There are many methods to become very wealthy, or just modestly wealthy, with your real estate investments. Although I have personally done “pretty good” investing in real estate, many of my friends, college real estate students and subscribers have done much better. I’m extremely happy for them! This four-part series will explore the question: Why do I want to invest in real estate? (See Part 1: First-timers find a place to call home; Part 2: Single-family homes best spot to sink money and Part 3: Fast real estate profits require elbow grease.)
4 – I want to invest in real estate to earn cash-flow income. Unless you buy income property with at least 20 percent cash down payment, it is very difficult to earn much cash flow from rentals until you have held the property long enough to benefit from rising rents. The one exception is low-income, management-intense apartments purchased at 4 to 5 times annual gross rents. But then you will be buying yourself a job managing your low-income rental housing.
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Housing where rent is paid weekly (or daily, or hourly!) usually offers excellent cash flow, but most long-term investors want to own such properties. Such properties usually show very little market-value appreciation, especially if they are slums.
5 – I want to shelter my income from taxes. This is probably one of my friend Yanik’s primary motivations for investing in real estate. But I must hasten to explain that unless you are a full-time real estate “professional,” such as a licensed broker or salesperson spending at least 750 hours each year in your real estate job, you will be limited to only $25,000 of tax-loss deductions from your investment property (primarily thanks to the non-cash depreciation tax deduction for wear, tear and obsolescence) against your ordinary taxable income.
When your adjustable gross income from all sources exceeds $100,000, then your $25,000 allowable real estate “passive activity” deduction against ordinary income gradually phases out. However, any unused “suspended loss” can be used in future tax years or when you profitably sell your investment property. In other words, real estate investments are no longer the great tax shelters they were before the 1986 Tax Act changes took away unlimited realty tax loss deductions against ordinary income.
Summarizing the five primary reasons for investing in real estate, two of them are sound (buying your primary residence as also an investment property, which is likely to appreciate in market value, and acquiring investment real estate for its long-term appreciation potential).
But purchasing investment property for quick profits, cash flow, and/or tax shelter rarely make much long-term profit sense. Smart investors understand sound profitable real estate investing is a long-term experience, not a get-rich-quick speculation. For this reason, the most successful real estate investors never (or rarely) sell their investment properties.
EXAMPLE: Speaking of long-term real estate investment profits, my friends Arthur and John Michael shared a recent great story from the Las Vegas Sun newspaper about a104-year-old real estate investor. Retired physician Russell Clark bought a nine-acre property in 1973 at 5115 Industrial Road in Las Vegas for $79,000. At the time, he was 73 years old. The article says he purchased the property as a long-term investment. Thirty-two years later, the investment paid off! Clark recently sold the property to a 30-year-old New York developer, Gil Dezer, for a reported $36 million. Dezer plans to construct high-rise condos on the property. Both of those investors spotted different profit potentials in the same property.
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