Real estate investments are the perfect way to build wealth for future generations. In fact, many people are taking advantage of this opportunity today. However, there are a few things that you should consider before putting your money in an investment property.
Active Vs Passive Investments
The question of whether to go active or passive can be one of the most daunting tasks an investor faces. Both strategies have advantages and disadvantages. In order to determine the best approach, you must first identify your personal goals and preferences.
Active investing, as the name implies, involves you making the decisions regarding your investments. This means you need to be knowledgeable about the ins and outs of the market. You also need to have a good understanding of your risk tolerance. If you are unsure about what you can afford or your investment preferences, a passive approach may be more suited for you.
Passive investments are more diversified. They allow you to purchase multiple types of properties. They also require less time commitment. However, they often carry lower returns.
Active real estate investments carry more risk and can be more taxing. This is because you are the one who is responsible for the loss or profits of a property. Often, you have to manage a tenants’ lease. These leases are typically for 12-months or longer.
Tax Benefits
Investing in real estate is one of the best ways to build wealth. Not only is it a great investment, but it also offers a host of tax benefits.
For example, you can deduct nearly all of your expenses associated with real estate. These include legal fees, insurance, mortgage interest, taxes, and more. You can also take advantage of a variety of special tax codes.
For example, the Modified Accelerated Cost Recovery System (MACRS) allows for residential property to be depreciated for up to 27.5 years. This means that an investor who buys a $10 million property can depreciate it by $2 million.
The personal residence exemption shields you from paying capital gains taxes on the profits from the sale of your personal home. It is possible to combine these with other deductions to reduce your tax liability.
Aside from that, you can use tax breaks to minimize your property taxes. In addition, you can take advantage of the Qualified Opportunity Zone (QOZ) program, which allows you to avoid capital gains taxes on real estate.
How much does a real estate agent make? A real estate agent is said to have the ability to earn millions of dollars in commission in a single night!
Liquidity
Liquidity is a crucial concept in real estate investing. It essentially refers to the degree of saleability of an asset. This can be used to evaluate a project’s success, and in deciding on which assets to invest in.
There are several factors that influence the liquidity of an asset, including the market’s price, the time it takes to sell it, and the number of open exchanges. The most liquid asset is cash, which can be converted to other assets quickly. However, a valuable piece of art may not be as liquid.
Aside from cash, there are also tangible assets and complex derivatives. These are less liquid than cash, and they are harder to evaluate and sell.
Investing in the latest technology, such as blockchain, can improve the liquidity of real estate investments. Using a tokenised format allows for the sale of properties to anyone. Rather than selling a home for $700,000, an investor can simply sell the property for $5,000.
Building Generational Wealth
If you want to pass down family wealth, it is important to put a solid financial plan into place. To start, you should make a savings and retirement fund. A great way to build this up is by investing in real estate. Real estate investments can provide long-term income, and they can also be leveraged to increase your returns.
One of the best ways to build generational wealth is to buy a home. The median net worth of homeowners was $255,000 in 2019. This is 40 times more than renters’ median net worth.
Another way to get started is to invest in stocks. Dividend-paying stocks can help generate wealth for generations. Additionally, real estate investment trusts can also be used to build generational wealth. These real estate trusts own real estate that produces rental income.
Buying a home is one of the best ways to generate long-term income, and the value of your property can increase over time. You can also leverage your property’s equity by purchasing additional properties.
