Lesson 1 - Why Invest In Real Estate?
Historically, real estate has been
sold as an investment for income and long-term gain, as well as a hedge against
inflation. The fact that real estate can be financed provides leverage
that multiplies the effects of value increases.
Before trying to select a property, you need
to define your goal or goals. That is, what do you want to
accomplish and over what period of time.
The same
criteria that is used in any sound investment strategy or financial plan
should be used in the rental property business. The basic goals
or reasons for investing are usually among the following:
Monthly cash flow
Maximum cash flow is realized from minimum leverage.
Long term appreciation
Maximum return from appreciation comes from maximum leverage.
Tax shelter
Maximum tax shelter is also realized from maximum leverage.
Resale for quick profit
Unless a Section 1031 tax deferred exchange is utilized, short holding periods result in
taxation at ordinary income rates rather than at the lower long-term capital
gain rate.
You Inherited Some
You may not have been looking for investment real
estate, but it fell into your lap.
Summary
Obviously,
you can have more than one goal at a time so long as they aren't mutually
exclusive. You can have monthly cash flow and long-term appreciation
and tax shelter. You cannot have long-term appreciation if resale
for quick profit is your goal, but it is possible to have cash flow and/or tax
shelter from property that is purchased for resale for a quick profit.
No matter why you own income property, it is very important to understand that
owning and operating rental property is not just an investment, it is a
business. Failure to understand the business can be extremely costly.
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