When you’re scrolling on LinkedIn or listening to financial podcasts, sometimes it can seem like real estate is the only asset class people are talking about.
And though real estate can be extremely profitable for investors, you shouldn’t assume that an investment will work for you just because it has worked for someone else. There’s no one-size-fits-all investment strategy that makes sense for everyone.
Instead of blindly following the advice of influencers or real estate professionals, here are three questions you should make sure to ask yourself before investing in real estate.
1. What are the Tax Benefits?
You may have heard that real estate investing will lower your income tax. This is only true in very specific cases where someone classifies as a real estate professional (check out our blog on this topic to learn more about this).
If you don’t meet the IRS classification for a real estate professional, there are other tax advantages to investing in real estate. Just remember, these benefits only impact the passive income you generate from real estate. They won’t lower the taxes you owe on your earned, W-2 income.
But you should also keep in mind that these benefits also vary based on the investment vehicle you choose. Real estate investment trusts (REITs), for example, are not taxed the same way as a direct investment.
So, before you make an investment, make sure you’ve done your research and understand the specific tax benefits of this opportunity, and take the time to think about how those benefits can add to your overall tax efficiency strategy.
2. How Much Work Will This Investment Require?
People love to talk about passive income, but don’t always fully explain what it means. Remember: Passive income does not always mean investing passively.
Passive income is a tax classification from the IRS that doesn’t always correlate with the amount of work required from an investor. For example, rental income from real estate is taxed as passive income, but if you’re directly managing a property, you’ll typically spend an enormous amount of time on management, marketing, and more.
Certain real estate investments do allow you to invest passively — such as co-investing with an experienced sponsor — but you should never assume that an investment is completely passive without fully investigating the specifics of the opportunity.
If you’re investing to make more money while working less hours, then an investment that requires an enormous amount of time and energy from you will not actively support your goals.
3. Does This Investment Support My Goals?
Successful investing is all about choosing the right vehicle at the right time to help you get to your destination more efficiently. So, before you make an investment, you should always take time to identify the specific goals you’re working toward, and then examine the opportunity in light of those goals.
Say, for example, that you want to lower the earned income tax you pay on your salary each year. Unless you spend more than 50% of your time working in real property business — and meet several other specific criteria — real estate investing is likely not the best opportunity for you.
You should also consider how well factors like the time horizon, level of risk, and minimum investment requirements align with your goals and needs.
If you’re interested in learning about partnering with FGCPTM on tax efficient, direct investments, please fill out this form to get in touch.