When you pass on an inheritance to a loved one, it leaves them with a sum of money they can carry through their lifetime and perhaps even give to the next. In many cases, though, cash funnels into the following generation before it runs out.
Therefore, you may search for ways to ensure you pass on wealth not only to your children, but also to their grandchildren and generations after them. A real estate investment can make that dream a reality.
1. Real Estate = Cash Flow
Inheriting real estate will mean the new owner has to pay some expenses. For instance, some face a mortgage transfer, wherein they have to cover the remainder of the deceased's loan. They might have to sign up for a new insurance policy, since the previous owner's agreement becomes null and void when they pass away.
However, a real estate inheritance can also provide cash flow to its new owner. You can calculate this by subtracting the cost of the mortgage, taxes, property fees and more from the amount of money coming in from rent each month.
Passing on a property can give someone a source of income each month and, depending on how many have been left behind, that amount of cash can be substantial.
2. Appreciation in Value
Another way real estate garners wealth over generations is in its appreciating value. Home prices always fluctuate but, in the long run, they've consistently increased. Your children and grandchildren can hold onto such properties and continue to cash in, whether or not they sell.
It's important to remember that a return on investment doesn't just include the initial home's sale price and the amount it gets down the line. Imagine, for example, buying a home for $300,000 and later selling it for $330,000. It appears to be a $30,000 appreciation in value, or a 10 percent return on investment. However, imagine the down payment equaled $30,000 as well. In earning $30,000 on the home, you've made a 100 percent ROI.
3. Tax Benefits
Investing and passing on real estate will likely require hiring help. For one thing, lawyers can help suss out the details of a will or trust, which will delineate how each piece of property will be given to the next generation. An accountant will ensure everything is done properly in terms of taxes, which will require some fine-tuning with the addition of an investment property.
The next generation, too, will have to get some help from financial experts to determine how much they owe on their inherited properties. However, real estate owners get a slew of tax breaks that make it an even more lucrative investment. For instance, rental income doesn't count as self-employment, meaning it doesn't incur the same amount of taxes such money would otherwise. Owners can also get tax breaks on property taxes, insurance, maintenance fees and even property depreciation.
Plus, if someone holds onto their investment in the long term, they get lower tax rates. In other words, arming a loved one with a rental or investment property won't hurt them tax-wise — it'll only help.
4. Leverage for Future Purchases
Getting a foot in the door in real-estate investment can seem daunting, but there are many ways to dive in. For instance, you could outsource your investments in commercial properties, or you could use online real estate websites to find suitable homes for sale in the right price range.
Once the first property joins the portfolio, it's relatively easy for real estate investors to continue to grow and add to that initial investment. That's because a rental property brings in income that not only pays for the mortgage, but also supersedes it. As such, a real estate investor has someone else pay for the house while they rake in an income that can help them put a down payment on another property and do the same again. The cycle can continue until you have a varied and lucrative portfolio.
Not only does investing in real estate provide this generation with wealth and cash now, but it can also do the same for generations to come. They, too, can leverage their inherited portfolio to purchase even more property in the family name. Thus, one investment and one inheritance can set in motion a family legacy of investments and income far into the future.
Invest Wisely, Reap the Benefits
Owning a property, renting it out and reinvesting the cash is a smart financial decision for just about anyone in the U.S. Based on past investments and changes in the real estate market, it's always a safe bet to put money into property ownership.
This is a gift you can pass onto your children and generations to come after that. These are just four of the many ways that investing in real estate could help you achieve the goal of leaving a legacy behind.
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