|
Many people consider an investment in a home for a rental property an IDEAL
investment:
Income, Depreciation, Equity, Appreciation & Leverage
Income: Regular cash flow from rents.
Depreciation: This paper expense can "shelter" or protect other income from taxes and reduce your tax bill.
Equity: If you borrow money to buy a rental property, your tenant essentially pays off the property for you.
Appreciation: Over the long-run real estate has gone up in value about 4%. Also you can force the value higher over a shorter period of time, with a house remodel.
Leverage: Using other people's money is a wonderful thing.
Many investors use debt leverage to buy real estate. This means, for example, $400,000 can buy four properties at $100,000 down instead of just one property for $400,000. Leverage magnifies the profits. Plus, interest on debt is deductible as a business expense.
Gold and savings accounts must be funded with cash. The maximum borrowed funds allowed for stocks is 50% and generally, at a rate higher than typical mortgage rates.
A 3% increase on a property where you put 20% down is a 15% cash-on-cash return. In five years you will have more than doubled your equity at this rate. Stocks, on the other hand, generate roughly 7% - 9% a year including dividends.
Owner occupied homes are a particularly attractive investment because you can enjoy them personally by living in them. The interest and property taxes are deductible and gains on the profit are excluded up $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly.
|
