How Real Estate Makes money for You?
In today’s post we discuss the way that you can make money out of real estate. The first major way to make money out of real estate is to lease out your property either as residential rental or as commercial lease. When investing for rentals ensure that your rental income will result in a net positive cash flow after maintenance costs, taxes etc. As stated before commercial lease is more attractive because it generates more income. Residential lease is a good starting point on your journey.
In order to maximize your rental income learn to treat the property as a business. This includes if possible ensuring that the tile rests in a private limited company so as to limit your liability. This enables tax benefits as well. I hear you say how? For example my family owns the building which our dental practice operates from. If it was in our personal names then we would not be allowed under tax laws to charge ourselves rent. But because it is under a separate legal entity, therefore we can legitimately pay rentals and manage our taxes. At disposal of a property that is held in the name of a private limited if structured well there will not be any capital gains tax because one would be selling shares with no change of title. Treating the property as a business means that you intend to make the property have its own income and expense statement to ensure that it is profitable in its own right.
One can increase rentals due for example by including all kinds of facilities together with the property for example – one could include full furnishings for the property and include a charge with the rental. A word of caution if furnishing the property, make sure this is high quality durable furnishing that suits your target client.
Some ten years ago I got stranded at Heathrow Airport when a connecting flight was late and we were left by our plane. We ended up being hosted by a husband and wife team who ran a short term rental property close to the airport. They stayed on the first floor and as guests we put up on ground floor. These guys provided breakfast and played games with us including Karaoke singing. In effect they used their home as a business for short term rentals. They took us to see a classic rural English village. These extra services enabled them to charge a fee.
The second way of generating wealth from real estate is through capital appreciation. I must clearly state that capital appreciation is in a sense phantom wealth as it is potential value. It only translates into real money if the property is disposed. However even before disposal since it builds your balance sheet and hence your networth. Owning real estate thus becomes an excellent store of value and wealth. Some people make money this way by buying, upgrading and then selling houses. This generates quick money by exploiting the velocity of money. Here the investor does no wait for capital appreciation but as a matter of fact gets properties that are at a discount then cheaply upgrades them before disposing. A well structured real estate investment programme allows someone to make money while deferring tax payment on the sale proceeds. A good accountant is required to make sure this is done properly and legally.
The third way that someone can make money out of real estate is through leveraging to borrow against the property. If someone has a good enough cash flow they can borrow against the property to acquire other assets. Let me clearly state that borrowing against the property for consumptive purposes is unwise. One should only place the asset at risk if it allows them to acquire a better and more profitable asset. Recently we leveraged one of our properties and borrowed funds through mortgage lender and used the funds to acquire a manufacturing business. This way we still had our underlying asset – the property and acquired a second asset – a business. Who said you cannot have you cake and eat it at the same time? By using a mortgage refinancing model in effect we managed to get a longer term loan than normal banks would have made available to us. Let me re-emphasise do not place your property at risk when your cashflow can not support the borrowing because you stand the risk of losing the asset.