Real Estate Miracle
Want tax money back from the IRS?
What about a “dividend” check each month?
How about paying $25k for a $100k asset?
Are you interested? Read on. . .
We’re often asked why invest in real estate? The answer - investment real estate provides wealth building benefits that traditional investments can’t touch! Benefits like . . .
Ø Cash flow
Ø Principal Pay Down
While stocks, bonds, CD’s, savings accounts and treasury bills may have some of these benefits, they don’t have all of them! We discuss each of these benefits briefly to give you a perspective as to why investment real estate needs to be in your portfolio. And if you're interested in learning more, read our e-Book found in the Resource Center.
1) Appreciation can be broken down into two classifications, market appreciation and forced appreciation. Market appreciation is the increase in property values due to supply and demand for properties in the surrounding area. The second type is forced appreciation which is gained by increasing the property’s value through adding value.
2) Leverage. If you purchase a $100,000 investment home and property values appreciate 5%, you see a gain of $5,000 in just 12 months, not bad. But now let’s add leverage to the equation. When purchasing investment real estate some investors choose to leverage using a small down payment and finance the balance. Using the example above an investor purchases a $100,000 investment home with a $25,000 down payment (25%) and finances the balance. We’ll leave appreciation alone at 5%.
Question: Does appreciation affect only the $25,000 investment or does it apply to the entire $100,000 asset that the investor controls? Correct, the entire asset appreciates. A gain of $5,000 (5% on $100,000) on a $25,000 investment (down payment) is a 20% return on investment. That’s the power of appreciation and leverage with investment real estate!
3) Depreciation is a tax benefit the US Government gives to real estate investors for investing, holding, and maintaining investment real estate. Depreciation is a paper loss that can be deducted from taxable income when no actual dollar loss occurs. Investors are offered this tax benefit to encourage them to own and maintain rental real estate and provide housing for individuals and families who cannot afford to purchase a home.
4) Cash flow is the amount of income derived from a property after all income and expenses are calculated. When calculating cash flow we are talking about actual dollars earned and spent. Depreciation is not included in cash flow calculations because it is a paper loss and not an actual dollar loss. If income exceeds expenses you have a net profit or positive cash flow. If expenses exceed income you have a net loss or negative cash flow. Typically, but not always, you want to make sure you have a net positive income.
5) Principal pay down. This is a significant benefit that most investors don’t realize. In the beginning of this section we mentioned an investor can use leverage to purchase the property rather than using all their own cash. They can buy a $100,000 investment property and put up $25,000 as a down payment. Then over the years, the tenant’s money, not the investor's, pays the loan off. A $100,000 asset for only a $25,000 purchase. That’s the power of principal pay down.
The benefits mentioned above are some of the best reasons to own investment real estate. However, they are not the only ones. More benefits that we did not cover in this section include not paying taxes on the sale of your investment properties by utilizing a 1031 tax deferred exchange, not paying Social Security or Medicare taxes on rental income, passing investments to your children tax fee, deducting business expenses, controlling investment property without ownership and the list goes on and on.
At Wholesale Homes we believe you can invest in real estate easily and effectively. That’s why we’ve created two models to meet the needs of each individual investor; Our "One-Stop Shop" and our "Value Added Turn-Key" investment opportunities. Both models allow the investor to take advantage of the wealth building benefits described above. The difference between the two depends on the risk the investor is willing to accept and the desire of their involvement.