There are so many reasons to invest in real estate! Talk to 10 investors, and you will get 10 different answers. Some will say that they appreciate the extra cash the investment brings in each month. Others will say that they appreciate the appreciation (see what I did there?) and like to see their properties double and even triple in value. Still other investors will tell you that they like to have control over where their money is.
The truth is, the list of reasons people invest in real estate is long. This is because there are many potential ways to build wealth through real estate investing. On the flip side, though, there are plenty of reasons not to invest and there is certainly risk to investing in real estate. My goal in writing this article is to show you that while no investment is risk-free, and there are never any guarantees, there are many benefits to investing in real estate and ways to mitigate your risk.
Do I have your attention? Good!
Now break out your scientific calculator, Excel spreadsheet and a six pack, or venti coffee, because we are about to get into some serious analysis!
Just kidding! I am going to give you the basics, the nuts and bolts, and a pathway to begin on an investment journey!
Let’s start with my answer to why I invest in real estate. I’d like to give you a clear, straightforward answer here, but it’s a little complicated. It is complicated because my answer has to do with the life that I want to lead. And I don’t just mean the things I want to do, I also mean freedom from the things I do not want to do.
I don’t want to be stuck in a 9 to 5 job. I don’t want my husband to retire from the Army and have to get another job. I don’t ever, ever, ever want to be stuck in the rat race because of finances. I want to be able to fly to Nepal and trek the Himalayas on two weeks’ notice. I want to be able to buy a Cadillac with cash. I want to be able to resign from my job, my career, so I can prioritize my family. These aren’t just pipe dreams, guys. These are all things I’ve done, and I am just getting started!
My husband and I are both educated, driven, and so far, successful individuals. We both worked hard for what we have accomplished and where we are in life. I don’t say this to blow smoke or brag but rather to show how alike you and I really are. Our careers allowed us to make good money, but it was always finite. When it ran out, there was nothing more. Though we weren’t living paycheck to paycheck, there was always a limit to what we could do. If we wanted to make more money, we’d have to get a second job and work more.
While this might have been somewhat appealing before kids, having children changed everything for both of us. We are still hard workers, but we want to spend all the time with our kids! Additionally, we want to take them to see Mickey Mouse on a fairly frequent basis. Since all things Disney cost approximately a million dollars, we had to get serious about our finances.
Except that we didn’t want to.
We did not want to have to watch every dollar and go through life pinching pennies. There had to be another way.
That’s when I started considering investing in real estate. A year and a half and about 14,758 hours of podcasts and numerous books later, I finally got the guts to purchase my first investment. And it was not the best investment I could have made, but it has not been vacant for even a single day, the loan is paid down every month, and I bring home a couple hundred bucks on top of that.
Furthermore, it is a safe investment and I enjoy watching its value increase. I am passively making money in four different ways on this single investment.
4 Main Ways to Build Wealth in Real Estate
OK, so now that I’ve convinced you to go out and spend all your money on a rental property, let’s talk more specifics. The four main ways to generate and build wealth in real estate include tax savings, loanamortization, cash flow, and appreciation. Not every investment will bring you all these benefits, but your particular investment strategy is up to you.
Let’s start with the most boring topic on the history of the planet: taxes! I know, I know, but we have to go there. And honestly, I bet the more you learn about taxes, and tax savings, the more interesting this topic will become!
In my opinion, this reason alone is enough to buy one single rental property. This won’t make you rich by any means, but it allows you to tap into a whole new world of tax saving strategies. And on things you already use and buy anyway! Think: your cell phone, internet bill, your home office, the list goes on and on. These are all potential write offs!
Now, I am no expert, and nothing can replace the advice of your CPA, but check out this article written by someone who is much wiser than me on the topic. Oh, and did I mention that he’s a real estate made millionaire? The fact is the government wants you to buy real estate. It will incentivize you to provide housing for its citizens in the form of extra tax write-offs and 1031 exchanges, to name a few.
The next thing I want to talk about, and perhaps my favorite, is amortization. What does that even mean? In a good real estate investment, if you do it right, someone else will be paying down your mortgage. And your interest, taxes, insurance and other expenses. Hopefully even your property manager’s fee. Notice that I said in a “good” real estate investment AND “if” you do it right. This means that you must not only buy it at a price that makes sense, you also have to manage it effectively.
Both are do-able, but neither just happen. In many markets, rents can cover all these expenses, and you can automatically build wealth simply by keeping your property occupied.
Now on to the real reason you are reading this article: you want to know how much money you can make. This is known as cash flow and is the money that an investor takes home after all expenses are paid.
A good investment cash flows most of the time. Notice, I don’t say always, because there will be times when your expenses exceed your income. My properties average around $300 per month. That is money in my pocket. When I am assessing a potential investment, I consider a good investment one that brings in at least $3,000 in income per year.
Again, this isn’t a huge number but when you consider that the value is likely increasing over time and somebody is paying down a mortgage for you, you can start to build some wealth passively. You can also duplicate this over and over again until you achieve your income goals.
The last topic I want to cover is the icing on the cake: appreciation. If you make a good investment, in the right area, you not only have someone paying off your loan and building you equity in your home, you also have a few hundred extra dollars in your pocket. On top of all of this, your property should increase in value each year. This is called appreciation. And a conservative appreciation rate for the average property in America is over 3%.
This is not a startling rate but let’s consider a $100,000 single family home investment. You put $20,000 on a 30-year mortgage at a 5% interest rate. This $80,000 loan will be paid off in 30 years, by someone else, and in that time, you should make $3,000 per year in income totaling $90,000 over this term.
Furthermore, if your initial investment of $100,000 increased at 3% per year, after 30 years it would be worth $235,656. Now, let’s say you completed a $30,000 remodel that increased the total value of your investment by $45,000. The difference, $15,000, can now be added to your $235,656 home value and $90,000 in income.
All in all, your $20,000 investment could turn into $340,656. Now, you could sell the house and net close to $310,000 after you pay realtor fees and closing costs, or you could hold onto it and enjoy a significantly higher cash flow since your mortgage is paid off.
Now, that understand these four ways, go ask your boss to match all of these benefits! I’m joking!Mostly! But seriously, don’t just think about it! Start taking action!
Are you investing currently? What’s your motivation? If you aren’t investing yet, what’s holding you back?