Four Reasons to Leverage your money with Real Estate

(Last Updated On: July 21, 2017)

Leveraging your money with real estateAn interesting article appeared recently in some financial planning Journals.  We found three points to be very interesting.

 

  1. Tax benefits of selling a primary home – in many cases, homeowners can walk away with a tax-free capital gain of $250,000 (single) or $500,000 (married) if they sell their primary residence after having lived there for two years.
  2. Tax benefits of selling an investment property – in many cases, investors can walk away with a tax-free capital gain if they roll over all the sales proceeds from their investment property into another investment property within certain timelines.  This is called a 1031 exchange after the section in the tax code it’s named after.  Using a 1031 Exchange for real estate investing may be the way to leverage your funds even more,
  3. Creative wealth transfer technique – some homeowners are transferring a fractional ownership interest in their property to their heirs using the annual ($14,000 per year) gift tax exclusion. In some cases, the value of the real estate can be discounted because the IRS “recognizes the fractional interest in real estate for its lack of marketability and control.”
  4. Purchasing an investment property using a loan and putting 20% or less down.  One of the biggest misconceptions is owning properties with cash will give you the highest rate of return because you are not paying anyone interest.  Generally, you can double or triple your returns by using leverage.  For you can purchase one property a single property for $200,000 or you can purchase 5 properties for the same $200,000 putting 20% or $40,000 down on each.  In some cases, you can buy 6 properties for the $200,000.  Once you take out the cost of borrowing your rate of return on the $200,000 can go from the standard 6% or 8% ROI to 12% to 16%.   All it took was a little leverage.  Your cash flow is smoother too because instead of 1 tenant in one house you have 5-6 tenants in 5-6 houses.  So Vacancy in one doesn’t hit you all at once.

What makes the article most compelling is that appears in a financial planning publication and cites subject matter experts in the financial planning world. It seems like financial advisors are starting to take a closer look at real estate as a wealth-building tool.  As with all investments, you will want to check with your CPA regarding tax implications and to see if leveraging your cash with real estate investments makes good financial sense.

Contact us with any questions about how to leverage your personal or investment real estate holdings