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.
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