Understanding Real Estate’s Incomeand
Compared with most other investments, good real estate can excel at producing current income for property owners. So in addition to the longer-term appreciation potential, you can also earn income year in and year out. Real estate is a true growth and income investment.
The vast majority of people who don’t make money in real estate make easily avoidable mistakes.
The following list highlights the major benefits of investing in real estate:
✓ Tax-deferred compounding of value: In real estate investing, the appreciation of your properties compounds tax-deferred during your years of ownership. You don’t pay tax on this profit until you sell your property — and even then you can roll over your gain into another investment property and avoid paying taxes.
✓ Regular cash flow: If you have property that you rent out, you have money coming in every month in the form of rents. Some properties, particularly larger multiunit complexes, may have some additional sources, such as from coin-operated washers and dryers.
When you own investment real estate, you should also expect to incur expenses that include your mortgage payment, property taxes, insurance, and maintenance. The interaction of the revenues coming in and the expenses going out is what tells you whether you realize positive operating profit each month.
✓ Reduced income tax bills: For income tax purposes, you also get to claim an expense that isn’t really an out-of-pocket cost — depreciation. Depreciation enables you to reduce your current income tax bill and hence increase your cash flow from a property.
✓ Rate of increase of rental income versus overall expenses: Over time, your operating profit, which is subject to ordinary income tax, should rise as you increase your rental prices faster than the rate of increase for your property’s overall expenses. What follows is a simple example to show why even modest rental increases are magnified into larger operating profits and healthy returns on investment over time.
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