INVESTORS’ CORNER: Benefits of Acquiring Real Estate

Income generated by rental payments is probably the single-most important benefit of real estate, as these monthly funds can pay mortgages, real estate taxes and insurance, as well as managers, and ultimately, owners.

Depreciation refers to the allowance for the lessening in value of the property or the physical wearing away and deterioration of real property. This depreciation of real estate is reflected in the US tax code, which deducts a portion of the cost of the improvements over a twenty-seven-and-a-half-year schedule. This deduction creates a tax offset, allowing the owners to offset income from real estate on their taxes and, thus, often increases their personal bottom line. The tax benefits of real estate ownership and depreciation are best explained by a CPA or tax expert considering your own tax situation.

Equity is the term that describes the amount that is derived by subtracting all the mortgages or debt from the fair market value of the property. For example, if a property is worth $150,000 today and there is a debt (mortgage and note) secured by the property for $100,000 today, then by subtracting the debt from the fair market value of $150,000 the property would have equity of $50,000. This is the dollar amount the owner would receive if the property were sold today for its fair market value and the debt were repaid.

Appreciation is the term that describes an increase of a property’s fair market value over a period or in a short period of time by renovations and improvements being made to the property. An increase in market value is an increase in a property’s value and is a major benefit of real estate control as appreciation adds wealth to the people who control that appreciation.

Leverage is still today probably one of the most powerful benefits of real estate. Leverage by an investor in any investment is the term that describes the relationship between the amount of cash an investor puts up to buy or control a property and the amount of money or debt the investor borrows to make up the difference between the purchase price and the amount of cash that he, the investor, is putting up. If an investor puts up $30,000 on a $100,000 investment, his leverage is 70%. If he puts up $15,000 to buy the same investment, he borrows $85,000 and has a leverage of 85%. The advantage of leverage is that the investor gets to put up a small amount of his own money (sometimes nothing down), which allows him to control a property of far greater value. Using leverage allows you to buy more property than you ever could if you had to pay all cash for an investment. Real estate remains, today, one of the most easily leveraged investments of all those available to investors.

JC Underwood is the director at the Metrolina Real Estate Investors Association, which provides education, mentoring, and networking for real estate investing in the Charlotte region. He can be contacted at [email protected]. For more information, visit www.MetrolinaREIA.org.