"Happy Tax Day!!"

If you are ready to throw a rock at your screen right now, intending to hit me, it is only because you did not buy enough real estate last year!

So, put the rock down (please) and lets talk...

Real Estate has been described as the IDEAL investment!

Its TRUE.

IDEAL is a device for remembering the five key attributes of the advantages of investing in real estate versus stocks, bonds, precious metals and other investments.

IDEAL =

I = Income.
Real estate generates income - or at least it is suppose to! If your real estate is not generating income, then you did something wrong. We need to go back to the instruction book (Can be found at: http://www.realinvestors.com/ click on: "Getting Started") and start over. Yes! It is true. If you have been "suckered", excuse me, "sweet talked" into buying a piece of real estate with zero (or G-d forbid, negative) cash flow by a local real estate agent, then you are missing out on one of the all time great things about real estate vs. other investments like precious metals or "growth stocks". During the entire period you own the asset, the asset should be paying you (every single month);

D = Depreciation (a/k/a "Tax Shield"). It is a wonderful thing to be an American, or at least have to pay taxes in America! Yes! You see, the tax code (as it currently exists, and has existed since 1986) allows for you to shelter the "I", as in income from your real estate through something called Depreciation. This depreciation is an imaginary loss in the value of the property, year over year. Now in reality, the property is increasing in value (should be if you bought right, if it is not, go back to the instruction book: http://www.realinvestors.com/ click on: "Getting Started"). However, the folks who make the laws (as in the rich guys/gals in Congress) say that real estate depreciates and therefore, everyone who owns real estate should get a tax break for this imaginary loss in value! Now in reality, the sticks and bricks on a property do go down in value over time, but again, a well placed piece of real estate should see the underlying value of the site (the dirt) go up over time. More on this in a future post;

E = Equity. Equity is defined as the difference between the Value of a piece of real estate and its underlying debt. Equity can be paid for (as in down payment), equity can be earned (as in what happens when you learn to buy real estate correctly, which is for "X cents on the dollar", or at a discount from actual value), or equity can be created - The great thing is that when equity is "created" it has absolutely nothing to do with energy exhausted, and has everything to do with "picking" the right property at the right time. E.g. you buy a house in the burbs. Over a five year period the house increases in value 200% - Question: how much of that increase did you "earn"? Answer: "ZERO"! Yes, it is yours, and yes, you can tap a home equity line of credit (HELOC) and pull it out "100% TAX FREE", but you can not honestly say you "EARNED IT" SWEET! One of the 101 reasons you not only want to own real estate, but want to make the time to learn how to do it correctly.

A = Appreciation. Again, Thank G-d for America! This is one country where real estate has historically gone up in value! So you say, "Sherman, doesn't real estate always go up in value all over the world..?" Don't think so! Let's talk about real estate values in Cuba from 1948-2006. You have to have a stable investing environment for values to consistently go up, year over year. WARNING: The following is not a political statement: The United States of America is the only country on the planet where every four year there is a "bloodless coup" and the people have the opportunity to change its leadership, and yet the day after the 2nd Tuesday in November, no one is flooding out of the country on plans, trains and automobiles... We can thank the framers of the Constitution for this, and every successive administration that believes it is worth fighting for, regardless of their skewed interpretation of it. Back to real estate: Check the stats going back to the 1929 stock market crash. In the US, in most markets (particularly along the cost lines) real estate goes up - can not say the same for any other type of investment;

L = Leverage. Most people think of this as the ability to borrow money to fund real estate deals - this is true. However, real estate (particularly single family real estate) also inherently has the ability to "leverage" other people's time! Think about it. If you want to buy a single family investment property you have a whole team of professional people who are ready at your "beck and call" to make the deal happen, and they do not get paid unless the deal goes through. Try this one with a small company and a payroll of 7-14 employees. Seriously, if you own a small company go to work on Monday and make the following announcement: "O.k. team, starting today, no one gets a pay check. From now on, when the company makes money, we will distribute commission checks to everyone!" See who comes back tomorrow ;)

Now let's look at the list again from the perspective of APRIL 15th:
1 - You get real INCOME you can spend (month after month) on properly structured real estate deals, BUT you also get:
2 - Tax savings from the DEPRECIATION (which shelters the real cash in your pocket);
3 & 4 - and if the EQUITY in the property goes UP because of APPRECIATION, you can refinance and pull cash out! That's right ;
5 - Because of the ability to use LEVERAGE, you can pull cash out of your properties that is 100% TAX FREE, because the IRS says it is a loan, and therefore NOT TAXABLE.

So, if you bought real estate last year, and have a good CPA, then this absolutely should be a "HAPPY TAX DAY!" for you.

And if for some reason it is not, then we need to get to work on this NOW, for next year....