Why Real Estate Income Investing?
Real estate income investing is not flipping! Real estate income investing is finding the right properties, working with your team to do the due diligence and running the numbers with your accountant before you buy. An income property is supposed to be a money machine making money for you with a positive cash flow. It is not a property where you contribute more cash (negative cash flow) hoping you turn a profit when you sellthat is Flipping, not investing.
The main reasons for Real Estate Income Investing
- INCOME- Reasonably reliable income with good after tax returns of 8-12% after tax cash on cash return=(net after tax income/$ amt invested)*100
- Diversification-Real Estate is not a paper financial instrument. It is tangible and can continue to generate income even in depressed financial markets!
- Tax Advantages- The tax bill on your net rental income can be reduced or eliminated by the proper use of depreciation.
In the post financial crisis world where money market deposits yield 0.2%, CD’s 0.5-1.%, 10 year US Treasury 2%, the above returns are very good. To get more from a financial instrument, e.g. junk bonds, one assumes more risk. But who knows what that risk may be? Sometimes, no one really knows. (Check out the recent film “The Big Short” about the financial crisis precipitated by the mortgage loan fiasco where almost all THOUGHT mortgage back securities were solid but few really did). With almost any financial instrument, the average person really has no clue about the underlying assets. With a rental, one should NEVER buy unless they see it and its’ neighborhood. Check out what properties rent and sell for and KNOW ahead of buying what’s up! In other words, you the investor have a lot of control to mitigate risk and optimize return.
Most financial planners agree that diversification is paramount to a solid investment and retirement portfolio. Brokers do not bring up Real Estate Income Investing. Why? They don’t get paid for it. A Financial planner as a fiduciary, will probably discuss it, but cannot help that much. However, your accountant should be a key player on your team because they can independently evaluate the numbers. Moreover, they are KEY in implementing one of the best reasons for Real Estate Income Investments- reduced taxes.
Reducing taxes is where your accountant comes in by helping to account for all expenses including depreciation. He/she will know that the purchase price of the property must at least be bifurcated into land (which cannot be depreciated) and the building which can. What is more, the non-land portion of the property can be further broken down to personal property ( depreciable over 5 years) and land improvements (depreciable over 15 years). Doing this greatly increases the amount on can depreciate over the first several years. By the way, if your accountant doesn’t either know about or want to do this, find another accountant because the one you have may be costing you money!