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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:
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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