Advantages of Real Estate Investment beyond Cash Flow

    Most new investors that come to me are completely unaware of all the additional benefits garnered through investing in income producing property.  They typically get hung up on the pro forma analysis of each deal, and pine over a quarter of a point in return using the same reserve factors no matter the condition of the investment property.  This is, of course, after they’ve restricted their search criteria heavily.  New investors want to be in the best markets and pay less than deals in less desirable neighborhoods.  Far too often, I’ve seen analysis paralysis that results in inactivity as prices soar in the market they were contemplating.  If I had a penny for every time I heard a client whimper, “I should have bought into this market last year,” I would have been retired a long time ago.  What get’s my blood pressure up the most is that these same “investors” have no idea of the additional advantages to investing in real estate!

    OK, so what are the advantages??

    When you work a regular W2, 9-5 job the tax max get’s his money through tax withholding, and the amount you pay scales based on your active earnings.  With real estate investment for a long hold period you can pay a lower passive tax rate and take advantage of a lot of tax write offs.  Even the small time land lord is able to start writing off some serious expenses.

    So, I’ve purchased my first rental property, now what can I deduct?

    Please start by contacting your local tax professional that has experience with rental property as regulations are always subject to change.  Your local professional can help you get the most relevant deductions while steering you away from making costly mistakes when filing your return.  Generally, capital improvements will get added to the basis of your investment and depreciated as per IRS code (27.5 years for residential rental property).   Repairs can be deducted in the year they were expensed, and items such as carpet can be deducted over 5 years.  This gives you the ability to increase the marketable value of your asset without paying any tax on the money you’re using to do it.  Your deductions will stack up if they total more than your cash flow, and as a rule of thumb you’ll want to have a profitable company within 5 years to keep the IRS off your back (they won’t let you use your rental property as a tax haven).  As inflation continues due to the fed’s never ending printing of currency the cost of materials will rise.  The improvements you make (if done wisely) will continue to appreciate with inflation!  Of course you will always lose some value to wear and tear or features that do not mimic the existing theme but when you buy right you’ve already budgeted a reserve to account for these items. (10% Capital, 5% Repair are our recommendations).  The interest on your loan is also tax deductible.  Now you’re leveraging other people’s money (OPM) and getting the deduction for the expense!!  What else can you deduct?  the IRS will let you take a home office deduction that is 10% of your household expense including mortgage, insurance, taxes, water, utilities, phone, internet, etc.  As you grow your rental portfolio these tax deductible items will grow with you to include things like computers, cameras, vehicles, technology services etc.

    But how do I start?

    You’ve come to the right place!  Send us a message today to make an appointment to speak with a specialist that will insure your success by optimizing your position within the current real estate market.  No matter what area you’re targeting, we’ll bring you up to speed quickly so you can understand the nuanced differences and compare apples to apples across investment areas you may be considering.

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    Mark Updegraff

    Mark is dedicated to building Monroe county's top real estate team from the ground up, Rochester Investment. He got started in real estate as a small landowner and quickly got acclimated with the ins and outs of residential rental properties. His passion to seize the moment after a massive correction in the housing market lead him to his broker's license in record pace. Over the years Mark has rehabilitated over 30 properties, bring much deferred housing stock back to life in areas that were in decline. This background gave him valuable insight into the nuts and bolts of the housing industry in a way that competitors don't understand and lead him to founding Updegraff Development, Management and Group. Mark actively leads the pursuit of developing the most tech-savvy real estate syndicate that will make your life easier for all things real estate!

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