Many will decide that they wish to invest in real estate in order to save money on their taxes. While there are some who will receive this advice in good faith, the principles behind this idea do not make a whole lot of sense. Negative gearing has become more and more popular in recent years and this is a baffling development.
For those who are unaware, negative gearing takes place when an investor decides to select a property that costs them more than the income they are deriving from it each month. This is not why investments should be made, though. Real investment is about maximizing profits and paying taxes in a fair manner. It is not geared towards those who believe that they can simply choose the most expensive properties and watch the money pour in.
For example, one of the more common tropes that a real estate investor will hear is focused on the importance of paying a sizable amount of taxes. If the investor is spending millions in taxes each year, this means that they are making a sizable income. It is not fair for business owners to pay less in taxes but this is the way of the world. The system is set up for real estate investors to take advantage.
United States investors are currently in the midst of a boom market. Losing money each month and using 9-5 income to offset these losses is not a wise investment strategy. Investors who are hoping to gain value hope that the property appreciates in value over the long haul. This is an all too common strategy in the current climate.
Supplementing Income Through Real Estate Investment
Capital appreciation but if real estate investment is not putting money in the investor’s pocket each month, it is time to make some changes. Banking on capital appreciation is not considered wise for a number of reasons. First of all, this is essentially a form of gambling. Perhaps it is an informed prediction but it remains a prediction nonetheless.
Investments cannot be made in this manner. Predictions are great but they are not a useful tool in the present. How much income can the investor derive from the property right now? This is the question that has to be answered if the investor is going to reap the full benefits of their real estate purchases.
Positive cash flow is a must. If the investor is not receiving any significant return on their investment, what was it all for? Real estate investment is about supplementing the income that is derived from a typical 9-5, allowing the investor to eventually transition from their day job.
The Downsides of Capital Appreciation
Capital appreciation is simply not something that can be depended upon. It is not a tangible form of income that an investor can rely upon. The real estate investor who places all of their eggs in this basket is making a grave error in judgment. These types of investments provide equity. They do not offer the investor with an opportunity to gain capital.
The problem with equity is a rather simple one. While the investor may have a sizable amount of equity in the present, it is a fickle mistress. One day it is available and the next day it is gone entirely. Any investor that thinks they have the ability to predict the future is placing themselves in a position that they should be doing their absolute best to avoid.
Real estate investment is supposed to remove all of these variables from the equation, providing investors with access to new income. No investor knows exactly where the market is going, no matter how intelligent they may think they are. Do not make investments that are dependent on the ability to predict the future. Cash flow is king.
Once the money begins to roll in, the investor needs to make sure that all taxes are being paid in the proper manner. Fairness is important. The tax system is always going to be favorable to the business owner. Those who are looking to take advantage of the current system are urged to contact an experienced accountant who is able to guide them through the process.