Why buy real estate? Take a look at the benefits in owning investment real estate. A common criticism of real estate as an investment is that it is believed to be a non-liquid investment. Meaning, it is not effortlessly disposed of. . . converted to cash.

In fact, that may be one of the fulfilling qualities of real estate as an investment. Unlike most other types of investments, real estate is not sensitive to the negative news and rumors that cause the wild swings in investment markets. Not even the biggest power players can significantly effect real estate markets. In contrast, well planned real estate investments are extremely stable, due in part to the fact that investors can't jump in and out of the market on the spur of the moment. Continued below

With most investments the decision is simply to hold or to liquidate. If your decision is to hold, you are likely to be at the mercy of decisions made by a board of directors thousands of miles away. If your decision is to liquidate you simply sell the investment and pay taxes on your gains. . .if any.

Generally, in most investments, what you see is what you get. There is little else to consider other than the profit you make when disposing of the asset. However, there is so much more in the way of benefits churning beneath the surface in a real estate investment.

Let's take a look at some of the alternatives available to the real estate investor that might help dispel the myth of non-liquidity that hovers over real estate as an investment. First and foremost, real estate investors have the opportunity to plan and financially structure their investments in every phase in the life of the investment. Well structured and monitored, investment real estate provides cash flow, equity buildup through appreciation and mortgage amortization, and tax shelter in the holding as well as disposition phases of the investment.

In the holding phase, the investment can be restructured to regain diminished tax shelter. In the disposition phase, tax on capital gain can be deferred indefinitely. Let's expand on those comments.

In the holding phase, tax benefits can be revitalized in a number of ways. The mortgage interest deduction advantage can be enhanced through refinancing. . . increasing the annual interest write off.

And contrary to the saying "you can't have both the penny and the cake too", the investor not only benefits from the write-off of the increased mortgage interest, the proceeds of the refinance, whether they be Ten Thousand Dollars or One Hundred Thousand Dollars, are tax free. You can write-off the interest on the money you borrow, and the money you take out of the investment is tax free, not tax deferred, but tax free. Tax benefits can also be revitalized by making capital improvements to the property, thereby increasing annual depreciation write-offs. Can you think of an investment aside from real estate that allows an investor to depreciate an appreciating asset?

In the disposition phase, alternative strategies available to the real estate investor can be tailored to minimize tax consequences and maximize wealth accumulation. The investor can take a partner, they can sell the property and pay their capital gains taxes (if any), they can sell the property and take back a mortgage spreading the payment of capital gains taxes over the term of the mortgage (paying Uncle Sam in tomorrow's dollars), or liquidate the property through a tax deferred exchange (roll it over into another investment property.) The term "tax deferred" implies that the tax on any capital gain will have to be paid eventually, however with prudent planning that need not be the case. Far too lengthy to detail here, but you need to know these alternative opportunities are available to you as a real estate investor.

Your ability as a real estate investor to benefit from these alternative strategies is without doubt limited to your awareness that they exist, and how they might be applied in your particular circumstance. Solely through control. . . prudent planning and constant monitoring in the management of a real estate asset, can full benefit of these many opportunities be realized.

About the author:  Stewart L. Mac Donald, CCIM, is President of Real Estate Assets, Inc., a consulting services company focused on maximizing wealth through Asset Management in the real estate portfolio. Mr. Mac Donald has counseled on and has been an active participant in a wide range of investment real estate projects. He has written and presented seminars on "Strategic Planning in the Investment Real Estate Portfolio" before bar associations, financial planning and investment groups.
http://www.real-assets.com
http://www.real-estate-assets.com

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