Strength In Return: How Real Estate Provides ROI
By: Catherine West
Real estate provides four points of return: cash flow; principal reduction; appreciation; and tax benefits.
When you invest in real estate that produces income, tenants help to pay the mortgage by paying their rent. Investors who buy at the right price in
the right place at the right time gain equity through the improvements they make as well as market appreciation.
As it grows, equity becomes an important tool. An investor can do a cash-out refinance and pull out the equity. This money is not considered
income and is tax-free. Investors can increase their holdings, using this money for a down payment on the next investment property.
Another important tool is the ability to place debt on the asset. This allows the investor to buy more assets with less money, significantly multiplying
asset value and increasing equity as the mortgage is paid down.
Positive leverage occurs when an asset produces more income than the cost of money borrowed to purchase the asset. That allows investors to
increase cash flow by borrowing money at a lower cost that the property pays out. For example, if real estate that generates a 6 percent
cash-on-cash return were to have debt placed on it at 4 percent, the investors would be paid 6 percent on the equity portion and approximately 2
percent on the money borrowed, thereby leveraging debt.
There are significant tax benefits, too. The U.S. Tax Code currently allows depreciation accelerations and mortgage interest deductions. This can
protect part of the positive cash paid out to investors. If the investor sells the property, the IRS allows investors a 1031 provision, allowing investors
to exchange into a like-kind instrument and defer all taxable gains into the future.
Real estate provides four points of return: cash flow; principal reduction; appreciation; and tax benefits.
When you invest in real estate that produces income, tenants help to pay the mortgage by paying their rent. Investors who buy at the right price in
the right place at the right time gain equity through the improvements they make as well as market appreciation.
As it grows, equity becomes an important tool. An investor can do a cash-out refinance and pull out the equity. This money is not considered
income and is tax-free. Investors can increase their holdings, using this money for a down payment on the next investment property.
Another important tool is the ability to place debt on the asset. This allows the investor to buy more assets with less money, significantly multiplying
asset value and increasing equity as the mortgage is paid down.
Positive leverage occurs when an asset produces more income than the cost of money borrowed to purchase the asset. That allows investors to
increase cash flow by borrowing money at a lower cost that the property pays out. For example, if real estate that generates a 6 percent
cash-on-cash return were to have debt placed on it at 4 percent, the investors would be paid 6 percent on the equity portion and approximately 2
percent on the money borrowed, thereby leveraging debt.
There are significant tax benefits, too. The U.S. Tax Code currently allows depreciation accelerations and mortgage interest deductions. This can
protect part of the positive cash paid out to investors. If the investor sells the property, the IRS allows investors a 1031 provision, allowing investors
to exchange into a like-kind instrument and defer all taxable gains into the future.