As technology and culture change, the most popular investing strategies change. However, one investment that has been consistent over the more than 50 years is real estate. If you are a regular reader of the blog, you have heard me say this many times in many ways: building wealth through real estate is by far my favorite way to invest.
The Great Depression and Great Recession are the only two times real estate has depreciated in America. In some areas, it went down by almost half, but within five years it was back to its previous levels or even higher. Outside of those two major events, records show residential real estate has increased by about 6% a year. While some other investments may yield a higher increase, they come with greater risk and less control.
So, why invest in real estate? I have several answers for this question, but this blog will focus on 8 reasons. Here we go!
1. Demand – Everyone Needs a Place to Live
The real estate market has built-in demand. Even in a recession, rents remain constant or steadily rise because everyone needs a place to live. There is no need to convince the general public of their need for your ‘product’ because the demand for a place to live is universal. You may periodically let people know you have an empty place available, but it requires very little in the way of a marketing budget due to the basic requirement for shelter.
2. Leverage – Bigger Assets For Less Capital
When asking yourself, why invest in real estate, leverage is another good reason. A lever allows you to move something heavier than you could lift by yourself. In finance, you are able to greatly increase the return on your cash because of the power of leverage. You can take a little bit of money and control a much larger asset. This is one of the keys to understanding how to build wealth. When you’re starting from nothing to build wealth through real estate, leverage gives you the advantage of being able to do more with less and magnify your returns.
Here is a good example. Because of leverage in real estate, you can take $10,000 and purchase a $100,000 property. Your 10% return is not on your downpayment– it’s on the $100,000 asset you acquire with your $10,000 investment. This makes your return $10,000 which calculates to a 100% cash-on-cash return. It’s hard to argue with those numbers!
3. Cash Flow and Income
Rent from a tenant is an income stream that can help you build wealth through real estate. When you buy and hold property, a tenant pays the mortgage on your asset. You collect rent, and while your asset increases in value every year, someone else is paying for it. Cash flow is a powerful advantage of real estate if you know how to do it.
Here is my formula for a $100,000 yearly income through real estate. It is fairly simple to understand:
- First, purchase 30 homes (over three year’s time)
- Charge $300 over PITIM for rent per house per month (you’ll need to do your market research beforehand to ensure this is feasible.)
- Doing the math, you have $300 x 30 houses which equals $9,000 per month x 12 months. You will make $108,000 per year (and in #5 below, you will see how to make that yearly amount tax-free.)
4. Appreciation – Assets Increase In Value
Appreciation is one of the biggest answers to the question why invest in real estate? Appreciation is the increase in your property’s value over time. No investment has a 100% guarantee of a profitable return, but real estate has the best track record for appreciation of anything out there.
How much a property appreciates yearly depends on the local real estate market and any improvements made to the home. Historically, residential real estate increases by around 6% a year. In 2023, the annual appreciation for single-family housing in the U.S. was 6.5%. In the states where homes appreciated the most- Rhode Island and Vermont– the increase exceeded 13%. When you consider those percentages over several years with several properties, the numbers can be rather staggering!
5. Tax Benefits – Valuable for Earned AND Passive Income
Whenever you are deciding why to invest in real estate, you must consider the role tax benefits play in your overall return on investment. One of the tax benefits is depreciation which entails deducting 1/27th of the value of the property, not counting the land. The loss of depreciation goes directly against any profit or gains you had on the property. You are able to also deduct any interest you pay on the loan.
A bit more complicated, but very much worth the process, is gaining the Real Estate Professional tax designation. 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.
You don’t apply for the designation. Instead, you check a box on your tax return. The IRS doesn’t make it easy to qualify for, but the REP designation makes a significant difference in the tax benefits of real estate investing. You can be making a net PROFIT on your rentals, AND wash away the tax liability from your salary, business, or 1099 income!
6. Control – You Decide
Another reason why I invest in real estate is how much control I have over my investments. In the stock market, for example, you have no control. However, in real estate you can buy, sell, and refinance it whenever you decide to.
In real estate, you make money when you buy, not when you sell. When you buy below market value, you realize immediate equity. After that, you decide whether you want to add value through renovations and/or if you want to refinance for a lower interest rate. You are always in control.
7. Insurance – Protecting Your Assets
Another great component of real estate investing is the ability to protect your assets. Quite literally, your assets can be insured! Insurance brings a protective shield against losses or litigation, natural disasters, and other damages. It is just another way to decrease the risk and make your investment more secure.
8. Creative Financing – Use Other People’s Money
A lack of cash is one of the biggest hurdles that deters people from investing in real estate. However, you may be able to start sooner than you think thanks to creative financing strategies.
One 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 costs for any necessary rehab. Then, you both split the profits. Another option is wholesaling. Instead of having a transaction with a title company, you flip the property over to another investor and get a finder’s fee.
Finally, you can choose a lease option by leasing a property from someone who is trying to sell it. You agree on the lease payment with an option that once you start leasing the property, you can start fixing it up. You can then lease-option it to another person, or in some cases, lease-option and flip it to another investor.
From short-term cash flow to long term appreciation, you can accomplish so much in real estate. This is my favorite way to invest and it is always my recommendation for how to build wealth! If you want to learn more about how to start or scale your real estate portfolio, we’d love to have you at our semiannual real estate workshop, October 11-13th in Denver, Colorado, or online via livestream! This power-packed weekend will give you practical steps for how to make your next move in our current market (all from a biblical perspective.) Click here to learn more and register.
This post was originally published on January 6, 2021 and has since been updated to serve you with more comprehensive content.
