How Owning Real Estate Keeps Food on the Table for Entrepreneurs
Posted on January 6, 2015
As an entrepreneur, your life equation looks like this: LIFE = FLEXIBILITY+ FINANCIAL GAINS – INSECURITY – STRESS. Wouldn’t it be great to increase flexibility, financial gains, security, and reduce stress when things aren’t going your way? Luckily, real estate is one of the best ways to do just that. Here’s how and why this investment class can keep you from pulling your hair out, put food on the table, and a roof over your family’s head when shit hits the fan.
3 Ways Real Estate Makes You Money
1. Cash Flow
When you buy a piece of real estate as an investment, you receive cash flows every month from renters. Let me clarify the word “investment.” When I say investment, I mean it actually puts money into your pocket on a regular basis. Your primary residence is not considered an investment by this definition.
What I’d recommend if you’re in a startup situation is to buy a home/apartment larger than what your family needs, then rent out a room or two within the house. This rental income can cover your mortgage payment along with other expenses. This way, you will breakeven and essentially live for free or even make excess gains each month. It all depends on how much you charge in rent and pay in expenses. In the San Francisco Bay Area, rent is high ($1,000-$3,000 per room). If you’re able to minimize your monthly mortgage payment by buying a foreclosure or bank owned property, owning real estate could be a lucrative scenario for you.
2. Capital Gains
Capital gains on a property are the difference between the buy and sell price. Historically, this has almost always been a positive number since real estate appreciates each year. Though the housing crash between 2009-2011 was one of the first times house values dropped so immensely. While that was a disaster, and it’s justifiable to fear another bubble, keep in mind that in the long run, the market has rebounded. Also, regulation has been put in place to help prevent such a huge disaster from happening again. To hedge against the risk of another market drop, buy undervalued properties.
3. Tax Gains
There are 3 primary tax gains you receive through real estate:
1. Depreciation vs. Real Property Value
The building value and your personal property technically depreciate each year, but this depreciated value is not true tangible value. To elaborate, depreciation lowers the book value of your property, which means the government taxes you less. Therefore, you get to pocket the extra cash that wasn’t paid to the government each year.
2. No FICA Taxes
Your rental income is taxed as ordinary income, BUT you don’t have to pay FICA (Social Security and Medicare) taxes on it.
3. Section 1031 – I’ll trade you instead!
Section 1031 of the tax code is magical: it enables you to defer payment on capital gains tax and swap one property for another. For example, you buy an investment property and 5 years later, you want to sell it to buy a bigger one. You won’t have to pay capital gains tax on the sale of that first property if the proceeds are used to buy the next property at a higher value. You can keep “upgrading” and leverage the tax not being paid to the government to put toward larger properties (until you decide to cash out completely that is). This means greater aggregate net worth for you.
You Can’t Count on Your Business for Cash
As a founder, you’ve been there: cash flow gets tight and your employees need to be paid. So, you forgo paying yourself this month. Simply put, when you’re starting out, you can’t count on your business for reliable income. The rental income coming in from your real estate investment can hedge your risks without much daily attention.
Keep a Roof Over Your Head and Food on the Table
Speaking from experience, immense stress comes from a fear of not being able to survive if all goes wrong. This fear can lead to irrational decisions in the short term at the expense of the long-term health of your business. This is never good. Real estate can keep food on your table via the rental income generated. Also, the investment will literally keep a roof over your family’s head (assuming you’re renting out space in your primary residence to pay for the mortgage). By ensuring your survival needs independent of your business, you’re able to keep your head about you and work towards long-term business success.
Owning your own business is stressful. By making a smart investment in real estate, you can maximize the overall quality of your life by increasing your flexibility and financial gains while minimizing your insecurity and stress. If you’re interested in learning about the detailed steps to owning an income property, what factors to consider, or how to team up with others to make it more affordable, comment below. I’ll do my best to answer your questions and if there’s a large enough demand, I’ll make a series of detailed posts including analysis tools to ease the process. Let me know!
What’s holding you back from buying an income property? Have you already bought one? What’s been your experience?
- S Prev