How to Make Money in Real Estate Investing
Lower Your Taxes
Tax incentives for real estate investors can often make the difference
in your tax rates. Deductions for rental property can often be used to
offset wage income. Tax breaks can often enable investors to turn a
loss into a profit.
For which items can investors get tax breaks? You could claim
deductions for actual costs you incur for financing, managing and
operating the rental property. This includes mortgage interest
payments, real estate taxes, insurance, maintenance, repairs, property
management fees, travel, advertising, and utilities (assuming the
tenant doesn't pay them). These expenses can be subtracted from your
adjusted gross income when determining your personal income taxes. Of
course, these deductions cannot exceed the amount of real estate
income you receive. In addition to deductions for operating costs,
you can also receive breaks for depreciation. Buildings naturally
deteriorate over time, and these "losses" can be deducted regardless
of the actual market value of the property. Because depreciation is a
non-cash expense -- you are not actually spending any money -- the
tax code can get a bit tricky. For more information about
depreciation and various tax alternatives, ask your tax advisor about
Section 1031 of the U.S. Tax Code.
Have a Positive Cash Flow
There are two kinds of positive cash flows: pre-tax and after-tax. A
pre-tax positive cash flow occurs when income received is greater than
expenses incurred. This sort of situation is difficult to find, but
they are usually a strong and safe investment. An after-tax positive
cash flow may have expenses that outweigh collected income, but
various tax breaks allow for a positive cash flow. This is more
common, but it is generally not as strong or safe as a pre-tax
positive cash flow.
Regardless of what kind of real estate you choose to invest in, timely
collections from your tenants is absolutely necessary. A positive cash
flow -- whether it be pre-tax or after-tax -- requires rental income.
Be sure to find quality tenants; a thorough credit and employment check
is probably a good idea.
One of the most important factors in determining a solid investment is
the amount of equity you are purchasing. Equity is the difference
between the actual worth of the property and the balanced owed on the
Benefit from Growing Equity
While investing in real estate is relatively complex, it is often worth
the extra work. When compared to other financial investments, like
bonds or CD's, the return on investment for real estate purchases can
often be greater.
The key to real estate investing is equity. Determine an amount of
equity that you want to achieve. When you reach your goal, it's time to
sell or refinance. Determining the proper amount of equity may require
the assistance of a real estate professional.