, should you need extra capital, because banks are willing to lend you money if the loan is secured by property. Real estate is fundamentally sound because everyone needs a roof over his head, and it is always in demand because of its basic and fundamental utility. Individuals have been investing in real estate long before there was a stock, bond, or commodity market.

 

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