Making Real Estate Investments

Real estate has been a lucrative investment for many years. Real estate provides greater diversification properties as compared to equity or fixed$-$

income investments. Two important benefits to investing in real estate are the abilities to leverage investments and to decrease tax liability.

Consider Sean's case:

Last year, Sean has an adjusted gross income from one job of $$35,000($not including any deductions from real estate loss$).$ In addition,

Sean owns an apartment building that he rents out throughout the year. The revenues he received from his apartment building

amounted to $$105,000$ in rent payments for the year. The operating expenses $($maintenance$,$ mortgage interest, and so forth$)$ amounted

to $$63,000$ for the year.

His income $($before subtracting depreciation expenses$)$ for the apartment building is therefore

$($his rental income minus his expenses$).$

His accountant has informed him that the apartment building can be depreciated up to $$47,250.$ Because his modified adjusted gross income $($MAGI$)$

is less than $$100,000,$ he can subtract

of the depreciation expense from his rental income $($and thus not pay taxes on that amount$),$ anc

the remaining

of the depreciation

be written off against his ordinary income.

Suppose Sean is interested in purchasing an additional apartment building as an investment. He has $$40,000$ in cash and can borrow an additional

$$120,000$ at an annual interest rate of $9\%$ to purchase a property costing $$160,000.$

If the property is expected to generate $$17,280$ per year after expenses, then the benefit from leveraging the investment

the cost of paying interest on the loan.