Prosperity or Poverty in the "Golden Years"?

"Investing in Real Estate"

by: Stewart L. Mac Donald, CCIM

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The investment planning decisions we make today will determine our quality of life when we reach that retirement light at the end of the tunnel. No one is going to do for us, and there is no better time to begin planning to assure those retirement years will in fact be, our "Golden Years." Economic and social changes are coming much too fast, and much too unpredictably. More and more people are reaching retirement age, and many more people are retiring at an earlier age. The uncertainty of our federal programs, the inadequacy of our pension funds and savings plans underscore the need for sound investment goals toward retirement. With the "baby boom" population bubble fast approaching retirement age, the strain on Social Security programs becomes even greater, intensifying our need to provide for our wealth accumulation by using sound investment strategies.

Since we can only reinvest the dollars we get to keep (after tax dollars), it is important that we seek out investments that will generate exceptional after tax cash flows. Well structured and monitored real estate investments provide unrivaled opportunities for maximizing after tax cash flows and wealth accumulation. With most investments (other than real estate)"what you see is what you get." If the investment offers an 8 percent return, that's all you can expect to receive in the way of a return on your invested dollars, and after tax you might be looking at a 5 percent return. Not so with real estate! Let's take a look at some of the hidden benefits taking place beneath the surface in a real estate investment that contribute greatly to an investor's overall wealth.

In a carefully structured real estate investment, cash flow before taxes (after expenses and debt service) should generate a 10 to 12 percent return (cash on cash) on invested capital. Add to that the amount of tax dollar savings together with equity build-up resulting from amortization (mortgage debt reduction) and property value appreciation, and you begin to realize there are many more benefits churning beneath the surface in the real estate investment than initially meet the eye. This is known as an "equity rate of return" (ERR) and often accomplishes a return as high as 40 percent.

Foremost among the benefits of owning investment real estate are an investor's opportunity to leverage investment dollars (control a higher value in appreciating assets), and to write off losses generated by depreciation and mortgage interest against income generated by the property. If you're holding an "out of gas" property (with little or no remaining depreciation or interest deductions), that property needs your attention. You need to examine available alternatives for enhancing your after tax return (keeping more of the income generated by the property), perhaps refinance (tax free proceeds) or exchange (tax deferred) into another investment property. Either alternative could greatly enhance your wealth accumulation toward retirement.

There was a time (prior to the 1986 tax law changes) when an investor in real estate could prosper with little or no concern for "managing the asset". . . a sound business plan for each individual real estate holding. In many cases the 1986 tax law changes brought about a silent erosion of equity for the poorly advised real estate investor, while the well counseled real estate investor continued to prosper. Prior to the 1986 tax law changes an investor could write off any losses generated by a real estate investment against ordinary income. However, losses from income producing real estate are now considered "passive losses" and are no longer permitted to be written off against ordinary income. With some exceptions; an investor with an adjusted gross income below $100,000 can deduct up to $25,000 in passive losses against ordinary income, that $25,000 write off phases out between $100,000 and $150,000 adjusted gross income.

Passive income as well as passive losses can be netted (offsetting income/losses) among real estate holdings in your portfolio. In a situation where an investment property generates passive losses that cannot be written off , a solution might be to acquire a property that generates passive income utilizing passive losses from the first property to offset passive income from the second property. The reverse might be the case where property "A" generates passive income. A solution might be to acquire a second property that generates passive losses to offset passive income from the first property.

Investment real estate can no longer be expected to perform on it's own, as it has in the past, with little or no consideration for "managing the asset." Real estate provides unrivaled financial structuring as well as tax planning opportunities to enhance your wealth accumulation at retirement. Take advantage of these opportunities, maintain a policy of periodic in-depth analysis of your real estate holdings. Seek the counsel of a CCIM prior to acquiring or disposing of an income producing property.

For more information on investing in real estate successfully view the links to pages below

[ Homepage ] [ About the Company ] [ Expertise of a CCIM ] [ Retirement Planning ] [ Tax Planning ]
[ Analysis Services ] [ Case Studies ] [Buy the Book; "Investing in real estate"]
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