Investing In Commercial Real Estate to Build Wealth Part 1

There are 2 common ways to make money in real estate: appreciation and rental income. This applies to residential investment properties and commercial properties. When a proper strategy is implemented correctly, the investor can pay little or no taxes until the property is sold.

Assume a dentist purchases a small strip center for $1,000,000 to open his dental practice. He then also leases out the extra spaces in the building to other medical businesses for a total of $10,000 a month in rental income or $120,000 per year. This would include the mortgage payment, repairs and maintenance, management fees, etc.

This rental income would presumably generate a nice positive cash flow, yet it could still result in a tax loss. The dentist will have to file the rental income for the building on his annual tax return. Scheduled depreciation write offs will allow the dentist to recoup the purchase price of his investment over time thru annual tax deductions on the building and its components.

Depreciation is considered a "non cash expense".  Depreciation combined with other property ownership expenses, could make the total expenses exceed the amount of income received on the property. In some situations this tax loss can offset other W-2 income.