Why is real estate consistently the preferred investment method for Americans for an investment strategy? The fact of the matter is that the benefits of investing in real estate exceed clear expectations. When responsible real estate investors engage in thorough due diligence, few strategies have a greater impact on wealth creation.
This discussion focuses on long-term buying and holding strategies rather than some types of short-term real estate investments. These investments are better suited to beginners because there is a minor knowledge barrier to overcome and they are optimized to reap benefits that will build up over time. These factors combine to combine wealth to generate wealth and ultimately accelerate your path to financial independence. What makes real estate so powerful?
The four pillars of real estate investing
Real estate is much more versatile than it first appears. The average person understands that buying a home is a wise decision because its value is likely to increase over time. While this may be true in many cases, it is only a small piece of the puzzle. Four main pillars of wealth creation make real estate an attractive asset class.
Increases in value, or increases in value over time, are common in the world of equity investing. For this reason, many new investors can easily understand this concept. Most people realize that if you bought a house in a healthy housing market 30 years ago, it would be worth double or even triple today. While he is the most famous factor in real estate exploitation, he should be seen as the least trustworthy person. If you are relying on an increasingly valuable home to keep it profitable, you are probably not making a good investment.
The real estate crisis of 2008 is often used as an argument against the continued appreciation of the real estate market. The housing crisis was certainly a catastrophic event that led to a sharp drop in property prices. But even if you bought a home when the market was at its peak in 2007, it would have a full return in less than a decade (based on average US home values).
Remember, this was the worst real estate accident ever, and even then its value was recovered. With the other three mechanisms for wealth creation in hand, even the risk-averse investor will find peace of mind.
Cash in circulation
Real estate investing isn’t very exciting until you start generating cash flow. Cash flow is essentially a function of income and expenses. Of course, there are costs involved in running a real estate investment. For example, you are responsible for paying mortgages, utilities, taxes, and insurance. Also, you need to consider the various vacancies and investment costs you need to plan, such as repair or replacement costs like the water heater or roof.
On the other side of the coin, there is a clear way to generate revenue. You guessed it, the purpose of traditional rent is to charge your tenant more rent than your costs. If so, that extra income is pure profit or cash flow.
This cash flow can only be a few hundred dollars a month. While it may not seem like a lifetime, changing the amount of money coming together over time has a measurable impact. For example, if you had the opportunity to raise $ 10,000 today versus $ 200 a month for the rest of your life, which one would you take? Some quick calculations would tell you that you would have spent $ 10,000 in 50 months or just over 4 years.
Let’s take it to the next level. Let’s say you saved $ 200 each month and decided to buy another rental property. With every additional property you buy, you increase the cash rate and can accelerate this cycle. You can continue this strategy indefinitely until you have reached the level of monthly income from your rental portfolio.
What does equity mean? Well, equity is essentially about ownership. For the most part, it may or may not be yours. Why do you think the equity of real estate or any other assets is expressed as a percentage? When you buy a home using traditional financing, the bank is paying for most of the home. As a homeowner, you simply pay off that loan over time, building up equity.
In the case of rented buildings, however, you collect the rent from your tenants. In a way, it seems that your tenants are paying the mortgage for you and building that equity for you. This is a powerful mechanism as it can massively increase the value of your home to which you have access.
To guide the concept at home, let’s use an example with numbers. For example, let’s say you bought a home for $ 1,000,000 with a 20% down payment, or $ 200,000. Your tenants pay their rent, which, in simple terms, corresponds to your total costs. Even if you didn’t get cash flow from that property and didn’t appreciate it, at the end of the repayment period you would still be worth a $ 1,000,000 property. In other words, you made $ 800,000 in stocks just because your tenants paid off your loan.
The last pillar of wealth accumulation in real estate is the pure tax advantages that one receives from owning a property. When starting a conversation about taxes, it is important to make it clear that you should only seek advice from a tax professional. This discussion will focus on the potential benefits for many real estate investors, but not all will be accessible to all. The options available to you will depend heavily on your particular situation.
Most of your tax savings as a start-up investor likely come from depreciation. Over time, your home will be subject to normal wear and tear which will reduce the value of the property. Fortunately, these costs can be deducted from your taxes, which can save you thousands of dollars each year. The IRS requires you to deduct the full value of your home over 27.5 years. Note that this is the value of the home itself, not the full purchase price of the property.
As a real estate investor, tax exemptions can make another important contribution to your tax savings. There are a variety of possible deductions that you can access, including the more obvious costs of maintaining your property, such as repairs or major improvements. Less obvious deductions include things like property taxes, insurance, and the interest portion of a mortgage payment.
Real estate investing is the key wealth-building strategy for over 10% of the world’s billionaires, and by now you can understand why. The power of real estate gives you a multi-faceted approach to getting rich, no matter what that means to you. Today we’ve mainly covered the benefits of investing in a simple long-term rental strategy. However, the real estate industry has the flexibility to adapt to a variety of strategies that can propel investor efforts toward their goals. With a little knowledge and some rework, you can also embark on your financial journey with all of the tools you need to be successful.