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Diversifying Through Real Estate
e should all diversify of a rental from the gross rental
our investments over income. If the losses exceed
different asset classes. income, they are converted into
Real estate is an excellent passive activity losses which are
vehicle for diversification. not deductible against ordinary
income, but are deductible
Real estate rental properties against other passive activity
used to be a perfect investment income as well as any gain made
for high wage earners. They were when the property is sold.
able to deduct all the losses
generated by the property - and Real estate investing offers
when you added up mortgage several special advantages: the
payments, property taxes and purchase can be highly leveraged,
maintenance, the losses could be from zero down to the usual 20%
substantial - from their gross down payment; the mortgage
incomes. payments are generally tax
deductible as are the taxes and
The IRS has rained on that expenses of maintaining the
parade. Real estate rental property; and if you own the
properties are now considered property over a year, it is
passive activity, even if you subject to long-term capital
actively manage the property. The gains taxes – presently 15% -
only ones who can take full minus any accumulated passive
advantage of real estate activity losses.
investing losses these days are
the so-called “real estate Because of the highly leveraged
professionals.” nature of most real estate
purchases, investors can afford
However all is not lost. Even now to own multiple properties. Or
you can deduct all the expenses you can start small, with one
property, and use that as management company to do this for
leverage on another house as your you. Most work on a cost plus
equity in grows. basis.
However, real estate is unlike Because of all of this, you do
other investments. Unless you buy need to find properties that
raw land, it requires management either throw off good income from
and maintenance, insurance and rents or have the potential for
tax payments. There will even be appreciation, especially if some
continuing costs with raw land, repairs are done. In other words,
property taxes and liability you have to work out beforehand
insurance being the major how any given piece of real
expenses. If you think you can’t estate will make money for you.
be sued if someone trips on a log If it won’t, keep looking.
or falls into a hole on an
undeveloped piece of property, Real estate prices are not as
think again. Ask your lawyer what volatile as the stock market’s
the liability laws in your state can be, but they do fluctuate. It
are. is better to go into a real
estate investment with a long
If you own rental buildings, they term frame of mind and remember
must be insured, properly the rule “location, location,
maintained and rented out. location”.
Someone has to fix the problems
and collect the rent. You can do Over time real estate values
this yourself, especially if you tend to grow and, because of the
like being awakened at three in leveraged nature of the
the morning because a toilet investment, the growth is
won’t flush – I’ve been there and magnified. For example, 5% growth
done that. Or you can hire a on $150,000 is $7500. But if you
only have 20% down or $30,000 can and has fallen, sharply at
invested, that $7500 becomes a times. There have been gluts of
25% return on your investment. office space in major cities,
overdevelopment of residential
Of course you don’t have to own housing (remember the S&L debacle
real estate outright. You can of about 15 years ago), or there
invest in “Real Estate Investment could just be a general down real
Trusts (REIT)”. These are estate market from time to time.
professionally managed funds that
usually invest in larger, Most of us have already
commercial projects – shopping diversified into real estate by
malls and office buildings. Your purchasing our home. If the
aim is long term capital equity is preserved, this can
appreciation. The investments are turn into a major cash cow after
heavily leveraged and the tax several decades of use. If
benefits spread among the certain simple rules are met, you
partners. can exclude $250,000 ($500,000 if
married and filing separately) of
Since real estate does not any gains you realize.
necessarily move in the same
directions as stocks or bonds and As you can see, real estate
also generally tends to hold its investing, if done properly, can
value, this is a good be quite lucrative. But study the
diversification move, but you are subject intensively before
unlikely to realize the gains you committing yourself. The library
would see with individual real is full of good books on the
estate holdings. subject.
Also, despite the fact that real Also consult with a CPA or tax
estate is booming right now, it attorney on how to best structure
your business for maximum
returns. For more financial planning
articles, visit
For those looking for multiple http://www.credit-yourself.com/fi
streams of income, rental real nancial-planning.html
estate is a good place to start.
About the Author:
Chris Cooper a retired attorney, and his wife Aileen, who has a MBA in Finance, provide personal finance and financial planning advice at Credit Yourself
Read more articles by: Chris Cooper
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