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How Real Estate Investing Can Benefit You
The successful real estate investor never makes a real estate investment because it’s romantic. Real estate is not purchased, held, or sold on emotional compulsion for love or beauty. As one real estate investor put it, “Only women are beautiful.”
Real estate investing is about return on investment. And real estate investors trying to decide whether there is a potential benefit to purchase, hold on to, or to sell rental income property rely on four basic returns inherent in real estate investment property to make that decision.
Understanding these investment decision basics, where they come from, and how to calculate them is what fuels real estate investment success.
Cash flow
Cash in minus cash out results in cash flow. When more cash comes in than goes out the result is positive cash flow, and when more is spent than received the result is negative cash flow.
All real estate investment property ebbs and flows with a stream of money coming in from rents and other income, and money going out for operating expenses and debt service (loan payment). Before making your investment, always run the numbers and look for the benefit of positive cash flow.
Appreciation.
Future selling price minus original purchase price equals appreciation. And the tendancy for real estate to grow in value over time is what gives a real estate investment the benefit of appreciation.
Straightforward enough, but smart real estate investors don’t leave appreciation to chance--they follow the income stream.
Smart investors understand that other real estate investors buy the income stream of rental property (as they do). Therefore, the more income stream they can sell, the more they can expect their property to be worth; the faster they can increase the income stream, the sooner the property will most likely appreciate.
So always consider market and economic conditions, physical improvements, and operating expenses to determine the likelihood of increasing property value.
A favorable location, positive shift in supply and demand, the probability to demand higher rents or lower vacancies, or an opportunity to reduce wasteful expenditures are all issues that could effect appreciation and are always worth carefully considering.
Loan Amortization.
Loan amortization means a periodic reduction of the loan over time. Therefore each time tenants pay the rent, they provide you the benefit of paying down your debt and virtually are helping you to buy the property.
Tax Shelter.
Real estate investment also provides an investor the benefit of being able to legally reduce annual or ultimate income taxes.
Of course there are nuances and exceptions in all tax matters, so real estate investors should always check with a tax expert to be sure what the current tax laws are for the investor in any particular year.
As a general rule, however, the IRS currently allows real estate investors to deduct the following:
Most costs incurred at the time of purchase are deductible in the year of purchase. All expenses incurred in the operation of the property are deductible. The interest paid on the mortgage is deductable. The IRS also assumes that your buildings are wearing out and becoming less valuable over time and therefore allows you take a deduction for that presumed decline in what the tax code calls cost recovery (i.e., depreciation).
There you have it. The benefit of real estate investing--making money. Just be sure to run the numbers, either on your own, with good real estate investment software, or with the help of a real estate professional.
Remember, real estate investing isn’t whimsy, its business. Best of all, real estate investment is profitable when done correctly.
James R Kobzeff - 21 Dec 2006.
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