This Memo has important information for everyone. Please share this with your networks and contacts.
As entrepreneurs find success with their primary business ventures, and employees salaries increase, many search for the proper investments for their profits and increased earnings.
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 many more people should consider rental real estate as an important part of their portfolio.
I realize many people shrug off this concept, especially after downturns in real estate values, but let me list a few reasons that may change your mind. Remember, rental real estate as an investment has been demonized by the financial services industry for decades. Why? They don’t make any money from it! Rental Real Estate is an excellent long term investment for many reasons.
Rental Properties do NOT become trashed college frat houses. If you follow my advice, which clients have done for decades, real estate will be a valued and most-stable part of your investment and retirement planning life.
- Real Estate Investments are real assets that can be insured against loss. Stocks cannot be insured. These simple facts should make you much more comfortable to invest in real estate instead of the stock market.
- 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.
- 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.
- 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.
- 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.
- 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.
- Rental real estate is a forced retirement plan. Did you know that you can set up a Self-Directed IRA and buy real estate within it? Yes, you can buy rental real estate as a retirement asset and take tax deductions against current income. 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.
- Real Estate Is REAL! Real Estate is a physical and tangible asset with true fair market value, unlike stocks, the valuations for which are never based in any reality of current tangible value.
- Real Estate Has Stable Values. The stock market is extremely volatile, with wide swings of gain or loss. This never happens with real estate. The real estate market valuations are based in the reality of the market. The stock market is akin to gambling. There is no true metric that is used to derive the value of stocks.
- You Can Impact The Value of Real Estate. Unlike stocks, where all value is out of your hands, real estate allows you to make improvements to increase values and your competitive edge if renting.
I meet with a lot of successful entrepreneurs, and almost every one of them has taken profits from their businesses over the years to invest in rental property. Based on this fact and the list above, I have consistently urged my clients to buy one rental property a year and already have clients with rental properties earning them money they never imagined they’d have.
The far 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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Chris Whalen, CPA
(732) 673-0510
81 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com
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