Did you know that real estate investing is one of the best ways to increase your wealth? While most investments are subject to volatility or instability, real estate typically holds stable value over time. Real estate provides exposure to another vital asset class, which can create a hedge against inflation.
Some benefits of real estate investing also include steady appreciation, diversity, less exposure to currency volatility, value-add strategies, and more.
However, real estate investing requires a hefty investment. It’s not as cheap as buying stocks. How do you make sure you can afford it? Consider the following strategies:
1. 1031 Exchange
The 1031 exchange is a tax-deferred real estate investment strategy in which you sell one property for another. That is, you are able to receive an offer with no capital gains taxes or depreciation recapture.
You can also defer the gain by setting up a like-kind, deferred exchange in which you use the proceeds from your sale to buy a new property within a specific time frame.
For example, you might sell an apartment complex and use the proceeds to buy a warehouse. The benefit of this strategy is that you can receive all of your money from the sale without owing any capital gains tax, and you can do this over and over as long as you stick with the rules.
Another benefit is that you can negotiate a better exchange rate if you’re able to offer a larger sum of money. A rule of thumb is that the value (or sales price) of your property should be greater than or equal to the price of the original. The same goes for debt.
2. Cost Segregation
Cost segregation is a process in which commercial real estate owners deploy teams of construction and engineering professionals to identify all the building costs that can be separated from the overall asset.
Why should you use cost segregation? The benefits of real estate investing are many, but you also want to improve your chances of qualifying for the best possible terms on a loan. By taking advantage of this strategy, you’ll be able to reduce the overall debt service on the property, which allows more room for borrowing.
This process is also helpful when it comes to calculating real estate depreciation. If you can separate and identify these low-cost components, then you’ll be able to save money on taxes for years to come by accelerating the depreciation of some of these classified assets. You can then use the amount to reduce your taxable income.
The most important thing to remember is that you should choose a reliable property management company that will be able to identify these low-cost components for you.
3. Raise Capital through Partnerships
Because real estate investments are expensive, this strategy can help you purchase more than one property at once. One of the best ways to find potential investors is to try to find someone who has the same goals as you. Together, you can set up a limited liability partnership, a business structure that combines the advantages of both a limited liability company and partnership.
For example, an LLP allows the members to divide up profits without having to pay taxes on them. However, they are able to avoid double taxation through the reclassification of income. That said, if one person does not pull their weight then it could negatively affect your investment.
How do you find the right partner? Consider these tips:
- Look for someone who has experience with the local area
- Find a partner who is willing to work long hours and put in hard work
- Try to find someone who shares your vision and values (and not just your bank account)
4. Use a Lease with Option to Buy
Did you know that you can use a lease with the option to buy? This is an excellent way to get into real estate investing without having to come up with a huge amount of cash for a down payment or closing costs.
What are the benefits of using this strategy? First, you’ll have the opportunity to learn more about being a landlord. Second, you can gradually add to your portfolio without having to worry about taking on too much risk or losing money.
Third, this strategy allows you to “test the waters” without investing too much. Most importantly, this technique will help you grow your wealth because you’ll have a better understanding of what it’s like to be a landlord and make money from real estate investments.
If you’ve ever thought about investing in real estate, now might be the perfect time to take action. Just remember that it’s important to understand your options and all possible strategies for increasing your profit margins without spending significant money. By doing so, you’ll be well-positioned to grow your wealth and achieve financial success.
