As entrepreneurs find success with their primary business ventures, many search
for the right investments for their profits.
Of course, we can and should all start traditional tax preferred vehicles
like an IRA and 401k. These are the bedrock of good ‘benefit’ planning for
ourselves and our employees. I’m also convinced more entrepreneurs should
consider rental real estate as an important part of their portfolio.
I realize many business owners shrug off this concept after the recent
downturn in real estate values, but let me list a few reasons that may change
your mind:
1. Gain more leverage. Real estate
is one of the few investment vehicles where using the bank’s money couldn’t be
easier. The ability to make a down payment, leverage your capital, and thus
increase your overall return on investment is incredible.
2. Grow, tax-free. Buying rental property based on
speculation of its value is a dangerous tactic since cash flow is the key.
However, appreciation over the long-run is certainly realistic and at the least
you should be considering a tax-deferred strategy. In the future, you may even
consider a 1031 exchange, charitable trust, or an installment sale to lesson
your tax liability further.
3. Tax free cash flow. It’s no secret that because of
depreciation and mortgage interest deductions (if you leverage your capital),
your cash flow should be tax-free. That’s right! The far majority of the time an
investor will never pay taxes on their cash flow and can wait for capital gains
on the sale of the property in the future.
4. The tax write-offs against your other income. Depending
on your classification as an Active Investor or Real Estate Professional and
your income level, there is a good chance your rental property will not only
give you tax-free cash flow, but an overage of tax deductions you can use
against your other income. With that said, this is something you want to discuss
with your tax professional before investing so your expectations are
realistic.
5. Increased tax deduction strategies. Rental property
affords investors with another incredible opportunity to convert personal
expenses to potentially valid business deductions. Don’t forget that rental real
estate is a business. This means that travel expenses to check on your
properties and payments to family members who manage your properties (such as
students away at college) can be deductible and increase the tax benefits when
it comes to cash flow and the future sale of the property.
6. Rental real estate is a forced retirement plan. Americans
are terrible savers. We lack the self-discipline to put a monthly deposit into
our IRA, SEP or 401k as small-business owners. However, buying a rental property
is a significant commitment that you are required to commit to and maintain. You
will always be grateful in the long-run when you don’t give up on it and build
future cash flow and wealth.
The majority of us will never get rich overnight. It takes long-term investing
and a diverse portfolio to build true wealth. Don’t forget real estate as an
important part of the equation.
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