Most people think of real estate in one form, a personal residence, but real estate comes in many shapes, and most importantly, price points. Because of that, whatever your income, you have the opportunity to invest, reduce taxes, earn money, and create a tangible savings account.
Real estate can add money to your pocket in a multitude of ways, but today, I’m going to share the top 5 reasons everyone should invest in real estate.
In case you didn’t know… the biggest draw for those of you on W-2 income is the tax benefits. As an employee, you know that tax breaks are hard to come by. In fact, about 55% of every American’s income will go to taxes. (YIKES!)
Wouldn’t it be nice if there was a way to keep more of your income in your pocket? Hmmm, taps chin thinking. There is a way! Purchase investment property.
The deductions for owning an investment property include all the expenses you incur to purchase the property as well as the money you fork over to manage and operate it such as utilities, maintenance, repairs, advertising… the list goes on.
Other government issued deductions include:
- Depreciation: Property (not land) depreciates in value over time, and you get to deduct that.
- Interest: The interest on all loan payments is deductible.
- Insurance: The premiums for every kind of insurance are also deductible.
You can change your tax rate simply by owning a couple (or one) puny pieces of investment property; it’s that powerful. Most Americans don’t realize that with the purchase of just a few income properties that they can virtually eliminate their tax liability. Think about that… without owning income property more than half of your lifetime’s income will go to Uncle Sam; With owning it, you get to keep all of that money.
If you could eliminate your tax bill (i.e. double your income), what kind of an impact would that have on your livelihood? Tic toc, tic toc, tic toc… Times up! Life would be better silly!
You hear me talk about cash flow all the time. I talk about it because it’s one of the most important pieces of real estate investing as it can get the average person to financial independence faster than anything else that I know.
Passive income, which is what you’re receiving from an investment property, it’s taxed at a lower rate than the money you work for (Ha! More tax savings!). Plus, even if you’re negatively cash flowing (your expenses are greater than your collected income), you can write that off as a loss, saving you more money. Cash flow is king (or queen, we’re equal opportunity here).
Real wealth creation lives in leverage. I prefer to use as little of my own money as possible when investing in real estate, and instead use other people’s funding to obtain the same result.
For one, income generated from borrowed money is the lowest taxable income there is.
Second, your wealth builds exponentially faster.
Let’s say you have $100,000. You can buy one house, own it free and clear, or you can leverage that money and buy 10 houses with 10% down and use a lender’s money. If you’re borrowing money at 5% but your investment is returning at 18%, you’re positively and responsibly leveraged.
True, in the beginning that one house will probably net you more, but your income is fixed. However as you… uh… I mean your tenant… pays down the mortgage on the 10 houses via their rent payments to you, your return will only increase. At the end of the loan term you will own 10 houses and receiving ten times the rent payments as your 1 house would have.
Responsibly managed leverage is a powerful thing and it can make you very wealthy.
Equity is the difference between what the property is worth and what you owe. It can be obtained a number of ways. If you get a great deal, you’ll come into the property with equity. Paying down your mortgage and capital improvements increase equity. And good ol’ appreciation will up your equity as well (but don’t ever rely solely on appreciation).
Once you’ve reached your equity goal in a property, don’t be afraid to sell it (or refinance it out) and move that money into another property (or multiple) that gives you a higher return.
Inflation, A Silver Lining.
When prices rise, so does the value of your property, and generally speaking, so do the rents you can command.
Your rental income increases, but your mortgage payment stays static, which means more money in your pocket.
The subject of inflation actually goes much deeper, but this is not the time or place. Trust me, though. It’s typically a REALLY cool thing!
Everyone of every tax bracket, in every area, at every income level should invest in real estate. At the very least, it will save you money, at the very most, it will make you financially free and feed your family for generations to come.