Are you looking for a way to build wealth that is relatively low risk with minimal barriers to entry? Real estate investing is a strategy that utilizes properties for investment purposes rather than as a primary residence. There are several benefits of real estate investing that make it the most effective way to build wealth—just ask ninety percent of the world’s millionaires.
My wife Becky and I have been investing in real estate for several decades now, but we actually got started by mistake! We were trying to sell our first house, and it just wasn’t working. So, we became landlords in our twenties. We ended up receiving about $950 more a month in passive income. I thought to myself, “You know, we ought to start doing this on purpose!”
Throughout the years, I’ve come to love real estate for several different reasons. Real estate combines the advantages of investing and of owning a business. As with business, you get a tangible product that you have a large measure of control over. As with investing, you get to be relatively hands off.
In this blog post, we will cover eight benefits of real estate investing. These benefits have made it my favorite way to build wealth!
[This post will touch on each benefit, but if you want to know how to apply each one strategically and specifically, I encourage you to attend The WealthBuilders Real Estate Workshop October 15-17, 2021. There is a livestream and in-person option!]
The first benefit of real estate investing is the built-in demand. Everybody needs a place to live. In most businesses, you have to market your product in order to get it in front of the customer. In real estate, the need for marketing is minimal because the customer searches for you! Even in buyer’s markets (when the housing supply exceeds the demand), the price of rents remains relatively stable.
Leverage is the use of debt (borrowed funds) to amplify returns on an investment. Let’s consider leverage when it comes to real estate vs stocks. If you have $10,000 in the stock market, it will buy $10,000 in stock and give you $10,000 in stock assets. If you received a 10% return that year on those stocks, it would be $1,000.
However, leverage in real estate allows you to take the same $10,000 amount and purchase a $100,000+ property. The 10% return is not on the $10,000 you put in, but on the $100,000 property. So, your return is $10,000. It’s literally a 100% cash-on-cash return.
3. Cash Flow
Each property you invest in provides you with an alternate income stream. When you buy and hold a property, your tenant actually pays for your asset. They pay your mortgage and then some. This provides you with extra cash each month. You collect rent from them, and your asset goes up in value each year.
The reality is that if you purchased 30 homes and made a positive cash flow of $300 every month, you could make $100,000 a year, tax-free, for the rest of your life. (I teach you how to get the tax-free part in my book, Strategic Real Estate Investing.)
[Related: 10 Must Read Books on Real Estate Investing]
The biggest money made in real estate is earned through appreciation. If cash-flow is one of the short-term benefits of real estate investing, appreciation is the long game. Appreciation is the increase in value of an asset over time.
Let’s stick with the example of purchasing one $100,000 property. The appreciation of that property at just 5% would be $5,000. (As of July 4, 2021, the appreciation rate in the United States is 14.5%) If you took out a loan (let’s say a 30-year loan at 8% interest), the equity buy-down would be about $800. Your total equity at the end of the year would be the $5,000 appreciation plus the equity buy-down of $800. You would now have a total increase in the value of your property of $5,800. Now, imagine what that could look like multiplied if you invested in several properties!
5. Tax Benefits
There are several tax benefits of investing in real estate. Firstly, you can deduct 1/27th of the value of your properties (not including the land.) You’re also able to deduct any interest that you’re paying on any home loans.
One of the biggest tax benefits of investing in real estate is becoming classified as a full-time real estate professional. Basically, it says that if you spend 750 hours a year on your real estate investments and you own your real estate business, then you can receive the full benefit of your tax exemptions.
Currently, the IRS will limit your deductions to $25,000 annually if you do not have the full-time real estate professional designation. And, if you have at least $150,000 of taxable income, you can’t receive any deductions without this designation. You can also swap one investment property for another with a 1031 Exchange. This exempts you from capital gains taxes.
One of the unique benefits of real estate investing is its ability to be insured against losses or litigation. You can set up a LLC tree to protect yourself, and you can insure properties against damage. This is one of the things that makes the risks of real estate investing low.
7. Creative Financing
Another reason I like real estate is that you can use other people’s money. The first way to do this is to bring in a partner who will put all the money into the deal. They will provide the down payment and any rehab costs, and you both split the profits.
You can also take advantage of a lease option. The seller and you agree on a lease payment, and then you tie an option with that lease so you can start fixing up the property once you get control of it. You can then lease it to another person, or, in some cases, lease option and then flip it to another investor. Another option is a wholesale flip. This is where you find properties for investor and receive a small 3-5% finder’s fee.
With other investments, such as stock, we have little control. Real estate is much different. If you know what you’re doing, you can purchase properties below market value to receive instant equity. For instance, I bought an investment property for $340,000, but the house right next to it sold for $430,000. That’s a $90,000 profit right off the bat!
You can also create value through rehab. You can change the way a property looks by sprucing up the shutters, adding a fresh coat of paint, updating the carpet, and so much more.
[Read Next: Why You Don’t Have to Be Rich to Invest in Real Estate]
I want to get into this market and I am a very “step by step” learner. I am also Ready to go with 10-20K is cash ready to invest in 1-2 properties. I am looking for 1 in Az as an investment to save me $ on dorms and food for my college age kid and then I’d like to find one that I could bring in some passive income each month.
These are great steps, Mike! If you are ready to purchase a property or would like specific guidance to help you make the most informed decision possible, I would consider attending our Real Estate Workshop April 22-24th. We have brief 1-1 coaching and Q&As where you can ask all of your questions.