Investing in Real Estate – The Benefits of an Expert Investor

Benefits of Investing in Real Estate:

I-tax shelter

II-Leverage

III-Inflation Covered Revenues

IV-Deferred Income Taxes*

V-Perpetual Income

Benefit I-Tax Shelter

By owning income-producing real estate, investors can use depreciation to offset a portion of the income a property generates. Through the effective use of cost segregation, we are able to break down the components that make up a property and depreciate them on more aggressive schedules than the typical 27.5-year straight-line method.

If financing is used on the property, the amount of interest paid to a Lender is a deductible expense that can also be used to reduce a property’s taxable income.

Profit II-Leverage

Income-producing real estate is an asset that can be financed up to approximately 70-75% of the appraised value. These loans can be non-recourse, which means that a person does not need to personally guarantee repayment of the loan. The asset is pledged as the only guarantee for the repayment of the loan. Using leverage allows you to accumulate more assets over time using other people’s money (OPM). The more assets you can acquire, the more income and wealth in the future will translate. The interest paid on the loans is deductible, and the people who really work hard to pay your mortgage are your tenants. This is another example of leverage being used called “OPW” which stands for Other People’s Work (OPW).

Benefit III-Inflation-Covered Income

Real estate income is protected against inflation, since rents can be increased over time to keep up with inflation. Increased income will also lead to an increase in value, since income properties derive most of their valuation from the amount of income they produce. Many retirees today who did not have cost-of-living adjustments as part of their pensions are now struggling because their income has held steady while the price of everything else has increased.

Benefit IV-Tax Deferred Income*

Real estate income can be tax deferred and in some cases even tax free. Depending on your tax status and income need, one of the best ways to get money out of income-producing real estate is to refinance it and get cash out. Borrowed money is not defined as income and therefore is not taxed as such. Income from the property will repay the loan, and the interest paid is tax deductible. This strategy can be done repeatedly, putting tax-free money in your pocket. Assuming you never sell the property, but pass it on to your heirs, they will inherit the property incrementally, and that money from the refinance will essentially have been tax-free “income” for you.

If you decide you want to sell your property and buy one that produces a different income, you can defer any proceeds you make from the sale through a qualified IRC Section 1031 exchange, also known as a “Starker Exchange.” The foundation you have from the old property moves with you to the new property. There are rules to follow, but by making these trades, you could continually grow your portfolio by buying larger and larger assets. Again, you could pass the property on to your heirs or leave it to your favorite charity and there would be no taxable earnings for them.

Benefit V-Perpetual Income

In addition to all the other benefits that income-producing real estate has for an investor, the benefit of income in perpetuity cannot be overstated. Through proper planning and management, income-producing real estate can provide you with an income you’ll never exceed, as well as the opportunity to leave an income stream for future generations. The asset could also be used to create a gift legacy by leaving it to your favorite charity or place of worship.

*This is not an attempt to provide legal or tax advice, please consult your tax advisor or lawyer.