Posts Tagged ‘real estate tax shelters’
The 6 Ways Real Estate Investing Makes you Money
Real estate investing is such a powerful wealth-building tool because it makes you money in so many different ways. Because there are so many income streams, it can be forgiving. You can mess up on one stream and the others will compensate.
1. Equity Capture
Equity capture is when you buy a house for less than it’s worth. Let’s say you buy a house that will be worth $100k after you fix it up for $50k. You spend $20k on the rehab, so you are “all in” for $70k.
You just captured $30k in equity which goes directly towards your net worth. Few other investment vehicles can create wealth so quickly
2. Market Appreciation
Real estate doubles in value every 20 years. Even though the market swings up and down, the long-term trend is up.
3. Forced Appreciation
Real estate investing gives us a special opportunity that stocks don’t: the ability to physically change the value of our asset. If a house is broken, we can fix it. You can’t fix a stock.
4. Cash Flow
Cashflow is the most important reason we invest in real estate. That’s when your tenant pays you $1,000 a month and your monthly expenses including principal, interest, taxes, insurance, and maintenance/occupancy reserve are $800 a month. The $200 difference is now income in your pocket.
5. Principal Pay Down
Even if you weren’t making money any other way, your tenants would be paying down your mortgage a little bit each month. It starts out small, like fifty or a hundred dollars a month, but it grows over time and adds to your equity in the house.
6. Tax Advantage
Real estate investors pay the lowest takes of any for-profit group in the United States. The IRS allows us to reduce our earned income tax on cash flow by taking a depreciation deduction against the house. We can avoid capital gains tax when we sell by using a 1031 tax exchange.
How long can you avoid taxes with a 1031? If you pass the property to your children, they will take over at the new cost basis, which wipes out all of the capital gains over the life of that asset.
It Makes Sense
When you understand all the ways you can make money in real estate investing, it makes a lot of sense. I don’t know why you would put your money anywhere else.