LOWER YOUR TAXESTax incentives for real estate investors can often make
the difference in your tax rates. Deductions for rental
property can often be used to offset wage income. Tax breaks
can often enable investors to turn a loss into a profit.
For which items can investors get tax breaks? You could
claim deductions for actual costs you incur for financing,
managing and operating the 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 your adjusted
gross income when determining your personal income taxes. Of
course, these deductions cannot exceed the amount of real
estate income you receive. In addition to deductions for
operating costs, you can also receive 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 -- you are not actually spending any money
-- the tax code can get a bit tricky. For more information
about depreciation and various tax 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 they are 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.
USE LEVERAGE
One of the most important factors in determining a solid
investment is the amount of equity you are purchasing.
Equity is the difference between the actual worth of the
property and the balanced owed on the mortgage. In order to
increase equity, investors often choose to borrow money.
Borrowing money allows you to magnify the return on your
investment. Borrowing money to increase equity is known as
leverage. Leverage can make the money you invest out of your
pocket go a long way.
In order to illustrate the value of leverage, let's take
a fictional example: assume you bought a $200,000 rental
property with a 30% down payment; the remaining 70% of the
purchasing price is paid for with borrowed money, Let's
further assume that after several years the home is worth
$270,000. The $70,000 return on your $60,000 investment --
the amount that you paid directly -- is more than 100%.
(There is more to calculating the return on investing, but
this will keep it simple.) If you bought that same $200,000
property without borrowing, the return on your investment
would be 35%. Leverage puts borrowed money to work for you.
BENEFIT FROM GROWING EQUITY
The key to real estate investing is equity. Determine an
amount of equity that you want to achieve. When you reach
your goal, it's time to sell or refinance. Determining the
proper amount of equity may require the assistance of a real
estate professional.
Remember as a real estate investor in the Morris County
and New Jersey
area, you can manage more investment properties and increase
your profits by teaming up with professionals such as
our
team. We are already geared up to handle various aspects of the
transaction. Our team-based approach not only reduces the
risk for novice investors, but also maximizes your profit
potential. Contact Us for more details.
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