Real estate investing is a great alternative to traditional investment vehicles especially, if you live in an area with a booming real estate market.
While real estate investing is not exactly widespread, most Americans think it’s a good investment.
Whether or not real estate investing is a smart idea totally depends on you, your financial situation, and your goals for the future. It’s not for everyone, but it can be a great wealth-building tool when it’s done the right way!
Popular Types of Real Estate Investing
- Appreciation – Simply buying a home as a primary residence is the most basic form of investing in real estate.
- Equity Build-Up– For one, if you live in an area where property values grow that means that your equity portion in the house grows too. Paying your mortgage builds up your equity as part of your mortgage payment is applied to paying off your principal, think of it as a savings plan.
- Tax Deductions – In addition, you can deduct up to $10,000 of your real estate taxes and, the portion of your mortgage payment that is applied to the interest of your loan. These two deductions can result in an increase in your net take-home pay.
If you have the money you can purchase a rental property and rent it out to tenants. Keep your expenses low so you can keep rent affordable to entice prospective tenants. Look for properties that need some investment and that will pay off in rental rates for the duration that you hold it
- Cash Flow – Make sure that your income covers your expenses. Rental properties can provide you additional cash-flow.
- Equity Build-Up – over the years someone else ie your tenants are paying your mortgage while you build up your equity.
House flipping is what most people have in mind when they talk about real estate investing. House flipping is appealing you buy a rundown house, put some money into it, and in just months, you could get the house back on the market and (hopefully) turn a nice profit. You then have to options:
- Take the money out and it becomes part of your income to be taxed as capital gains.
- Re-invest it by doing a 1031 exchange. The term 1031 Exchange is the IRS code defined. To put it simply, this strategy allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long another “like-kind property” is purchased with the profit gained by the sale of the first property. This is a strategy employed by sophisticated investors, deferring the payment of capital gains, in theory, until you stop this exchanges.
Remember that the key is to buy low, updates and renovations have the potential to cost more than you plan, and those costs could eat into your profits. It takes a lot of time and effort, so you need to think about whether or not you want to devote that kind of energy to such a project.
If you want to learn more about how to identify rental or other investment properties it is crucial that you work with a knowledgeable real estate agent or team that can guide you on the right strategy for you and the property you may be considering.
If you have any other real estate questions, feel free to reach out to us. We look forward to hearing from you at 201.341.4765