Ahh, December. A blast of arctic cold for most of us, but also the time of year where performance increases (i.e. raises) and bonuses if you (and your employer) did well this year and happened to be generous. Although high performers can glean some extra percentages out of that raise and perhaps get some stock options to boot, a majority of wage earners are going to be doled out earnings increases more drab and boring than old military rations.
If you have a full-time job and work as an employee, you will find that sometimes you have very little control over this raise you receive. Market conditions, competition, and senior management could easily derail all of your hard work via a bad earnings year, a sales target miss, or a “rebuilding” phase where your well-deserved bonus went to a repair a string on someone’s golden parachute.
Why not choose your own destiny and give yourself a raise next year with a piece of income property? Sure it’s hard work, but it’s likely that you are one of the high performers I mentioned above and you toil long hours to achieve your financial goals anyway. After all, you did happen to come across our site in order to quench your thirst for knowledge, save time, and achieve more with powerful tools that are simple to use.
Consider this: in your “free time” on weekends after your daily grind ends for the week, you’ve just purchased a $90,000 property that you are renting for $900/month. We’ll assume a 25% tax bracket for all tax deductions to make it easier. Let’s roll through the 5 “IDEAL” Reasons You Should be Investing in Real Estate and check out the benefits you’ll receive:
Income (Cash Flow): $2,750/year (assume one month vacancy)
Depreciation: $2,618 (offsets most of your taxable income)
Equity: $1,484 ($72K loan, 30 year fixed at 4.38% int)
Appreciation: $1,080 (1.2% appreciation per year of $90K)
Leverage: $977 (deduct mortgage int $3,908, save 25% tax)
Total Earnings (Before Tax): $5,314
$5,314 is your before tax earnings. We’ll need to go ahead and tax the $132 remaining cash flow, but credit the $977 you are able to deduct from the mortgage interest.
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Total Earnings (Taxing $132 CF, Deduct Int): $6,258
You’ve received $6,258 when you combine cash, equity paid back, property value increase, and tax savings from your debt service. Not too shabby!
Let’s assume a yearly salary of $50,000 and add the $6,258 earnings:
$50,000 salary + $6,258 earnings = $56,258
Divide the new amount by the old amount to get your percent (%) increase:
$56,258 new salary / $50,000 old salary = 12.5% increase
Look at that–you just got a 12.5% raise this year! You might be able to get a promotion at work and achieve that, but here’s a twist on the raise–you won’t be getting taxed on that $6,258 since it is an after tax total.
Let’s see what you would need at your job to get $6,258 of take home pay, assuming our 25% tax bracket again:
$6,258 take home / 75% take home after tax = $8,344 pre-tax income
You would need $8,344 of pre-tax income from your job to get the $6,258 take home pay. Going back to our previous calculation (divide new amount by old amount), you would actually need a 16.7% raise to achieve the same benefit you received from the rental property. Now of course I realize you need to get a hold of that property and come up with a down payment in order to realize this. Although it’s easier said than done, You Don’t Need to Be Rich to find money for investment properties either.
To wrap it up, by no means would I ever suggest that you don’t work hard at your job. This is only a means of comparing a real estate purchase with late nights in the office to plot your road to financial independence. If this post resonates with you, you might be an employee getting a paycheck, which is most likely your primary source of income.
Your yearly increase via promotions and profit sharing at work may exceed the real estate example above, which is laudable. In that case, how about doing both? If you’re on the fast track to wealth with your company, you’ll need a good place to invest your cash and you’ll be able to handle the down payments needed to “give yourself a raise”. Finding the right real estate deal is easier than you think and takes a lot less time than you realize, especially with AssetRover. Stay tuned since we have great automated tools coming soon, hooked directly into live data from the MLS! Find profitable investment properties in your area, ranked by cash flow potential and more, with a few simple clicks of the mouse.