How to invest money? As entrepreneurs find success with their primary business ventures, many search for the proper investments for their profits.
Of course, we can and should all start traditional tax preferred vehicles like an IRA and 401k when deciding how to invest in real estate. These are the bedrock of good 'benefit' planning for executives and employees. More entrepreneurs should consider rental real estate as an important part of their portfolio.
Many business owners shrug off this concept of how to invest money after the recent downturn in real estate values, but for those asking “how to invest money and where to place my investments”, real estate can be the perfect asset allocation. Here are a few ways that real estate investing will work in your favor:
- Gain more leverage. Real estate is one of the few investment vehicles where using the bank's money couldn't be easier when decinding how to invest money. The ability to make a down payment, leverage your capital, and thus increase your overall return on investment is incredible.
- Grow, tax-free. Buying rental property based on speculation of its 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 installment sale to lesson your tax liability further.
- Tax free cash flow. It's no secret that because of depreciation and mortgage interest deductions (if you leverage your capital), your cash flow should be tax-free. That's right! 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. With that said, this is something you want to discuss with your tax professional before investing so your expectations are realistic.
- Increased tax deduction strategies. Rental property affords investors with another incredible opportunity to convert personal expenses to potentially valid business deductions. Don't forget that rental real estate is a business. This means that travel expenses to check on your properties and payments to family members who manage your properties (such as students away at college) 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. Americans are terrible savers. We lack the self-discipline to put a monthly deposit into our IRA, SEP or 401k as small-business owners. However, buying a rental investment property is a significant commitment that you are required to commit to and maintain. You will always be grateful in the long-run when you don't give up on it and build future cash flow and wealth.
The far majority of real estate investors will never get rich overnight. It takes long-term investing and a diverse portfolio and the help of a good investment advisor to build true wealth. Don't forget real estate as an important part of the equation.
Entrepreneurs that are asking “how to invest money” can give Asset Quest a call at (239) 541-8448 to learn more about how real estate can help grow your investment portfolio.