Investing in real estate income property has been one way people have accumulated wealth over the decades. You can make money in several ways if the winds of fortune blow your way. There are a number of ways to postpone paying income tax on a portion of rental income, which means that there will be more to spend now and pay later. Yes, you can use a strategy to possibly avoid paying some tax altogether, but it involves dying which to my mind is a rather unpleasant way to save money.
Along with possible tax avoidance, there are benefits associated largely with borrowing money and leveraging it to create wealth. When you borrow to pay for any investment, you hope to offset the interest charged with the money earned on that investment. Some of the income from rental property will pay down the amount owed, and some will be used to pay interest on the debt. Some of your taxes will be postponed through depreciation deduction, but you'll eventually have to pay recovery tax when you liquidate your investment. Nonetheless, there will be some temporary tax advantage.
Growth in the value of an investment property was once a common assumption. Today, it's hard to feel confident in any growth beyond the inflation rate. Some would argue that even inflation rate growth is overly optimistic.
When you borrow money to invest, the amount of risk increases with the amount of investment being financed. Borrow 100% of the cost of the investment and the risk or reward is higher than if you borrow less, say 50%. There are almost countless variables that come to play with a leveraged investment.
One way any investment should be evaluated is whether it stands on its own, whether it has a reasonable likelihood of profit if you were to open your wallet and pay 100% cash for the investment. Herein lies the question. What is a reasonable expectation of return on investment if you don't finance it? I come up with a number of between 6-7% when running numbers in today's market. Does this sound about right?
Now the next question, how does real estate investing compare to other more passive investments like mortgage REIT's which return 12-15% in annual yield to investors? Any thoughts you would like to share on this?
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