How to Make Money in Real Estate Investing
Lower your taxes
Tax incentives for real estate investors can make the difference in your tax rates. Deductions for rental property can often be used to offset wage income, and tax breaks may enable investors to turn a loss into a profit.
For which items can Investors get tax breaks?
Deductions could be claimed for actual costs incurred for financing, managing and operating 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 adjusted gross income when determining personal income taxes. Of course, these deductions cannot exceed the amount of real estate income received. In addition to deductions for operating costs, there are also 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 – the investor is not actually spending any money – the tax code can get a bit tricky. For more information about depreciation and various 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 it is 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.
A positive cash flow, whether pre-tax or after-tax, requires rental income and timely collection from high-quality tenants. Do a thorough credit and employment check.
One of the most important factors in determining a solid investment is the amount of equity being purchased. Equity is the difference between the actual worth of the property and the balance owed on the mortgage.
Benefit from growing equity
While investing in real estate is relatively complex, it can be worth the extra work. When compared to other financial investments, like bonds or CD’s, the return on investment for real estate can be greater. The key to real estate investing is equity. When the equity goal is achieved, it’s time to sell or refinance. Determining the proper amount of equity may require the assistance of a real estate professional.
Ten Real Estate Investment Secrets
When it comes to investing, everyone has unique goals and aspirations. However, we have found that there are certain guidelines every aspiring real estate investor needs to know.
1. Compare Property Values and Rents
Financial statistics only go so far; the best measure of a property’s market value is often the selling prices of nearby properties. The same holds true for area rents. A low price can often be justified by a reasonable rent; renters who can afford a high rent can afford to buy instead, so reasonably priced rent is a necessity.
2. Be Careful – Tax Laws May Change
Don’t base tax investment on current tax laws. The tax code is constantly changing, and a good investment is a good investment regardless of the tax code. The right property with the right financing is key.
3. Specialize in Something You Know
Start in a market segment you know. Whether you focus on fixer-uppers, foreclosures, starter homes, low-down payment properties, condominiums, or small apartment buildings, it makes sense to specialize in one area of investment real estate properties.
4. Know the Costs Going from the start
Know the financial statements inside out. What are operating expenses? What are loan payments? Vacancy costs? Taxes? What does the cash flow statement look like? These are key issues that must be addressed before making a solid investment.
5. Know Where Your Tenants are Coming From
If the last rent increase was recent, your tenants may be considering a move. If tenants have a short-term lease, they may be living there simply to attract unsuspecting buyers. It is also important to collect the tenants’ security deposits at closing.
6. Assess the Tax Situation
Taxes are an integral part of successful real estate investing, and they often make the difference between a positive cash flow and a negative one. Know the tax situation, and see how it can be manipulated to your advantage. It may be a good idea to consult a tax advisor.
7. Investigate Insurance Coverage
If seller’s coverage is based on less than the current replacement value, insurance costs may increase with the higher purchase price.
8. Confirm Utility Costs
Local utility companies can verify recent utility expenses, especially if any of these costs are included in the tenant’s rent.
9. Consult Your Accountant
Be sure to find an accountant who is well-versed with the constantly evolving tax code.
Make sure that you always perform a thorough inspection of the property before buying it. Never, ever buy any property without at least examining the site. In some cases, hiring professional inspectors to examine the structural and mechanical systems may be a sound investment.