Beginning Real Estate Investing - What You Should Know
Nowadays there are plenty of ways to invest in the markets and best among them is beginning real estate investing. Investing in real estate has some terrific advantages over other investing alternatives. If and when you become a real estate investor you will get many benefits which are favorable through this investment vehicle.
One of the biggest advantages of investing in real estate is financial leverage. If you get loans for real estate investing from banks, you typically can get it with 10% down payment as your contribution, which means your returns would be magnified 10 times. If you, let's say, have $10,000 to invest and all asset class give a return of 10% per year, then investing these $10,000 in stock would result in $11,000 at the end of the year, with a gain of just $1,000. While on the other hand investing the same $10,000 in real estate worth $100,000 (with $90,000 as bank loan) would result in $110,000 with a total gain of $10,000.
Your $10,000 has been doubled in the real estate investment but returned only $1,000 from stock market. This is because of the fact that you have used your lender's money through real estate investment. This is the best part of real estate investing as it gives you power of leverage in the investment. There are more strong and valid reasons for you to become a real estate investor.
The tax benefit that one can avail is another good reason for getting started in real estate investing. The REQUIRED depreciation by the IRS on the property provides one of the best tax breaks by showing a "paper loss" on the property when in most cases the value of the property is appreciating. The juicier part of the story is that one pays taxes on a reported profit figure that is significantly lower than the actual earnings.
1031 exchange as defined by section 1031 of the Internal Revenue Code is a better tax benefit scheme as compared to others. The essential feature of this rule is that an investor can delay payment of tax on any capital gain from the sale of a property as long as the proceeds are reinvested in other appropriate property. This incentive by the government in effect encourages the investor to remain invested in the market for longer duration.
There is a unique advantage of beginning real estate investing in the fact that, unlike in stock market, you do not need to have standard offers and contracts. You can virtually bargain anything and everything for your property, resulting in some stupendous gains for everyone involved.
If you become a real estate investor, you can look forward to stupendous profits. But how does real estate investing work that it begets such returns? Beginning real estate investing, if you leverage your down payment to earn a return on the entire value of the property, you profits soar a lot more. Required depreciation allowed by the IRS brings the actual tax liability down every year but on the contrary the actual market value appreciates. So you pay less tax on the reported profit figure which is lower than your actual earnings. You can exchange virtually anything for a property leading to some spectacular win-win arrangements.
- David E. Williams
