Fortunately, the Asheville Citizen-Times notes, the government is smart enough to realize that private property owners make better landlords than it does.
When you own real estate and make it available to renters, you perform a very valuable service for your community, and the government rewards you with some impressive tax benefits.
Even with recent tax law changes, investing in real estate is still one of the best, if not the best, financial move you can make. But it’s not the gravy train it was before the 1986 tax law revisions.
Back in the heyday, people used real estate to shelter incomes in excess of a million dollars a year and paid no federal income tax. Sounds like a good use of a mortgage loan to us.
Unfortunately, those glory days are over, but the remaining benefits make real estate one of the most lucrative assets you can own.
Look at your next paycheck stub and you’ll notice a deduction for Federal Insurance Contributions Act. Not only do you pay this tax, but your employer must match, too. Earned income is subjected to the FICA tax, and there’s no way around it until your income surpasses a certain amount. Both the tax rate and the amount subject to the tax have been steadily rising.
On the other hand, rents you collect from real estate, no matter how large they get, are considered “passive income” and are exempt from both employee and employer share of FICA taxes. Just this tax break alone is a tremendous reason to own real estate.
You can also deduct all expenses associated with investment real estate to reduce the amount that is taxable. You can deduct things like interest expense, property tax, management fees, homeowner’s insurance, repairs, homeowner’s association dues, utilities, legal and accounting fees, etc.
Moreover, you even get to deduct a portion of the purchase price you paid for the property each year in the form of depreciation.
If, after taking all of the allowed deductions, your income is zero or you show a loss on paper, you will pay no ordinary income tax and, under these circumstances, may be able to apply some or all of your loss to offset taxes on your salary.
The mortgage interest deduction plays an important role, especially when you’re just getting started and cash flow is tight. Most investors finance as much as possible in the beginning; interest is most likely the largest expense.
Over time as the home mortgages are paid down and the rents increase, the interest deductions will decline but the cash flow will increase. When the mortgage is paid off, although there may be some tax to pay, investors will get to keep a substantial part of the income because they won’t pay interest.
There are so many additional tax benefits to real estate it’s hard to do justice to all of them. There are ways to sell properties and defer taxes on the profits if you if you reinvest them in additional properties.
Even if you don’t reinvest them, if you have owned the properties for at least a year, the profits are taxed at a very favorable capital gains rate, which can be less than half the rate for ordinary income.
Under the current Internal Revenue Code, you can avoid paying taxes altogether on profits up to $250,000 from the sale of your personal residence and can do it again every two years.
SOURCE: Asheville Citizen-Times
If location is the golden rule of real estate, then many who invest in a real estate investment trust (REIT) might at times feel as if they’ve stumbled upon a great deal in the fanciest building in town.
A big acquisition in the commercial real estate market has led observers to speculate that heavy demand will continue for companies whose specialty is investing in real estate.
REITs have shown, at times, returns greater than 25 percent per year in the last several years.
REITs frequently invest in commercial real estate or larger residential projects such as apartments, have dodged the financial wrecking ball that has left cracks in the housing market.
In February, the Blackstone Group, a power hitter in the private equity world, acquired Equity Office Properties in a $23 billion buyout.
The bidding war that erupted over the company, whose properties included certain commercial skyscrapers, spurred talk that other mortgage funds or REITs may be snapped up by private equity companies looking for places to spend their vast quantities of cash.
“More investors seem to find value every fiscal quarter, and it’s probably too early to announce a top to the real estate market,” said Jeff Tjornehoj, an analyst at Lipper Inc., which rates mutual funds.
“You’re going to have some investors out there who believe the EOP buyout is not the last and they’re probably willing to stretch their necks out a bit in the current environment because it seems so wide open for M&A activity,” he said.
And even if the gains shown by REITs and the funds that invest in them cool in the coming years (as mortgage loan demand is expected to), which many analysts predict, the foundation could be adequate to support solid - though perhaps slower - growth.
“I think people are concerned that real estate has done so well that it’s comparable to the tech bubble of the late ’90s. I think this is a completely different animal,” Tjornehoj said.
The recent volatility in the mortgage market is certainly a factor. While REITs are unique in that they skirt most income taxes by paying out nearly all of their income to shareholders through dividends, this has often made them desirable for investors seeking income from real estate.
“At this point people are investing for appreciation, not income,” Tjornehoj said.
While many REITs focus on commercial properties, some stick to projects in the condo market, while others venture into shopping malls, for example, or apartment complexes, so it’s important for investors to understand the types of REITs a fund might invest in.
“Certainly, the apartment REITs did very well last year and I think there is some concern that perhaps this side of the market is a bit overheated,” Tjornehoj said.
Whether the buyouts will continue is unknown, though some investors will likely be happy with returns from REITs in their portfolio, even if those returns are less than in recent years, when home loan activity soared to new heights.
SOURCE: San Jose Mercury-News
Investing in real estate can, under the right circumstances, be quite profitable.
Whether you plan to flip it (a term for buying a property, fixing it up, then selling for a profit) or rent it out, real estate is a way to expand your cash flow, according too Quicken Loans.
But even when you know what kind of property you want to buy and how you want to manage it, you have to find a way to finance the purchase. Granted, there are many no down payment mortgage options available, but if you opt to put a down payment on the property, you have to know where to come up with the cash.
You also need some cash to close on the property, then you have to be able to make the monthly payments on the mortgage loan.
So where do you start?
You could start with your savings accounts, but wisdom says your savings are better left where they are right now. Even if you use some of your savings, you never want to dip too deep into that pool, or you risk losing the financial cushion you’ve worked so hard for. So where else can you look?
One smart place to get the money would be to tap into your home equity. If you’ve built up some equity in your primary home, you can get a home equity loan that will give you the cash to use as a down payment.
There are several advantages to home equity loans:
- Where traditional first mortgages can take weeks to close, a home equity loan may take only several days.
- The mortgage interest is tax-deductible.
- Home equity loans offer flexibility. Some are even available with interest-only mortgage payment options where you can choose, when you want to pay only the interest due for that month; although you can still pay as much principal as you want.
Now that you’ve found a way to finance the down payment, how do you finance the rest of the property? A home equity loan allowed you to extract the money - now how to you spend it wisely?
There are several loans available that are good for the purchase of an investment property. Some loans allow you to state your income, meaning that you don’t have to document your income. It makes the mortgage process easier because there is less paperwork, but you need to have a good credit score to do qualify for no doc loans.
There are option ARMs that allow a significantly lower monthly payment as well. In fact, option ARMs give you just that - options. You can choose a 30-year traditional mortgage payment, a 15-year payment, an interest-only payment or a minimum payment, where you pay less than the interest due for that month.
If you decide to go this route, look for an option ARM that offers a fixed interest rate, one that doesn’t allow you to defer too much interest and doesn’t force you into a prepayment penalty.
Coming up with a down payment to buy an investment property doesn’t have to be hard, especially when you don’t want to dip into your savings. Neither does financing the rest of the property. Speak to an experienced mortgage broker to find out which mortgage best fits your individual situation and investment goals.
