Hard money real estate investment has many preferential tax implications not allowed in other investment classes. For example, but not limited to, investment properties that make profit can be 1031 exchanged and rolled into another real estate investment purchase of higher value and many times will incur not tax on that current gain. Real Estate that is not sold but rented requires no tax be paid on the equity now built into the property. That profit can now grow tax deferred until the final sale of that property. Real estate held over 1-year before a sale also qualifies for a much lower long-term capital gains tax rate. That lower rate allows the investor to pay less in taxes on the entire gain when they chose to take those profits.
Real estate investing allows for the opportunity for leverage. For example, if you want to control $10,000 in a stock or bond you need to have the full $10,000 to buy it. If you want to purchase a $500,000 piece of property you will only need a loan and a small percentage of that cost to control that asset. Both assets can go up and down in value, but the advantage of real estate is that you as the owner get 100% of the profits that come from the increase of the total value of the property while only having to pay interest on the money you borrowed to purchase the property. If you rent out the property can you also generate income from the property which can pay for the interest of the loan.
This is a person who purchases a property and then rents it out. The landlord controls the property, sets the rent, and gets the increased equity in the property as it goes up overtime. Rental properties can provide monthly income and the increasing value of the property can grow tax free. Taxes on real estate equity gains are not paid unless the property is sold which is like any asset. The best part about real estate is that you can borrow from the equity to pull out cash tax free. Also expenses associated with managing the property and costs to maintain the property are tax deductible. The downside is that rentals can take time and effort to rent out and managing tenants can be have their own burdens if they don’t pay on time or are destructive to the property. Vacancies (times where the property is not rented) are also part of the game and should be factored in when owning investment real estate.
The basic strategy of a Fix and Flip is for a real estate investor to purchase a property at a discounted price. Then fix up the property to either meet conventional lending standards or renovate the property with the goal of selling for a profit. The same is true for a fix and hold except the investor after renovating the property gets their own conventional loan so that they can hold the property long-term as a rental or primary residence.
While there is a great profit to be made by flipping a home it is by no means easy. You have to buy well, rehab inexpensively and do so quickly. You will also need a significant capital. Not only do you need funds to acquire the property you will also need money to rehab the property, pay your people, taxes, utilities, insurance and carry the cost of any loans you have taken out. After that you will have to pay taxes on the profits made from the sale. It has been said that you need to have money to make money and that is certainly the case if you are in the business of renovating real estate for a profit.