Los Angeles is a city of stark contrasts, from the multi-million dollar homes in Pacific Palisades to the slums of South Central. For many of modest means, the accumulation of great wealth through Los Angeles real estate is a chimera, an unrealizable dream. The gap between where they stand and where they would like to be is just too large. Yet there are those who, starting from just such a situation, have parlayed an investment of a few thousand dollars into substantial real estate wealth. The particulars vary, but the key in each instance is formulation of a sound plan and consistency in pursuing that plan over time. Here are the stories of a few outstanding individuals who did just that:
Why Real Estate?
For the patient investor, real estate is substantially more attractive than securities as an investment. Even for the dyed-in-the-wool stocks and bonds investor, real estate is appealing as a means of portfolio diversification. The four main benefits of commercial real estate are:
The benefits of appreciation and equity buildup are available to both real estate investors and homeowners. Tens of thousands of families have created the most significant portion of their family wealth through appreciation in the value of their home over the course of their working careers. In addition, payments made on a mortgage loan are like a monthly savings plan, adding to equity.
Commercial real estate offers additional income benefits. The issue of income is related to supply and demand, which affect the asking price for rents. Because of the myriad employment and self-employment opportunities in the Los Angeles area, rents have marched steadily upward over the decades, and the consequent benefit in terms of income for the real estate investor is a very solid one.
With respect to tax benefits, couples who sell their home can take a capital gain exemption of up to $500,000 tax free on a joint tax return, or up to $250,000 on a single return, provided they have lived in the home for at least two of the five years preceding the sale. The real estate investor also enjoys exceptional tax benefits. The first is the write-off of depreciation as a deduction against income, resulting in a tax break. The second is the IRS Section 1031 tax-deferred exchange, one of the last great investment tax shelters in our country. Section 1031 allows an investment property owner to exchange equity from one property to subsequent larger properties and defer capital gains taxes over the course of his or her life. This tax-deferred exchange is available for all the properties in a real estate investor's portfolio. In a comprehensive estate plan, a lifetime of capital gains passes tax-free into the owner’s estate.
A lifetime plan of investing in real estate is thus one of the nation’s
last true means of creating significant wealth and deferring taxes.