Why Real Estate Works
October 13th, 2007 Categories: Investing
Here is a part of a Robert Kiyosaki newsletter someone had emailed me about 6–7 years ago, hard to remember now. I had retyped it and have it saved in a small book with other prices I will share. Obviously the principles of investing haven’t changed.
Why Real Estate Works
“Real estate is the simplest, most reliable, and most consistent vehicle to convert even a little financial intelligence into cold cash,” says Rich Dad advisor and author Dolf de Roos Ph.D. in Real Estate Riches. Real estate is an asset that keeps pace with inflation, generates wealth, and shelters it from taxes. The majority of the wealthiest people in the world own real estate. What do the rich know about real estate that you don’t? Their secrets are:
• Cash flow
• Leverage
• Tax Benefits
Cash Flow
“The beauty of real estate investments is when you open your mailbox and your rent checks are there,” says Dolf de Roos. If you have invested wisely and your property is truly an “asset,” it should be generating a positive cash flow. The cash flow is passive income, so it’s taxed at a lower rate than earned income. So how many rental properties can you afford if you have a positive cash flow coming in on a monthly basis from these investments? As many as you can get your hands on!
Leverage
The easiest way to understand the lesson of leverage is to consider a situation where you have $10,000 to invest. You want to compare the return on a paper asset purchase (stocks) with the possible return on a $100,000 piece of property. You could purchase the stock for $10,000 cash, or, you could put a down payment on the property. Your choice is to create an asset worth $10,000, or one worth $100,000. The benefit of leverage is using other people’s money, in this case $90,000 of the bank’s money, to accelerate the growth of your net worth. How is this possible? Say both the stock and properties go up by 10 percent. Your stocks would worth $11,000 a profit of $1,000. However, your property would have appreciated to $110,000, a profit of $10,000. In this case, leverage is the difference in profit of $1,000 and $10,000.
Tax Benefits
Current tax law allows many benefits for the real estate investor such as:
1. Sell a house and $250,000 (single) or $500,000 (married) of your gain from the sale tax free. The only requirement is you must have lived in the house for two of the past five years.
2. For those with a flair for decorating or skill in home improvements, consider buying a home that you can fix up. Let’s say that after fixing up the house and occupying it for two years, you sell it for a profit of $30,000. If you normally pay, 31% federal and state taxes on your income, you would have to make an additional $43,480 in earned income to equal $30,000 after tax.
3. Defer tax gain from a property sale by exchanging it for another of like-kind.
4. Offset investment real estate income with depreciation to reduce your tax on income from the property. While you receive cash flow from the property, you may pay little or no tax on the cash you receive depending on the amount of depreciation.
5. Refinance the property for tax free cash after your property has appreciated.
Rich Dad advised,”… invest your excess cash and hold your wealth in real estate. It may not be the most exciting investment, but if you invest wisely, it will keep you the most happy and secure.” By purchasing rental property, you will gain a source of ongoing passive income as well as hedge against inflation, since rents can be raised. So regardless of what the stock market does, you can receive steady income from your rental properties each month. Fortune, as they say, favors the prepared mind. So, do your research, and then step ahead.
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