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

Consider Beth's case:

In $2011,$ Beth has an adjusted gross income from one job of $$50,000($not including any deductions from real estate loss$).$ In addition, Beth owns an apartment building that she rents out throughout the year. The revenues she received from her apartment building amounted to $$150,000$ in rent payments for the year. The operating expenses $($maintenance$,$ mortgage interest, and so forth$)$ amounted to $$90,000$ for the year. Her income $($before subtracting depreciation expenses$)$ for the apartment building is therefore $($her rental income minus her expenses$).$

Her accountant has informed her that the apartment building can be depreciated upto $$67,500$ for tax purposes in $2011$; therefore, she can subtract $$ of the depreciation expense from her rental income $($and thus not pay taxes on that amount$).$ If her adjusted gross income were less than $$100,000$ per year, she could write off $$ of the depreciation amount against her ordinary income.

Suppose Beth is interested in purchasing an additional apartment building as an investment. She has $$60,000$ in cash and can borrow an additional $$150,000$ at an annual interest rate of $9\%$ to purchase a property costing $$210,000.$ If the property is expected to generate $$22,680$ per year after expenses, then the benefit from leveraging the investment $$ the cost of paying interest on the loan.