Why Real Estate?
Investment is Secured
Your investment is secured and backed by real estate, a hard asset that includes intrinsic value. This intrinsic value is driven from greater resilience against a market panic due to their inherent illiquidity.
Invest for Cash Flow
Multi-unit rental properties such as apartment buildings offer more income stability and diversification than investments in other real estate asset types.
One of the keys to wealth building is to make money while you sleep. Acquiring cash flowing assets that produce consistent income passively
Return on Equity
Equity creation, or “forced equity,” is created by increased revenue or decreased expenses of the multi-family asset (5 units or greater).
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Thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), residential landlords who operate as pass-through entities (a special business structure, such as sole proprietors, LLC’s, and S Corps, that eliminates the burden of double taxation). This essentially makes 20% of your profits tax free. There are some limitations and exemptions, so be sure to consult your income tax professional.
Tax Free Harvesting
There are several ways to measure the performance of investment real estate. One of these ways is Return on Equity, or ROE. The less equity and more cash flow a real estate asset produces, the higher the return. Strategic real estate investors watch their Equity metric periodically. Due to market forces and inflation, quality real estate values will go up over time. This appreciation creates more equity for the owners. If there is a loan on the property, this is considered good debt. After all it is the tenants whom are paying for it! Each month when the payment is made, a portion of that payment goes to pay the loan balance down through amortization. This amortization of the loan balance downward also creates equity for the owners. These dual factors of a rising property value and loan paydown together widen the equity stake in the property for the owners simultaneously. This equity grows tax free, and strategic investors know that harvesting this equity can also be tax free. The forces of inflation will also cause rents to rise, pushing rent revenues upward. This allows the property to remain cash flow positive even when a new larger refinance loan is put in place of the previous one. The proceeds of this new greater loan permit the owners to re-position this newly monetized equity, harvesting the proceeds tax free and shielding it from any unforeseen drop in market value. Owners can then make necessary improvements to the subject property, and/or invest in additional cash flow producing real estate. Once the original cash equity investment is re-positioned, the returns to the owners become infinite!
Cash Flow Sheltered by Depreciation
Also known as a phantom return, depreciation is an annual expense deduction that is taken on paper without actually incurring the expense. This deduction is typically a percentage of the value of the property that you can write off as an expense against revenues. The concept of depreciation holds there are two parts to an investment property, the land and the improvements (structures). Structures can be depreciated, as they will deteriorate over time. In most cases the land value is about 20%, and the value of the improvements are at 80%. It is the structure (80%) the IRS will let you write down (depreciate) over a certain number of years depending on the type of real estate. For residential real estate that timeline is 27.5 years. For example, a $300,000 property has $240,000 (80% of 300k) that can be depreciated over 27.5 years, which equals $8,888.88 per year. This amount is listed as an expense, even though no actual $$ is coming out of your pocket! The net income generated from the property is sheltered by the $8,888.88 (depreciated amount yearly), resulting in tax free income by the same amount to the owner.
Tax Free Trading
When an asset is sold for a greater amount than the cost basis, capital gains income is generated, and therefore taxed. Capital gains can be derived from the sale of various assets such as stocks, gold, cars, art etc. Capital gains can also be generated from real estate. Unlike gains from other assets, gains from real estate transactions can be tax free utilizing a 1031 tax free exchange. Instead of paying the tax on the gain like other assets, savvy investors know to utilize this tax-free option to put the proceeds into more “like kind” cash flowing real estate. This is a great way to “multiply thy gold” tax free and create even more cash flow. Strategic investors then harvest this equity through a refinance and re-position the newly monetized equity tax free to buy even more cash flow producing assets. This strategy blueprint execution is known as the “Velocity of $$.” It is no wonder why real estate is the favorite investment vehicle among wealthy investors.
IRA Cash Machine
If your IRA custodian is a big bank or brokerage house, your investments range to only what they offer in terms of stocks, bonds, or mutual funds. Your investment choices are limited, and you have little control over the performance of these precious retirement funds. Even worse, you are restricted to what is on the menu of investment choices offered. Mandatory with-drawls and market crashes have a big impact on how long investor’s $$ will last. Advancements in today’s medical care has retirees oftentimes outliving their IRA balance and run out of $$. Educated investors know this, proving why self-directed IRA’s are so important. It is not widely known that self-directed IRA’s can buy real estate. In fact, real estate is the most popular investment in self-directed IRA’s, and for good reason. Investment experts know that quality real estate:
- Offers focused capital backing & security, an important factor in any investment portfolio.
- Assets in your self-directed IRA grow tax free.
- The cash flow from an investment in real estate provide a steady income stream while the capital amount originally invested grows tax free, all while being secured and backed by real estate.
- Once a set of requirements are satisfied in a Roth IRA, the earnings are distributed tax free.
- Is a time tested hedge against inflation.
Profit from inflation
Inflation makes people poorer, and it is the primary reason why the gap between the rich and the poor in this country continues to widen. Educated investors thrive by carefully choosing investments that consistently perform at a rate that outpaces inflation. Smart investors use leverage and hedging, similar to the way banks make $$ through arbitrage. Savvy investors play the bank’s game and borrow $$ from a bank at a fixed rate to buy cash flowing assets.
This new asset covers the debt payment, and costs less as the dollar loses purchasing power due to the forces of inflation. This allows the investor to become their own bank and use less of their own $$, increasing the rate of return. Income from quality multi-family investments grows due to inflation, as rents generally rise 3-5% each year as the dollar loses purchasing power. This creates the hedge investors are looking for, as the bank is owed only the agreed upon payment. The rising costs for rent each year flow straight into the investor’s pocket.