How Real Estate Makes money for You?

In today’s post we discuss the way that you can make money out of real estate. The first major way to make money out of real estate is to lease out your property either as residential rental or as commercial lease. When investing for rentals ensure that your rental income will result in a net positive cash flow after maintenance costs, taxes etc. As stated before commercial lease is more attractive because it generates more income. Residential lease is a good starting point on your journey.

In order to maximize your rental income learn to treat the property as a business. This includes if possible ensuring that the tile rests in a private limited company so as to limit your liability. This enables tax benefits as well. I hear you say how?  For example my family owns the building which our dental practice operates from. If it was in our personal names then we would not be allowed under tax laws to charge ourselves rent. But because it is under a separate legal entity, therefore we can legitimately pay rentals and manage our taxes. At disposal of a property that is held in the name of a private limited if structured well there will not be any capital gains tax because one would be selling shares with no change of title. Treating the property as a business means that you intend to make the property have its own income and expense statement to ensure that it is profitable in its own right.

One can increase rentals due for example by including all kinds of facilities together with the property for example – one could include full furnishings for the property and include a charge with the rental. A word of caution if furnishing the property, make sure this is high quality durable furnishing that suits your target client.

Some ten years ago I got stranded at Heathrow Airport when a connecting flight was late and we were left by our plane. We ended up being hosted by a husband and wife team who ran a short term rental property close to the airport. They stayed on the first floor and as guests we put up on ground floor. These guys provided breakfast and played games with us including Karaoke singing. In effect they used their home as a business for short term rentals. They took us to see a classic rural English village. These extra services enabled them to charge a fee.

The second way of generating wealth from real estate is through capital appreciation. I must clearly state that capital appreciation is in a sense phantom wealth as it is potential value. It only translates into real money if the property is disposed. However even before disposal since it builds your balance sheet and hence your networth. Owning real estate thus becomes an excellent store of value and wealth. Some people make money this way by buying, upgrading and then selling houses. This generates quick money by exploiting the velocity of money. Here the investor does no wait for capital appreciation but as a matter of fact gets properties that are at a discount then cheaply upgrades them before disposing. A well structured real estate investment programme allows someone to make money while deferring tax payment on the sale proceeds. A good accountant is required to make sure this is done properly and legally.

The third way that someone can make money out of real estate is through leveraging to borrow against the property. If someone has a good enough cash flow they can borrow against the property to acquire other assets. Let me clearly state that borrowing against the property for consumptive purposes is unwise. One should only place the asset at risk if it allows them to acquire a better and more profitable asset. Recently we leveraged one of our properties and borrowed funds through mortgage lender and used the funds to acquire a manufacturing business. This way we still had our underlying asset – the property and acquired a second asset – a business. Who said you cannot have you cake and eat it at the same time? By using a mortgage refinancing model in effect we managed to get a longer term loan than normal banks would have made available to us. Let me re-emphasise do not place your property at risk when your cashflow can not support the borrowing because you stand the risk of losing the asset.

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  • Reply drtaffie August 26, 2010 at 5:53 am

    I would like to highlight the net effect of TAXES, out of 12 months the first 4 months salary goes to TAXES. It’s very important for people to know and use tax accountants whenever possible. In Australia there is depreciation tax on property which enables you to claim back every year from the government. Another major avdantage of real estate is that the bank helps you buy it. they lend you 80% of the cost which means you get the passive income plus the house ( legal way of getting rich).

    I think people should find away of legally reducing thier TAXES.

    • Reply nurturingchampions August 26, 2010 at 7:52 am

      Thanks Taffie. There is great wisdom in working with clever accountants to reduce taxes. Even in Zim depreciation tax exists but because most people do not know they cannot exploit it. Building Societies (mortgage lenders) are slowly becoming active which will allow bank financing of real estate. Its amazing that you get a loan that is repayable in 10-15 years to buy a real estate asset and yet its pretty difficult to get a start up loan or a long term loan for a business for that length of period. That is the beauty of real estate.

  • Reply vfconq August 26, 2010 at 7:09 am

    Dr Makoni, just to say this is blogg is eye opening to us the young genereation, having prospects of wanting to get into property it says a lot I did not know about!! we are trying to come up as a group of friends to get into the real estate market, what would be your best advice on how we can start with the little capital we might have.

    • Reply nurturingchampions August 26, 2010 at 7:55 am

      I am glad that you are enjoying it and finding it useful. It depends on what you mean by small capital. Another way is to link your team and purchase land preferably direct from city council. You can lobby as a youth initiative. This would be cheaper. If you got meaningful land you can then team up with a developer and get bank financing. There are lots of people keen to fund youth led initiatives.

  • Reply drtaffie August 26, 2010 at 9:50 am

    Dear Vfcoup

    My experience though limited has taught me a number of things. “A friendship founded on business is better than a business founded on friendship. John D Rockefeller” You need to be organised and by that I mean you need to have an MOU and a NON disclosure agreement. Then you build the business. “Remember everyone has got a great idea but only those with a team succeed. Robert Kiyosaki”. From my experience you need to 1. Define the mission of the project, 2. Have a team (accountants, lawyers, IT e.t.c – this depends on what you are working on), 3. Leadership styles, 4. Cashflow, 5. communication (internal and external), 6. systems, 7. legal and 8 the product.

    I would defiantly encourage you to go for it but I will state the need for a legal document that what you guys discuss in your meetings stays there. I learnt the hard way in Zimbabwe when I started the Label SAINT, no sooner had I told a brother, i only discovered it when he was on stage getting the credit and this led to a bitter legal battle.

    • Reply nurturingchampions August 26, 2010 at 10:20 am

      I fully concur with Taffie’s insights. Document everything and make sure that all corporate formalities are observed. Agreements should be in writing and confidentiality of business model and concept should be protected. Robert Kiyosaki’s material if you can get hands on it will be very useful.

  • Reply Jen August 30, 2010 at 4:57 pm

    good post..great share, great to read it

    • Reply nurturingchampions September 6, 2010 at 2:48 pm

      Thanks. Am glad you enjoyed the read. Trust you will start applying some of the concepts. be blessed.

  • Reply Marie Chelle September 1, 2010 at 3:20 pm

    Thank you very much my friend, you are very kind in sharing this useful information with others…. the details were such a blessing, thanks.

    • Reply nurturingchampions September 2, 2010 at 12:13 pm

      Thanks Marie am glad you found this useful. Your comment greatly appreciated. Be blessed

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