How to Make Money in Real Estate Investing

Lower your taxes.  Tax incentives for real estate investors can make the difference in your tax rates. Deductions for rental property can often be used to offset wage income, and tax breaks may enable investors to turn a loss into a profit.

For which items can Investors get tax breaks?  Deductions could be claimed for actual costs incurred for financing, managing and operating rental property. This includes mortgage interest payments, real estate taxes, insurance, maintenance, repairs, property management fees, travel, advertising, and utilities (assuming the tenant doesn’t pay them). These expenses can be subtracted from adjusted gross income when determining personal income taxes. Of course, these deductions cannot exceed the amount of real estate income received. In addition to deductions for operating costs, there are also breaks for depreciation. Buildings naturally deteriorate over time, and these “losses” can be deducted regardless of the actual market value of the property. Because depreciation is a non-cash expense – the investor is not actually spending any money – the tax code can get a bit tricky. For more information about depreciation and various alternatives, ask your tax advisor about Section 1031 of the U.S. Tax Code.

Have a positive cash flow.  There are two kinds of positive cash flows: pre-tax and after-tax. A pre-tax positive cash flow occurs when income received is greater than expenses incurred. This sort of situation is difficult to find, but it is usually a strong and safe investment. An after-tax positive cash flow may have expenses that outweigh collected income, but various tax breaks allow for a positive cash flow. This is more common, but it is generally not as strong or safe as a pre-tax positive cash flow.

A positive cash flow – whether pre-tax or after-tax – requires rental income and timely collection from high-quality tenants.  Do a thorough credit and employment check.

Use leverage.  One of the most important factors in determining a solid investment is the amount of equity being purchased. Equity is the difference between the actual worth of the property and the balance owed on the mortgage.

Benefit from growing equity.  While investing in real estate is relatively complex, it can be worth the extra work.  When compared to other financial investments, like bonds or CD’s, the return on investment for real estate can be greater.  The key to real estate investing is equity.  When the equity goal is achieved, it’s time to sell or refinance. Determining the proper amount of equity may require the assistance of a real estate professional.