Potential Criterion Investors – Top 5 Reasons to Invest in Real Estate
Take a bit of time to educate yourself on the advantages of investing in real estate and you’ll discover that with some knowledge you can easily understand all the benefits and won’t have to be apprehensive about investing.
With that in mind let’s look at the top 5 reasons to invest in real estate:
1. Cash Flow – Positive monthly cash flow will occur when the monthly expenses are subtracted from the monthly lease income, thus giving you a monthly income from your real estate investment. Today’s favorable financing with a low debt payment makes this especially attractive.
2. Appreciation – Appreciation is the increase in the property’s value, which generally occurs over time due to inflation and can be increased by investors who add value to the property through rent increases, repairs and enhancements. This is also a way to create equity in the property.
3. Depreciation – Even with an increase in the property’s value the government allows investors a tax deduction which allows you to depreciate the property’s value over time. This deduction can be used to offset the property’s income.
4. Tax Benefits – In addition to depreciation, appreciation of the property compounds tax-deferred during the years of ownership. You don’t pay tax on the profit until the property is sold – and even then you can roll over your gain into another investment property and avoid paying taxes using a 1031 exchange. If an investor decides to keep the profits they are considered a long term capital gain if the property was held for more than a year. The long term capital gains tax rate is typically lower than the investors normal income tax rate. Also, a step-up basis happens when the property investor dies, and the property is inherited at its fair market value. It is entirely possible after deferring capital gains and depreciation recapture for your entire life you could pass the property to your heirs and eliminate all of your tax liability and create none for them.
5. Leverage – Leverage is a powerful reason for investing in real estate. For example, if an investor used 100% cash to acquire a property worth $100,000, and the property increased in value by $5,000 in one year, then the investor made a return of 5% (assuming no other costs in this case). However, if the investor obtained 80% financing, only $20,000 cash would be required at the closing table, and a bank or other lender would loan the remaining $80,000 to acquire the property.
Assuming the same $5,000 increase in value, the investor’s cash contribution of $20,000 would yield the same increase in equity of $5,000 in one year, but due to the lower cash investment it would yield a 25% return on investment. Taking advantage of the other benefits to investing in real estate, such as cash flow, and the increase is even greater.
With all these and a number of other benefits you can see how easy it is to accumulate wealth and become a successful investor.
Best,
Brian Duck
Co-Founder | Criterion