Maximizing Your Real Estate Investment

The secret is out… Real estate investment produces more millionaires and personal wealth than any other investment opportunity. Although you may not always get super high appreciation on all your investments, there is one thing common about real estate, specifically land… they are not making more of it. As population increases and growth demands rise, the value of real estate continues to climb. If you do your homework and insure the numbers work in your favor, you will be successful in real estate investing. Here are four ways to profit from real estate.

First, you can lower your taxes.  The tax code offers very good incentives for investors.  Some investors use deductions from their real estate investments to offset some of their wage income, while others use the expenses and deductions to make up for their rental income. While this may not make up for all the rental income, tax breaks usually help make up the difference.

As an investor, you may claim deductions for operating, managing and financing a rental property. For example, you can deduct interest payments on the mortgage, insurance, maintenance, repairs, real estate taxes, property management fees, travel, advertising and operating expenses for a rental property. If you pay the utilities, they can also be deducted. As long as these deductions do not exceed your incoming revenue, these deductions are subtracted from the adjusted gross income of your personal tax statement. However, there is one very important deduction you can take, regardless of the value of your property… that is depreciation.

Second, you profit from positive cash flow. When your rental income exceeds the expenses you’ve incurred, the result is positive cash flow. You and your accountant need to determine whether you need positive cash flow before or after taxes. Let me explain. If you have a positive cash flow before taxes, this will be considered current income on your tax return. It is usually harder to find rental properties with a pre-tax positive cash flow. Many rental properties will have more expenses than income. This is why it is so important to do your homework to see if the numbers work in your favor.

When your income prior to tax is negative, the result is a positive after-tax cash flow. However, depreciation expenses usually offset the positive after-tax cash flow. There is an eligibility test used to determine if you can shelter some of your taxable income and thus reduce your income tax. Consult your tax accountant. One of your primary objectives is to insure your tenants pay their rent on time and take care of the property. You must have income to produce a positive cash flow. When you rent, screen your renters carefully. Check their credit, employment history and previous landlords to identify your best possible renters.

Third, real estate investing helps in maximizing your leverage. You’ve probably heard the saying, “If you want to make money than use ‘Other Peoples Money’”. This is true. You should pay as little of your own cash as possible. This makes your income go further. Leverage is using someone else’s money to increase your own equity. Equity is defined as the difference in what you owe for a property and what it is worth. By carefully building up of your equity you increase the value of your investment dollars.

Finally, as equity increases, so does your investment portfolio. Historically, real estate has always appreciated over time. There may be ups and downs in the real estate market, but as a rule the return on investment from real estate has always been greater than other types of financial investments. With every payment you make, you pay part of that payment toward principal. This increases your equity. As that principal is paid down, you equity increases even if the property does not increase in value. The key to successful investing is to use a knowledgeable professional to help you identify properties that meet your specific investment criteria. You need to know how much equity you have and learn to leverage that equity as you purchase additional properties. Once you successfully do this, your personal wealth and real estate investment portfolio will significantly increase.