Compare Earnings: Joe the Plumber versus Jim the Investor - Who Wins?

For those new to short sale investing one thing often comes as a total surprise; earned income is the worst type of income to have. Not only do you exchange your hard labor, blood, sweat and tears for an hourly wage or salary...but it is heavily taxed. In fact, the harder your work, the higher it is taxed. You literally work more to bring home less and less. On the other hand, instead of trying to get a second (or third) job only to watch the government take more and more of your hard earned income, purchasing short sale real estate in the properly held method allows you to generate significant cash flow, future appreciation and keep more of the earnings!

Let's present two situations and see how the scenario plays out. Joe and Jim both need some additional money in the bank to save for retirement, put the kids through college and splurge on some fun for the family now and then.

Joe is an average working class guy....let's just say he's a plumber since that seems to be a popular name for plumbers. He makes $65,000 annually which puts him into the 25 percent tax bracket plus he pays an additional 15 percent for FICA/Self employment taxes. Joe decides to work nights and weekends to generate more income and manages to bring in an additional $15,000 per year. 

Unfortunately, that now puts him into a 28 percent tax bracket for earnings plus the 15% self employment portion so he only brings home $8,550 of the $15,000 he earned. It's not a lot but hey, it helps and times are tough. Since the current rate of inflation is approaching 6 percent, by the end of the year Joe's actual purchasing power is down another $500. He's worked a lot of extra time for an extra $8,000.

Jim decides to invest in short sales instead. He also earns $65,000 a year at his regular job and pays the same in self employment/FICA taxes. Jim finds solid short sales investment and takes the plunge to purchase a home that he rents for a year and day then sells for a profit of $15,000 after expenses. Let's see how Jim makes out assuming all the rest of the numbers remain exactly the same. During the one year of rental, Jim actually gets to depreciate the home and write off many of his expenses against his regular earned income. To keep things simple, we will assume he does NOT make any profit from the rent each month (although in reality he easily could do so) and simply breaks even for an apples to apples comparison to Joe's situation.

He still gets to depreciate the cost of the home and write off many expenses against his regular earnings. After a year is up, Jim sells the property and out of his $15,000 he is taxed at a Capital gains rate o 15 percent. He gets to keep $12,750 versus only $8,000 that Joe got to keep after taxes. After adjusting for inflation he still has over $11,000. Now ask yourself, since Jim doesn't have to spend every spare hour working, how many of these homes could he afford to buy?

If he purchased 10 of them and did the same thing, each one would still only be taxed at the same capital gains rate. Notice, this is an extremely conservative and simplistic example. In reality, Jim would likely make a profit from the rent, benefit from numerous tax benefits from holding real estate and the home would likely appreciate in value over time.

The bottom line: Earned income is the most expensive way to generate additional cash flow. Not only does it take all of your additional time and leave little energy for living but the harder you work - the more is taken. Short sale investing benefits from tax advantages and the potential for capital gains rates.

See you on the other side-2009 is mine!!

Charles Gardner

Short Sale Investor

http://humblehomz-re-solutions.com/shortsaleriches.aspx