With entrepreneurs finding success with their primary business ventures, many further their search for proper investments for their profits, and a property investment company is the destination of many.
Of course, we can and should all start traditional tax preferred vehicles like an IRA and 401k as these are the basis of beneficial planning. But entrepreneurs should consider rental real estate as an important part of their portfolio.
Many business owners shrug off this concept because of the recent downturn in real estate values, but there are a few reasons to still do so:
- Have more leverage. Real estate is one of the easiest ways to use bank’s money for investment. The ability to make a down payment, leverage your capital, and thus increase your overall return on investment is incredible.
- Tax-free growth. Buying rental property on speculated 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 instalment sale to further reduce your tax liability.
- It is no secret that because of depreciation and mortgage interest deductions (if you leverage your capital), your cash flow should be tax-free. 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. You can discuss this with your tax professional before investing so your expectations are realistic.
- Increased tax deduction strategies. Rental property give investors an incredible opportunity to convert personal expenses to potentially valid business deductions because rental real estate is a business which means that travel expenses to check on your properties and payments to family members who manage your properties 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. 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.