|
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.
Use Leverage
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 mortgage.
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. |
