Punit Minocha

• You can leverage your purchase to multiply your return 3-5x -see definition and examples below

• Tax deductions increase your after-tax cash flow-deduct repairs, fees, interest, insurance, taxes ...

• Residential property is the most liquid of all real estate investments-homebuyers are everywhere

Leverage is multiplying your gain by investing a small amount of money in an asset that is worth much more than the initial investment. Typical investments in stock and bonds do not use leverage. For example:

Not using leverage: Invest $30,000 in stocks that yield 5%. Your return is $1,500 (5% return on $30,000).

Now Let's say you invest just enough money in a rent house so that the rentals pay for overhead, and let's say your property appreciates at, say 5% per year; then you receive a much greater return than if you get 5% only on the amount invested. Illustrating the concept of leverage at its simplest:

Using leverage: Invest $30,000 in a $150,000 property that appreciates at 5%. The return is $7,500 (5% of $150,000). This is equivalent to a 25% return on the $30,000 investment.

That's the leverage concept. The actual return is less when considering operational and sales expenses; however, return can be quite a bit more when appreciation is higher. And holding property for several years can produce astounding results due to compounding appreciation.

Tax savings are achieved by writing off expenses and depreciation. For example, say you have a $150,000 property you bought with 20% down and a $120,000 mortgage. The following figures are a greatly simplified estimates used for illustration purposes only, are subject to change, and are intended only to give you a glimpse of the possibilities. YOU MUST CONSULT YOUR CPA FOR ACCURATE TAX ADVICE.

Yearly Interest	$ 7,800
Yearly Insurance	$ 650
Yearly Taxes	$ 3,765
Yearly Management fees	$ 936
Rental charges	$ 780
Depreciation	$ 4,364 (paper loss)
Total annual write-offs	$18,295 ($13,931 actual losses)
Rental income (11 months)	$14,300
IRS sees a loss	$ 3,995
Gain before appreciation	$ 369
After tax cash flow	$ 1,569 (not including appreciation!)

What does this mean to you tax wise? It means that you could afford to lose $1,569 and still have a break even cash flow after taxes. It also means that although you may have made money, IRS sees it as a loss, reducing your taxes. So the money you would normally spend to pay taxes actually helps pay for your asset.

Note that the rental income with one month of vacancy is $369 greater than the expenses, pretty much a break even cash flow before taxes. A wonderful benefit comes after tax: Because IRS allows you to depreciate the property, your after-tax cash flow is a negative $3,995, a net loss that reduces your income tax. The example does not take into account repairs, which you need to figure in; the good news is that they can be minimal on new properties.

Are you in the 30% tax bracket? If so, for every additional dollar or thousand dollars you make, 1/3 goes to IRS. Every additional $4,000 you make, $1,200 goes to IRS. But if you have a net loss of $4,000 IRS looks at it as if you have $4,000 less income. This would mean a tax savings of $1,200. So if you own more properties, you could save thousands in taxes, the properties could pay for themselves, and you could get appreciation on multiple properties instead of just one. Is it starting to get fun now?

PUNIT & ANU MINOCHA