So, you have an interest in real estate and want to understand exactly how owning investment real estate can benefit your bottom line. Congratulations on taking the first steps.
Before I start, keep in mind that I am not a CPA. The numbers/assumptions below have been simplified to make the ideas easier to understand, so you are advised to run any questions by your trusted tax professional or CPA prior to any property purchase. Tax law changes often, and there are many criteria that investors have to meet to benefit from the many tax benefits of investment property ownership. I am using the following example for illustrative purposes only.
Assumptions (for simplicity):
Your annual gross income is $50,000 Your federal income tax is a flat 25% and your state income tax is a flat 10% You purchase a modest $100,000 single-family home for rental purposes of which $10,000 is the value of the land. Your monthly principal and interest mortgage payment on the rental home is $550, of which $450 is mortgage interest Your property taxes are $600 per year (i.e. $50 per month) Your insurance is $300 per year (i.e. $25 per month) You rent the home for $950 per month You pay a property manager $75 per month to manage the property for you and handle all tenant issues so that you don’t have to spend time on these. You hold the property for 5 years Appreciation in your area averages 3% per year
Your financial benefits of investment property ownership are many and can include cashflow, interest and depreciation deductions, principal payoff and appreciation. We’ll walk through each of these benefits below.
Cashflow
Cashflow is the difference between the rents you receive on a property minus the mortgage and other expenses you pay out. On this property you will receive cashflow in the amount of $950 -($550+$50+$35+75) = $240 each month. This passive income is real money in your pocket. So, to start you just gave yourself a $2880 annual raise just by purchasing this investment property. (It’s nice not having to ask your boss for a raise, isn’t it?)
Interest and Depreciation Deductions
Rental property owners can write off the amount of interest they pay on loans used to acquire or improve rental property. The IRS also requires real estate investors to depreciate their investment property. Depreciation is a “paper loss” that is required to account for estimated wear, tear and obsolescence. The value of the land that your rental home sits on, however, is not depreciable (as land rarely loses its value). In our example, residential investment property is depreciated over 27.5 years on a straight-line basis (your CPA can advise you on other methods of depreciation).
The value that you can depreciate is $100,000-$10,000 = $90,000
Therefore the annual depreciation deduction that you can take is $90,000/27.5=$3272.73
and the annual interest deduction you can take is (450*12)= $5400
So, without the rental property, you would have paid $50,000*(10%+25%) = $17,500 in taxes.
And with the rental property, you will only pay ($50,000-$3272.72-$5400)*(10%+25%) = $14,464.55 in taxes.
So, the rental property saved you an additional $3,035.45 in income taxes! (And this doesn’t take into account additional tax deductions for insurance, property management fees paid, property taxes and any allowable improvements/repairs made to the property). Imagine that; Uncle Sam requires you to pay less in income taxes as a rental property owner!
Principal Payoff
Over the 5 years that you own this property, your tenant’s monthly rent payments are paying off the mortgage for you. At the end of year 5, you should owe approximately $92,300 on your mortgage; down from your $100,000 purchase price. This is an additional $7,700 in value for you! How does it feel to make money while you sleep?
Appreciation
History has shown that over time, real estate appreciates. Appreciation rates vary by location so check with your local real estate expert (me!) for historic rates in your area. Don’t bother asking about future rates as no one has a crystal ball. (And if they give you an answer run the other way…FAST!) Just know that the historic trend over time from the early 20th century forward has been favorable. For this example, our conservative assumption of a 3% annual appreciation rate, when compounded over 5 years, gives your property a value of $115,927.40 at the end of year 5. This is an additional $15,927 in value that you didn’t have to lift a finger to earn!
Overall, your financial benefits after 5 years of ownership total:
drumroll please…
($2880 *5)+($3035*5)+($7,700 )+($15,927 )= $53,202!!! And this is from only one property. Imagine the power of these benefits with a small portfolio of properties. This is how real estate can propel you to early retirement. It doesn’t take outrageous amounts of money or huge investments. Just a slow and steady real estate investment plan that you consistently act on over time. If you’re not sure where to start, feel free to contact our office and we can work with you to create an investment plan that will work for you.
How NOT to waste $30 per day for the rest of your life
The numbers above are the very reason why many investors hold investment property in their portfolios. The $53,202 above equates to just under $30 per day for just one small property owned. ($29.15 to be exact). So, if you’re on the fence about investing in real estate and need a bit more time to mull it over, be sure to add up the 30 bucks you’re missing out on each night that you go to sleep without action! On the other hand, if you’re an action-taker and want to start earning your $30 “sleeping money” every night, get the ball rolling today, and buy rental property!
Financial Benefits of Owning Investment Real Estate – Earn Money While You Sleep
Best Mutual Funds & Best Investment Strategy For 2010 & Beyond
The best mutual funds for 2010 and the best investment strategy for 2010 and beyond may not be the same mutual funds or investment strategy that worked in 2009. Here are some adjustments to consider in mutual funds and investment strategy going forward.
In considering in the best mutual funds to invest in and the best investment strategy for 2010 and beyond remember this: what shook the nation and the investment world in 2008 was not just another recession. It was a financial crisis. The economy improved and stock prices went up in 2009 through early 2010, but are our troubles behind us?
BEST MUTUAL FUNDS, STOCK CATEGORY… Be less concerned with the best mutual funds here and more concerned with how much money you have allocated to stocks in general. Your best investment strategy for 2010 and going forward: lighten up; don’t load up on stock funds. Don’t chase a market that has gone up 70% in little over a year. The large institutional investors have bid prices up, for at least two basic reasons. First, stock prices had fallen almost 60% by early March of 2009 and were over-sold (cheap). Second, big money managers had few other attractive alternatives with low interest rates making both bonds and money market securities less than attractive. Hence, the best investment strategy they could come up with for most of their money was to wade into the stock market.
Stay away from the more volatile and riskier stock funds that invest either domestically or abroad. Debt problems are in the spotlight in several areas of Europe, and there is fear that this contagion could spread. Emphasize high-quality stock funds of the large-cap equity-income variety that pay a respectable dividend in your portfolio. In the international stock fund area, go with high quality as well. One exception to avoiding volatility is that you may want to include some specialty stock funds, or those that invest contrary to the norm in your portfolio: like gold, real estate, natural resources funds or funds with a “contra” approach to investing. This will give you added diversification.
BEST MUTUAL FUNDS, BOND CATEGORY… The average investor in recent times has bought into bond funds in search of higher income and more safety than stock funds offer. Few seem to realize that this can be a risky proposition in today’s economy and interest rate environment. The best investment strategy for 2010 and into the future: avoid long term bonds and bond funds with average maturities of 10 years or more (that invest in longer term bonds). Interest rate risk is high, which simply means that when interest rates go up these bonds and funds will fall significantly in price (value). Bond funds with average maturities closer to 5 years will pay a reasonably attractive income with a whole lot less interest rate risk.
BEST MUTUAL FUNDS, MONEY MARKET CATEGORY… Money markets and the funds that invest there are paying next to nothing, but at least these are among the safest investments in the world. The best investment strategy for 2010 is NOT TO AVOID these funds. This interest rate situation is highly unusual and can not continue indefinitely. Our government has purposely moved to keep money market (short-term) rates low to stimulate growth in the economy. The problem is that with these rates near zero, what do they do to stimulate the economy the next time we see recession or worse? What happens when the rest of the world is no longer eager to buy our Treasury securities at historically low interest yields to finance our debt? Interest rates will go up, and so will money market fund yields.
The best mutual funds for 2010 in the money market category could be the tax-free versions, especially for those in higher tax brackets. Some of them are actually paying more than their taxable counterparts. Money market funds pay interest in the form of dividends, do not fluctuate in value, and are by far the safest of all fund categories. These funds do not have sales charges, but investors do pay for yearly expenses. Check and compare the expense ratios and yields before deciding on a money market fund.
BEST MUTUAL FUNDS, STOCK and BOND CATEGORIES… There is one best investment strategy for 2010 and beyond that can only work for you as an investor, and never fails to increase your profits and returns in mutual fund investing. The best mutual funds keep the cost of investing low. No-load funds have no sales charges and some of them have lower than average yearly expenses. Sales charges, expenses and fees come out of your pocket and only work against you. The very lowest cost of investing can be found in no-load index funds of both the stock and bond variety. Lower your cost of investing as part of your overall investment strategy.
3 Best Return On Investment Ideas
Return on investment can be controlled to a certain extent with 3 things. The SOR or speed of return, Leverage and Personal Cash control.
Speed of Return
One of the biggest ways a yearly compounding rate can be increased is to invest for faster turn around cycles. If you can find investments that actually have a one or two week cycle, that is much stronger than a yearly cycle.
Leverage
Available capital can be magnified using leverage. A $100 dollar account can be turned into a $1000 using borrowed money. If the yield is 10% then on $100 you would have made $10 but if you made a bigger purchase with borrowed money, the same yield is 10% of $1000 which equals $100 so in real terms you have made a 100% return.
Personal Cash Control
Having ready access to your cash puts you in a position to swoop on good opportunities when they present themselves. There is a plethora of opportunities that can be had, for people with the available funds. Anything from a small business in trouble whose assets are worth more than the asking price (which you can sell off for a profit) to under valued consumer goods which can be resold for a profit, or even dabbling in importing from China.
The best ways to increase your speed of return can have a dramatic impact on your annual compounding goals and with a little smart planning anybody can achieve compounding rates of 100% or even more each year. This is not difficult using the above three strategies.