Beginning Real Estate Investing - What You Should Know
There are many ways people can invest in today's investment markets. One of the most rewarding ways is by beginning real estate investing. Investing in real estate can prove to be a very good source of income. If you decide to make money in real estate investing you will enjoy some amazing benefits which are favorable to this investment vehicle.
One of the biggest advantages of investing in real estate is financial leverage. If you get loans for real estate investing from banks, you typically can get it with 10% down payment as your contribution, which means your returns would be magnified 10 times. If you, let's say, have $10,000 to invest and all asset class give a return of 10% per year, then investing these $10,000 in stock would result in $11,000 at the end of the year, with a gain of just $1,000. While on the other hand investing the same $10,000 in real estate worth $100,000 (with $90,000 as bank loan) would result in $110,000 with a total gain of $10,000.
So your $10,000 has been doubled in the real estate investment above whereas it only produced an extra $1,000 in the stock market. Why? Because your lender's money has been working for you too. This is the power of leverage and is one of the biggest advantages of real estate investing. And yet there are even more reasons to make money in real estate investing as you will see.
The tax benefit that one can avail is another good reason for becoming a real estate investor. The REQUIRED depreciation by the IRS on the property provides one of the best tax breaks by showing a "paper loss" on the property when in most cases the value of the property is appreciating. The juicier part of the story is that one pays taxes on a reported profit figure that is significantly lower than the actual earnings.
Perhaps an even better tax benefit is the 1031 exchange as defined by section 1031 of the Internal Revenue Code. Essentially this allows investors to delay paying any capital gains taxes when a property is sold as long as the proceeds are reinvested in an appropriate property. The government is basically encouraging investors to stay in the market with this fantastic incentive.
There is a unique advantage of real estate investing in the fact that, unlike in stock market, you do not need to have standard offers and contracts. You can virtually bargain anything and everything for your property, resulting in some stupendous gains for everyone involved.
If you become a real estate investor, you can look forward to stupendous profits. But how does real estate investing work that it begets such returns? Beginning real estate investing, if you leverage your down payment to earn a return on the entire value of the property, you profits soar a lot more. Required depreciation allowed by the IRS brings the actual tax liability down every year but on the contrary the actual market value appreciates. So you pay less tax on the reported profit figure which is lower than your actual earnings. You can exchange virtually anything for a property leading to some spectacular win-win arrangements.
Published May 31st, 2007
Filed in Business, Real Estate
