At the most basic level, owning investment real estate means profit. That’s because there are basically 3 ways of making a return on the initial investment.
1. Cash Flow
2. Return on Taxes, and
Added together, these 3 returns can add up to a noteworthy total. Let’s look at these 3 profit areas one by one.
1. Cash Flow
This is simply the yearly amount of cash left over after paying for a property’s expenses and mortgage payments. This return is called the Cash-on-Cash Return or Return on Equity —your downpayment.
Let’s say the interest rate on a 25-year mortgage is 6.25%. With a downpayment of 25% of the price, the annual cash left over, after expenses and mortgage payments, can represent a 10.4% return on cash invested. 15% down can represent a 12% return.
2. Return on Taxes
Real estate investment can provide excellent tax advantages.
1. The appreciation of your investment is sheltered from taxes until you sell, and there is no limit to how much growth you can shelter.
2. When you sell, you are taxed on only 50% of your gain.
3. Mortgage interest, property taxes, repairs and maintenance and other related expenses can be deducted from your gross rental income, minimizing the amount of tax you will pay.
Consult your tax advisor for advice.
The increase in a property’s value can account for the largest return on investment over time. The key is to own the property for an extended time, say 7 years, and to sell in favorable market conditions.
A Final Note of Caution
Without question, some investments have a small or even negative cash flow, representing investments for most that might best be avoided. A good real estate salesperson can advise you before you decide to make an offer.
For a FREE Cash Flow Analysis Before You Buy, Contact Contact Us at Century 21 Today Realty Ltd.