Real Estate Investment

Investment typically mean purchase of an asset in the hop that it will generate an income stream PLUS/OR appreciate in value in the future. In an economic sense, an investment is the purchase of goods that are NOT consumed today, but deployed in suitable avenues to enable increased consumption potential at a future date. Real Estate Investment can either be done through a professional vehicle like REIT’s (like a Mutual Fund Investment) or by purchasing a residential / commercial property, or even raw land. The acquisition of a developed property, either residential or commercial, also creates the potential for annual cash flows by way of rental income.

Investment in Real Estate, if done systematically, has proven to be an effective risk reduction strategy whilst optimizing returns on one’s portfolio. Some of the obvious advantages are :-

• Greater Leverage : The ability to make a down payment and leverage on one’s capital using bank funds to increase the overall return on investment.
• Tax Optimal Strategy : Capital appreciation is generally over a longer term horizon and thus benefits from reduced Long Term Capital Gains tax. One may even consider a 1031 exchange, a Charitable Trust, or an Installment Sale to further reduce the tax liability.
• Tax Free cash-flow : By taking advantage of Depreciation provisions and Mortgate Interest deductions on leveraged capital, the cash-flow can be effectively made free of tax liabilities.
• Tax Write Off's against Other Income : Depending upon one’s classification (Active or Professional), the rental income can be covered to generate tax-free cash flows, through deductions of valid business expenses.
• Proxy "Forced Retirement" Plan : Buying a rental property is a significant commitment that one is required to commit to and maintain, thus becoming a forced saving tool.