Property purchased as a personal dwelling is the archetypal way many care for the requirements of their family; but other than a nominal tax write off for interest expense, and perhaps some amassing of wealth through appreciation, the reimbursement of home ownership are not measured in the same monetary terms as properties acquired through real estate investing.
Home buyers are looking for good school districts, safe tree-lined neighborhoods, an ample amount of bathrooms and bedrooms, and beautiful open floor plans.
According to Larry Polhill, real estate investors never purchase investment property based upon these things other than how they might influence occupancy and rents.
The advantage of real estate investing boils down to four ways investors plan for to make capital on investment property.
- Cash flow
The prime purpose of most property investors, certainly, is rent out space in their asset with the intent to collect rental income.
Cash flow is engendered after the property’s operating debt and expenses service (that is, mortgage payment) are deducted from this rental income. When more currency comes in than goes out the consequence is a “positive cash flow” that becomes episodically obtainable to the investor on a customary basis.
- Tax Shelter
Real estate investment also offers investors the advantage of being able to officially lessen his or her ultimate or annual Federal income taxes usually by permitting the owner to take deductions for the following:
- Property expenses – All expenses acquired in the operation of the property are deductible.
- Acquisition costs – Most costs incurred at the time of purchase are deductible in the year of purchase.
- Mortgage interest – The interest paid on the mortgage is deductible.
- Depreciation – The IRS also presumes that your buildings are eroding and becoming less expensive over time and therefore permits you take a deduction for that supposed decline in what the tax code calls cost recovery (that is, depreciation).
Of course there are exceptions and nuances in all tax matters that every investor should always talk about with a tax professional. But you get the notion.
- Loan Amortization
Loan amortization is a sporadic reduction of the loan over time. In other words, with a fully-amortized loan (i.e., not interest-only) each recompense made trims down some amount of principal. The profit surrounding real estate investing is that each time occupiers pay the rent they are virtually paying down the debt and consequently helping the investor to acquire the property.
Appreciation is definitely not limited to rental income property. For any property sold for more than its original acquisition price would benefit from appreciation whether it be an office complex or personal residence.
Real estate investing has established to make capital for investors like Larry Polhill. But it is not dictated by the same arousing feelings that may lead you to acquire a home for your family. It is all business. So approach it rationally and always run all the numbers cautiously before making any real estate investment judgment.