The Tax Benefits Of Investing In Real Estate

A lot of people have at least heard that investing in real estate can be beneficial to your taxes. However, very few people know how it works.

Cash Flow vs. Taxable Loss

First off, even if you have cash flow from an investment, the property can still have a "loss" for tax purposes. This is primarily through depreciation. How you figure depreciation is a topic for another time.

Where can you apply your tax shelter? That depends on whether you are "active" or "passive" in your investment.

If you don't meet the criteria, it's a "passive" loss, and can only be used to offset "passive" income, stuff like mutual fund and stock dividends.

Active Vs. Passive Investing

A taxable loss can offset earned income, if you can be considered "active" in your investment.T he IRS has several criteria for being "active", including stuff like if you are personally liable for the debt, do you make decisions regarding operation, how many hours you spend managing, stuff that shows you really do have an "active" role. If you are "active" in the investment, and your property generates a taxable loss, it is called an "active loss." Active income (your regular income) can only be offset by active losses. Talk to your tax professional to make sure you meet the criteria.

I have known people who were able to shelter 100% of their regular income through real estate investments.

How To Figure Tax Shelter

The benefit you get from the taxable loss is called tax shelter. The best way to understand how your tax shelter works is through an example.

Let's say your regular taxable income is $100,000 this year. I don't know which tax bracket that really puts you in, but let's just call it 30% for our example. If you're in the 30% tax bracket, that means you have to pay $30,000 in taxes.

Now, let's say you own a property that generated a cash flow (money you can spend), but still had a $6,000 Taxable Loss (due to depreciation) and you are an "active" investor.

That means with this property, now your taxable income is $94,000 and what you pay in taxes taxes is $94,000 * .30 (30% tax bracket) = $28,200

That's $1,800 lower total tax bill than you had without the property. If you've paid the $30,000 already through what you had removed from your paycheck, that means refund. For all intents and purposes, this is "found" money, money you can spend on that new TV, or whatever you want.

Bryce Beattie is a real estate investor and the webmaster at www.middleclassmillionaires.com

I've Found The Secret To Investing Success

While this might sound like a bold claim, it is true. After years of trying nearly everything out there, I can say without reservation that the key to investment success no matter the market or time frame is the ability to recognize technical divergence.

They say there are no "leading indicators." Actually, this is not true. Momentum indicators properly configured can show divergences from price which often forecast a price change in the direction of the divergence. This is not 100% foolproof. There is no "holy grail" out there. However, this kind of divergence does accurately predict short-term direction about 70 - 80% of the time. And this is enough for a well-constructed investment plan to make some serious hay from!

Of course, since it isn't foolproof, it is of critical importance to use stops. Stops keep you in the game. Over time, the positive expectation of a technical divergence strategy can make one a lot of money. However, the key is patience. Don't try to "see" a divergence that just isn't there. Jumping the gun and taking false signals will only decrease your winning % in the long term.

Over time, as you get more practice, you'll begin to see these divergences in all types of markets. Spend time learning to see the divergences and act on them. They will lead you to wealth!

Trent Eyring manages private equity funds and has spent the last 20 years researching and applying various investment strategies to glean the best information from all the "fluff" out there. He also owns various websites, including www.homeonlinebusiness.info which has a wealth of articles to help entrepreneurs.

Real Estate Investing Myths - Busted

Myth 1: It is too late to invest. I’m too old to wait for an income.

Fact: It is never too late. The focus should be on positive cash flow and not on the mortgage pay off date. It is easy to own several rental properties that will pay you enough to not only pay the mortgage, but also give you a nice income.

Myth 2: I can’t afford to buy property now. I’ll wait until my house is paid for, then I’ll look into it.

Fact: Your house has equity in it already. You can use that equity as a down payment on an investment property and realize a positive cash flow from the rent.

Myth 3: The Real Estate bubble will burst and I’ll be left holding an empty balloon.

Fact: It is possible that interest rates will rise causing fair market values to lower, but that isn’t likely. The economy has been very stable. Rent rates have been predictably low in most markets. As markets correct themselves there will be some areas that rent inflation will occur and can only mean more money in your pocket. The key is finding the right location for investing.

Myth 4: Interest rates must rise and keep rising.

Fact: The Federal Reserve Board has been doing an excellent job in keeping inflation at so low an incline it is almost flat. Hurricanes Katrina and Rita, and the recent spike in oil prices have caused a slight increase in rates, but the tide turned in the oil prices and inflation seems to be checked. Without going into complicated economics, the Federal Reserve has been keeping inflation clipped by tiny hikes in interest rates. The job market and labor force has maintained balance, therefore the slight increases are actually good for the economy and for investment security. Consumers are utilizing equity loans for their spending and huge spikes in interest rates would basically collapse the growing economy.

Myth 5: I don’t have any extra cash so a $0 down payment loan is the best route to start my real estate investment career.

Fact: If you don’t use any of your own money, your mortgage will be higher. $0 down means 100% of the loan equals 100% of the value. That kind of ratio means a negative cash flow. While negative cash flow is not a huge problem for someone who has available cash, negative cash flow for someone who lives from paycheck to paycheck is financial suicide.

Myth 6: A fixer-upper is a cheap way to riches.
Fact: A fixer-upper can put money in your pocket but there are so many pitfalls that you need to be very careful. Buying well below market value for a house that needs a new roof will only be profitable if you just put the new roof on. Thinking that you need to not only fix the roof but put in another $20,000 of refurbishing to make it perfect is not good strategy. The more money you pour into a fixer-upper, the less profit you’ll realize when you sell it. Buying a fixer-upper, making it perfect all for under market value, then renting it is a better way to make money on that type of project.

Investment Property Coach Alex Anderson Connects Real Estate Investors (From All Around The U.S.) With High-Quality Investment Properties. Get A Free Copy Of Her New eBook, "The Investor's Guide To Renting" at: http://www.GreatInvestmentProperty.com

Investing Strategies: Aggressive And Conservative

Investors who have different risk profiles, investment objectives and time frames will adopt different investment strategies in order to achieve a similar result. Basically, there are two types of investors; aggressive and conservative.

An aggressive investor will take a shorter time period to achieve the desired result as his risk attitude should reward him with a higher rate of return, given a dynamic portfolio investment style and a well drawn up investment philosophy.

For any reasonable portfolio management exercise to be meaningful, you must have at least $50,000 to start with. If you're looking at a portfolio of shares or unit trusts, $50,000 will be a good starting point. As for property investment, $50,000 should be sufficient in most cases for down payments.

Where the money should be invested will very much depend on the prevailing market cycles and opportunities. However, this will have to change throughout the portfolio management process, which is fundamentally based on your investment philosophy and the changes in your financial statements and life goals.

However, always take into account two things when investing; a well-correlated portfolio and the market cycles. Having all monies in the same asset class at any one time may not be prudent, so, the other area to look out for is the equity market. For more disciplined and market savvy investors, investing your money in stocks can help to double your initial capital.

It's advisable to put only a small allocation of just 20% of your available funds into carefully chosen stocks. Pick the ones that have good net tangible assets and price-earnings ratios. Study the highest and lowest prices for these stocks over the past one year and discuss what price levels will be prudent for a buy and sell.

Another option to look at is unit trust funds. Choose the fund house based on the umbrella of funds available to you for the purpose of portfolio management. Two factors are important to determine that a fund performs; your investment strategy and who is managing your funds directly and indirectly. However, of course there are risks in unit trust investments too, though less when compared with direct stock investing

On the other hand, the conservative investor should be more patient as he will need more time to grow his money. Conservative investments like fixed deposits, bonds, money market or income-yielding instruments have yields below one's personal inflation index and thus may not be a meaningful tool for wealth accumulation over the long term.

Choose a well-managed balanced unit trust fund that has a combination of fixed income securities and equities and is dynamically aligned to suit the various events and market cycles over time.

Consider opting for a regular savings plan using the balanced fund as a base to invest, as this will help smooth out the volatility of events and cycles over time. There are many regular savings plans available in unit trust funds but be careful when choosing one. When you invest regularly, you may push the dollar cost upwards or downwards and if the fund you choose is a highly aggressive one, the upward and downward dollar costing exercises may eventually prove to be less effective than investing regularly in a more stable fund like a balanced fund.

Last but not least, you may also want to look out for opportunities in some direct stable and established stocks that provide high dividend yields. These yields will provide a cushion against market and specific risks, which will not worry you too much as a conservative investor. Some unit trust funds have their core holdings only in high dividend-yielding stocks and they may prove to be of good value in your portfolio.

Michael Russell

Your Independent guide to Investing

Investing: Wine

Wine investment is not at the top of investors' minds. For some investors, it may be at the back of their minds to keep a few bottles in case the prices appreciate, but no one is explicitly buying wines as an investment.

It's very much by chance to those who discover that their wine collection is worth a lot more over time. The lack of interest in wines as an investment could be due to the fact that investors are still at the appreciation stage and don't view wines as a commodity.

Those who are looking to invest seriously in wine face several issues. The main obstacle is the lack of a marketplace for selling wines. Serious wine investors will have to look to establish markets for fine wines, where they're able to liquidate their stocks and get good prices. For instance, London is traditionally a strong trading market for fine wines where investors can sell to established wine merchants or consign their collections to auction houses like Christie's and Sotheby's, which regularly hold fine wine auctions.

Storage or rather, concerns about bad storage and freight, is also another obstacle that wine investors in this part of the world face.

It's advisable for those interested in wines as an investment to consider 'en primeur' or futures, particularly of blue-chip wines like Bordeaux First Growths. If you want to reap the best benefits, you have to buy 'en primeur'.

However, with futures, it's crucial to get the vintage right. With a good vintage, the prices can appreciate by as much as 50% by the time the wine hits the market 18 months from the sale of its futures.

The key to buying wine futures, however, is that one needs to be an established buyer to actually catch them at the best prices. The current market for wines is not as vibrant as in its heyday in the 1980s, when the 1982 Bordeaux vintage was released into the market and American collectors were eagerly buying it up and also during the year 2000 millennium craze. The market today has softened. The collector's bubble has somewhat burst since the US economic slowdown.

Ninety percent of wines bought for investment would be Bordeaux, which today has become a commodity. First Growth Bordeaux would be most in demand but the supply is not exactly small. On average, most First Growth chateaux produce between 200,000 and 400,000 cases a year.

By and large, however, people still stick to blue chips. Thus, it's advisable for budding wine investors to go for well established First Growth Super Chateaux, if they want to play it safe.

Buy a top vintage at a high price and hope to sell at an even higher price. Then, it's a matter of how much it will rise and what your holding power is. You can also consider taking a punt on top-ranked small production Chateaux like Le Pin, which produces only 500 cases a year. At the end of the day, few in this part of the world take wine investing seriously.

Michael Russell

Your Independent guide to Investing

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