The Four Rewards of Real Estate Investment
Most people have heard that real estate is a smart way to invest your money. But why is that exactly? There are four specific reasons why real estate can be such a great addition to your investment portfolio, and all of them generate wealth.
Debt paydown.
If you buy real estate and then rent it out to tenants, your tenants are paying down your loan for you. Additionally, real estate is an asset you can borrow against to get leverage while your tenant is paying back that loan. Everybody is different. There are different types of loans that allow you to get in the game without needing the full amount of the asset. For example, if you buy a stock, you have to have the full amount of money for the value of the stock when you purchase it. Whereas in Real Estate, you can buy a much more valuable asset with that exact same amount of cash.
Cash flow.
When you invest in real estate with the intent to rent it out, you are creating passive cash flow. If your mortgage is $1200, but the rent you’re charging is $1800, your mortgage is paid and after some reasonable expenses you might be cash flowing a couple hundred a month! If you manage your expenses well, you have your debt paid down by your tenant and you’re going to get cash flow on top of the debt paydown. That’s money that you can (1) reinvest or (2) live off of.Appreciation.
Historically, real estate always appreciates. There maybe years or months that aren’t as great, but if you hold onto it long enough, it will appreciate. Now, there are two types of appreciation: (1) market appreciation and (2) forced appreciation. With market appreciation, real estate organically appreciates about 5% per year. To put that into perspective, if you buy a house at $100,000 in 2020, by 2030, it should be worth around $160,000.
Forced appreciation is when you make improvements to the property to increase the value. For example, renovating an apartment to be able to rent out the unit for more money will add to the value of the whole property. The bank or your appraiser includes the income the property is bringing in in their formula for the value that the property is worth. A flip is another form of forced appreciation.
- Tax advantages.
There are several tax advantages to owning real estate. There are several things you’re able to write off that you wouldn’t be able to write off otherwise. This is a blackhole of knowledge. If you don’t have a good accountant, you need one. Our favorite local accountant to help with real estate needs is Lydia, of LML Tax & Accounting Services in Bethlehem, PA. In addition to accounting, she also offers a one-on-one Real Estate Crash Course. You can find out more at her website here.
When you’re thinking about investing, think about which one of these wealth generators is your primary goal. If you don’t currently own any real estate at all, your first deal is going to give you a ton of those tax advantages. Maybe you’re looking to replace your income, in which case you would need to focus on cash flow. Maybe you just want to leave a legacy for your kids, so you’re not as worried about cash flow, you just want that market appreciation over the years. Your goals are going to determine what kind of real estate you’ll invest in, so clarifying those at the beginning is crucial. For more information about how we can help you build wealth through real estate investment, click the link below!
