Planning a Profitable Exit – Rehab and RentLets take a look at one of the most profitable strategies today’s Real Estate Investor can use. In fact, not only can this strategy yield you some of the highest profits, it can also bring you some added tax benefits. In fact, this rehab and rent strategy can bring you income that will support your business or your lifestyle while being one of the greatest contributes to you wealth that can carry on for generations.Rehab and Rent is favored by many real estate investors as one of the greatest wealth building tools of all time. With Rehab and rent you can get a deal on the property today, do only necessary repairs to make it rentable, then enjoy the passive income and the tax depreciation for years to come.
Most investors will hold a rehab and rent project for an average of two to three years. That is often just the right amount of time to enjoy the income and watch the value increase. Of course holding the property for more than one year also reduces capital gains taxes which puts you, the investor, in a position of greater cash profit in your pocket where it belongs. Considering the current market conditions this may very well be the right time for you to get into a few rehab and rent projects and watch them increase in value over the next few years.Advantages of Rehab and RentThere are many. The first being that you can pay a little more for this type of deal than you could for a traditional rehab and flip. Think about it this way. with a rehab and flip you need to account for sales expenses right away, which means you need enough discount to cover those expenses or you will make less profit.
However, with rehab and rent, your goal is to get income from the property, thus putting your sale off to some time in the future when the value could be much higher than it is today.Another advantage is the lower cost of rehab involved with a rehab and rent strategy. After all, most tenants don’t care if the bathroom is pink or green, just as long as it works. That means you don’t have to as much rehab or updating for a rental property as you normally would for a rehab and flip deal.Perhaps the biggest advantage of the rehab and rent model is the number of deals that are now possible. That’s right, with this model there are more neighborhoods you can buy in and more sellers you can make offers too. We all know that in today’s market you need to choosey about the neighborhoods your going to flip in, and that will eliminate some areas that are nice, but just not selling in today’s market.
Now by adding the rehab and rent strategy to your investor tool belt, you can do deals in those neighborhoods and enjoy the passive income while you wait for the market to rebound.Tax Advantages of Rehab and RentNow one of my favorite parts, the tax benefits. Although I am not an accountant, I have help income property for many years and I can tell you that the difference it has made on my tax returns is outstanding.
First lets consider depreciation. That’s right, depreciation. The IRS allows you to depreciate a property based on the value it holds on the day you placed it into service. That means if you buy a junker, do some repairs and thus increase the value, you get to depreciate on the new increased value and not the price you bought it for. Pretty good huh! Of course you cant depreciate the land value, just the building or improvements, which generally means about 80% of the value.The next is the cost of repairs. Some repairs, like replacing a roof, will be included in the long term depreciation, while others, like carpet and paint can be written off in the same year that you did that work. That means you can enjoy some pretty good write offs in the year you acquire the property, and that really helps to offset your other income and keep your taxes low.Then there is the best part, Passive Income. That means the income from your rentals is not subject to FICA tax. That fact alone saves you 15.3% in what is normally referred to as the self employment tax. Ever wonder how the rich keep getting richer? They have multiple streams of passive income and they reinvest that income into other passive income streams liek real estate.Lets put that together really quick. Say you buy a property for $80,000. Then you put $10,000 into misc repairs to make it rent ready increasing the value to $90,000. Your depreciable base is now approximately $72,000, which over 27.5 years equals $2,618.18 in depreciation deduction every year, and that will pass through against your personal income reducing your taxes. Then there is the income, if it rents for $1,000 per month, that means $12,000 per year before your expenses.
If you have a mortgage chances are the income will be cancelled by your depreciation giving you a tax free income stream.Then as an added bonus, the property goes up in value over time. So when your ready to sell that property that you have valued at $90,000 may sell at $150,000 or even higher. You may even be able to do a 1031 exchange of that property into a bigger project that brings even larger amount of passive income to you.Now you’re beginning to see why so many real estate investors like the rehab and rent model. Used consistently, even a novice investor can build a large amount of wealth with the rehab and rent model. Of course you will need to mix in other strategies too. It will be some of those other strategies that will give you increased cash flow and ability to buy even more property.