The idea of real estate investment is attractive for many reasons. It offers exceptional returns. It's future-proof. And, depending on the model you choose, it can deliver high earnings with minimal day-to-day involvement.
However, there's one caveat about real estate investment. To achieve a high ROI, you have to know what you're doing to ensure profitability.
After all, with multiple risks to navigate — including vacancy, liquidity, low demand, or your cash being tied up for extended periods — it's essential that you have strategies and structures in place to help you maximize profits. You need to understand the tax system so that you can take advantage of all potential opportunities.
This guide will provide you with an overview of how to enter (and remain profitable) in the business of real estate investment.
How Real Estate Investment Works: Strategies & Structures
One of the biggest misconceptions about investing in property is that it's all about buying, then waiting. This belief isn't much of a surprise. After all, in some states, real estate appreciated as much as 10% in 2024.
However, actively investing in real estate as a business model isn't as simple as playing the waiting game. Instead, to achieve a solid ROI, you need a strategic approach.
Ideally, you have a clear idea of what short-term and long-term goals you wish to achieve before purchasing your first property. Moreover, if you already own an asset and want to transform it into a money-making engine, you have to understand the tactics that will help you accomplish your objective.
So, what are your strategic options with real estate investment?
Buy-and-Hold
The most popular type of real estate investment is when entrepreneurs acquire properties and wait for them to appreciate over time.
If you have a healthy cash flow (and a solid chunk of capital you want to turn into passive income), this is one of the best options for you, as it provides an impressive ROI over long periods.
Flipping
If you don't mind a project (and maybe even some DIY), flipping properties can be a great way to make a quick profit.
However, to make it worthwhile, you need to be good at project management. Otherwise, you'll spend unnecessary time or funds, diminishing your returns, or even losing money.
Short-Term Rentals
If you're looking for impressive returns and don't mind having a higher operational involvement, short-term rentals can be a great option.
Websites like Booking.com, Airbnb, or Onefinestay allow you to achieve high returns, depending on demand in your area. And not just that. This is an excellent strategy if you want to boost your monthly cash flow.
Real Estate as a Diversification Strategy
Ultimately, if you're an experienced investor seeking to diversify your income, real estate can be a valuable addition to your portfolio.
To boost profits and minimize risk, choose the right structural model for your needs.
Personal ownership may be more affordable and simpler upfront, but it does come with a higher risk factor. Forming an LLC can protect your personal assets, which is why most investors prefer it. It's also possible to consider the benefits of general partners or joint ventures, though these models necessitate a slightly more complex organizational structure.
Lastly, it's important to mention the option of investing in Real Estate Investment Trusts (REITs). These organizations pool capital from multiple individuals, then generate income from a multitude of property types, including private, commercial, industrial, and hospitality sectors.
What's interesting to mention is that REITs can also offer exciting employment opportunities for profit-minded individuals, regardless of whether you're looking for a full-time position or a side hustle that will allow you to make an impressive income.
Tax Advantages of Investing in Real Estate
One of the biggest benefits of real estate investment is that it comes with attractive tax advantages, the likes of which you won't find in other sectors. However, making the most of these benefits necessitates an in-depth understanding of how the tax system works.
For this reason, it's super important to surround yourself with the right support team, including an experienced accountant and legal team.
In general, there are three main tax benefits you can take advantage of when investing in real estate.
Depreciation
Essentially, by claiming depreciation, you can deduct a portion of your property's value as a loss each year. This means your taxable income will be lower (saving you a significant amount of money). Plus, you can implement this tactic for several years — 27.5 years for private and 39 years for commercial properties.
If you already own property, you can calculate your depreciation tax savings with RE Cost Seg’s calculator tool.
1031 Exchanges
Another great way to defer capital gains taxes is to do a 1031 exchange.
Essentially, this tactic involves selling an investment property and reinvesting the funds into another like-kind asset. The timeframe to do this is 45 days. What you need to note is that if you've claimed depreciation, that sum will be recaptured as income.
Cost Segregation
Finally, when trying to maximize profits from real estate investments, keep in mind that you can break up property into IRS-approved categories to minimize taxes.
This approach works for nearly all types of assets and can significantly boost earnings, particularly when combined with advanced tax deductions, such as those from bonus depreciation.
How to Build a Successful Real Estate Investment Business
Although you can approach real estate as a personal for-profit project, real earnings come from turning these investments into a business. However, if you decide to go in this direction, you need to be prepared to build the infrastructure needed to run a successful company.
In other words, a real estate investment business — just like any other venture — necessitates a core team (of property managers, agents, accountants, legal professionals, etc.). Moreover, you need to keep a close eye on your cash flow, track performance, and adjust your tactics as needed.
Furthermore, as with any other business idea, real estate investment necessitates a well-thought-out exit strategy. This means you have to have a long-term business development mentality. Additionally, it requires an understanding of how to effectively transfer any acquired wealth to ensure you achieve impressive returns, rather than losing all your hard work to taxes.
Final Thoughts
Although it requires a significant up-front capital, real estate investment can be a marvelous opportunity for entrepreneurs and investors looking to make a profit.
It allows you to choose from versatile operational models, and in addition, there are several tax benefits available, enabling you to build more wealth, especially over longer periods.
