A good real estate investor understands the necessity for diversification of investment and one of the many investment prospects that holds good value and can serve as an inflationary hedge for your portfolio is an investment in oil. There has never been a better time to invest in oil with many experts advising that opportunities for investment in oil and gas today through 2018 are better than the opportunities in the real estate market bubble of 2008. With an estimated, over $1 trillion in large project cancellations, the future demand for oil and gas consumption which continues to see a steady growth rate, are sure to be unmet, thus forecasting a rise in future prices.
For the savvy real estate investor, now presents an opportunity to branch out and hedge your investments by adding to your portfolio an investment in oil. Adding oil to your investment portfolio has been made easy through advancements in crowdfunding technology and regulations. Investment in oil through crowdfunding platform can start for as low as $1,000 and some platforms have created a structure to pass through unique oil and gas tax benefits to the investor.
These tax benefits are backed by an Act of Congress. The purpose is to provide incentives for investors who elect to commit private equity in the high risk/high reward nature of oil and gas production. It authorizes a binding, one-time election to expense intangible drilling and development costs, which permits an immediate write-off of expenditures that would otherwise be capitalized and amortized. In essence, there is waiver to cushion the effect of any loss that maybe incurred.
Direct investments in oil and gas projects provides for the investor outstanding tax benefits, steady stream of profits generated by the wells they own on a monthly basis and a strong hedge against inflation. Not only do investors in oil take advantage of short-term tax benefits, Investors may also see a near-immediate return on investment, whereas it could take decades to get the full tax benefit on real estate investments. For Instance, if an investor commits $100,000 in a property, he gets to deduct $3,636 per year. Receiving the full tax benefit would take nearly 30 years but that investment of $100,000 is in an oil and gas project with “intangible drilling costs” (IDCs), he can deduct up to 80% of his investment, or about $80,000 in the first year. At a 35% or 39.6% tax bracket, this is equivalent to a 28% – 32% return in year one, even before the project produces oil and/or gas. He would also receive additional tax reduction benefits based on production values and depletion of the reserves.
Intangible drilling costs (IDCs) is the term used to describe all cost associated with the exploration of crude oil. Cost includes items like labor, drilling mud, fuel, wages, structures necessary to perform labor, and supplies, whether it is performed on the well, to drill the well, or on the ground surrounding the well. Think of it as all costs incurred that have no salvage value.
Benefits outside of tax breaks that an investment in oil will derive for the investor includes but are not limited to the following :
Quick Turnaround Time of Investment : An investment in real estate can take several years to determine if the investment is a success. In contrast, an investment in a small oil and gas project like those proposed by crowdfunding platforms, will provide for the investor a time frame of between six months to a year to determine the success or failure of the project.
Diversification: Investment in oil and gas projects, serves as a good vehicle for diversification as it provides an inflationary hedge for your investment portfolio. It is most times independent of the bulls and bears of the stock market and returns from these projects are not dependent on the economy, as is the case for the housing market.
High Rewards: Direct investments in oil and gas projects can pay off big and has the capacity to break even several times over if the well is productive. This result of this is steady cash flow from distributions for many years.
Ownership of crude oil at the point of extraction can be a very lucrative addition to your investment portfolio, going by current prices and forecast of increased demands backed by the promise of Tax benefits, investment of profits from real estate in Oil is a very good bet.