Historically, real estate has been sold as an investment for income and long-term gain, as well as a hedge against
inflation. The fact that real estate can be financed provides leverage that multiplies the effects of value increases.
Before trying to select a property, you need to define your goal or goals. That is, what do you want to
accomplish and over what period of time.
The same criteria that is used in any sound investment strategy or financial plan should be used in the rental property business. The basic goals or reasons for investing are usually among the following:
- Monthly cash flow
- Long term appreciation
- Tax shelter
- Resale for quick profit
- Operating
- Summary
- Monthly cash flow
- Maximum cash flow is realized from minimum leverage.
- Long term appreciation
- Maximum return from appreciation comes from maximum leverage.
- Tax shelter
- Maximum tax shelter is also realized from maximum leverage.
- Resale for quick profit
- Unless a Section 1031 tax deferred exchange is utilized, short holding periods result in
taxation at ordinary income rates rather than at the lower long-term capital
gain rate.
- You Inherited Some
- You may not have been looking for investment real estate, but it fell into your lap.
- Summary
- Obviously, you can have more than one goal at a time so long as they aren't mutually
exclusive. You can have monthly cash flow and long-term appreciation
and tax shelter. You cannot have long-term appreciation if resale
for quick profit is your goal, but it is possible to have cash flow and/or tax
shelter from property that is purchased for resale for a quick profit.
No matter why you own income property, it is very important to understand that
owning and operating rental property is not just an investment, it is a
business. Failure to understand the business can be extremely costly.
