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Investing for Income vs Appreciation

A whopping 40% of Americans rent their homes (NYU Furman Center, 2017). Median rents have also increased in every metro area over the past ten years, triggering a flood of interest in real estate investment for income.

But is income a good real estate investment strategy for you or should you focus on appreciation? Before deciding it’s important to understand which type of investment best fits your situation or stage in life.

Your lifestyle goals should guide your deal selection. Otherwise real estate investing can leave you frustrated, waiting for slow returns in what can feel like risky business that locks down your money.

Here, we’ll explain the relationship between lifestyle goals and real estate decisions.  Where you are in life and your long term financial goals should guide the type of property you buy and the strategy behind buying it.

Investing for Appreciation

If you’re young and focused on building wealth over time, an appreciation strategy is more likely to fit your lifestyle. This is a long term strategy. Consider whether you plan to live on the property, develop or improve it, and the historical trends in economic growth around the property.

Keep in mind that your return calculation can be dependent on many factors out of your control, such as interest rate changes and economic decline. So focus on the long game and buy something you are comfortable watching appreciate over five to ten years or more.

Investing for Income

As we mature and enter the later years of life we tend to value steady, predictable income over a slow wealth building strategy. If you’re older and entering retirement, an income investment strategy may be right for you.

The key to buying for income is to properly calculate the returns. Confirm that the rent you collect covers the cost of buying and maintaining the property, taking into account vacancy, maintenance, management, insurance and tax liability.

Using a 1031 Exchange to Shift Strategies

Many investors change strategies over time as their priorities shift. But if a change in strategy requires you to buy and sell, the capital gains tax liability can significantly impact returns.

Executing a 1031 exchange can reduce your tax liability under certain circumstances. For example,  if you sold property that appreciated over the years, to buy income earning property, a 1031 exchange would allow you to defer capital gains taxes by reinvesting the proceeds into another “like-kind” investment property.

Get Into Action

While investing in real estate isn’t a get rich quick scheme, the returns over time can grow steadily and allow you diversify your portfolio. Success requires perseverance, education, and research.

With the right team helping you align your strategy with your lifestyle goals you can grow your wealth with a feeling of security rather than sleepless nights.

Ready to demystify the real estate investment process and build your wealth? Contact the Level Up Group's Investment Specialists to talk about the best investment strategy that fits your dream, or start your search below.