There are many different assets in which you can invest such as stocks, bonds, jewelry, or bitcoin, but real estate assets build wealth more consistently than these others. If you were a victim of this decade’s earlier real estate crash, you may be questioning this fact. Here are a few reasons why this is true!
“Cash flow is the money you have left over from the rent you’ve collected after all expenses have been paid. Most real estate has expenses such as a mortgage, property taxes, insurance, maintenance, and property management fees. When you buy a property that pulls in more rent each month than the expenses you carry to own it, your cash flow is positive.”
“Wise investors don’t bet on appreciation. They purchase properties on a sound judgement that the property will generate more income than it costs to own. For these folks, who “cash flow” positively, they don’t care what the market does. If prices drop, they are safe. If prices rise, they have more options.”
Although cash flow is a good way to benefit from a real estate asset, appreciation of the asset over time is how most wealth is built. While the real estate market fluctuates, it always trends upwards, and therefor can produce a big return on investment.
“Even though the name can be deceiving, depreciation is not the value of real estate dropping. It is actually a tax term describing your ability to write off part of the value of the asset itself every year. This significantly reduces the tax burden on the money you do make, giving you one more reason real estate protects your wealth while growing it.”
You should consult with a real estate attorney or accountant to discuss the depreciation from which your real estate asset can benefit. There are many tax exemptions and rules that can effect your specific asset.
“Leverage is such a critical part of real estate ownership that we often take it for granted. Where else can I borrow money from A (the bank), pay that loan back with money from B (the tenant), and keep the difference for myself?”
Real estate assets are one of the easiest to leverage, with low interest rates and long-term loans.
Loan Pay Down
“When you take out a loan to buy real estate, you typically pay it back with the rent money from the tenants. After enough time passes, a good chunk of every payment comes off the loan balance, and wealth is created in addition to the monthly cash flow. The best part is, it’s your tenant paying this off for you, not yourself.”
Forced equity is a term used when an investor adds value to a real estate asset by making improvements to the property. Some ways to force equity are buying a fixer-upper, adding additional bedrooms, and adding new amenities.
“The most common form of forced equity is to buy a fixer-upper type property and improve its condition. Paying below market value for a property that needs upgrades, then adding appliances, new flooring, paint, etc. can be a great way to create wealth through real estate without much risk.”
“The key to using inflation to build wealth in real estate lies in the fact the majority of your big expenses (mortgage, property taxes) stay fixed for the majority of the time you own the property. When you combine this with rising rents and home values (due to inflation), you start to see big results.”
Of all the ways to invest and built wealth, real estate assets have proven to be the most consistent. Don’t forget to consult an experienced real estate attorney when investing, buying, or selling real estate.
Stachel Law’s real estate clients include lenders, brokers, investors, consumers, sellers, and real estate agents, all of whom are counseled and represented throughout every step of a legal matter. The firm provides clients with extensive experience in complex real estate transactions and litigation.