We all have our own unique goals and dreams. Maybe you want to travel abroad for 6 months out of the year, open up a restaurant or Climb Mount Everest.
While we all have different ambitions, most great dreams have something in common … they may cost quite a bit of cash. Fun fact, climbing Mount Everest is going to cost you about $60,000. That’s a pretty decent annual salary!
Here’s the point. If you want to grow your long-term wealth, gain financial security and have more autonomy in your life, you need to consider adding real estate investing to your portfolio. 90% of the world’s millionaires have been created by investing in real estate. While we’d like to be shocked by this number, we’re not! It’s no secret that real estate investing is the best place to put your cash.
Here are some of the reasons investing in real estate allows you to build your long-term wealth:
No Income Limits
Society tells us at a young age that if we want to be wealthy, we should go to college and get a great job. Maybe as a lawyer, doctor or engineer. Yet, even doctors have income limits. When you invest in real estate, there is no ceiling or cap on your earning potential.
When we talk about rental cash flow, we are talking about the money left over after you’ve taken all of your expenses from your rent check. These expenses include: your mortgage (principle and interest), property taxes, insurance, utilities, maintenance expenses and reserve funds.
What’s so great about cash flow is you have the power to understand what this will be before you even commit to a property. Unlike many other forms of investing where you are making a “bet” that your funds will appreciate and provide a return, cash flow is concrete. This is predictable, positive income hitting your pocket every single month.
While cash flow is predictable, real estate properties sometimes may be less so. At some point, you will have to make surprise repairs. However, if you predict the unpredictable on the front end and take funds out of your income to save for surprise expenses, you will be in a much better financial position.
Everyone needs a place to live. Whether someone is renting or purchasing, homes are never going to go out of style. There is only so much space on the planet. While it would be great for Elon to figure out a way to get us on Mars soon, right now, Earth is all we’ve got. Yes, the economy has its ups and downs, yet one thing is certain. We only have so much land, and this precious commodity may fluctuate in value, yet in the long-term, it will always trend upward.
That said, this upward trend in home values is called appreciation. This past year alone, the national real estate appreciation rate was 7.3%. If you were to have purchased a $250,000 home last year, today it would be worth $268,250. This is $20,000 in equity built in just one year by literally doing nothing.
Let’s say that appreciation rates settle a bit and go back to an average of about 4% year over year. If you bought that $250,000 house and kept it for 5 years, that property would be worth $304,153. Now, these examples are more applicable to single family homes, and single family homes do make great rentals. Nowadays, people are becoming more interested in having their own space, making single family homes a highly desirable option for renters. As a landlord, it also provides you multiple exit strategies when it comes time to sell as well. You could sell as a single-family home or you could sell as a rental.
If you are more interested in multi-families, your buyer pool is limited to investors. For multi-families, appreciation works a little differently. This is because multi-families are valued based on their rents. Because of this, landlords create their own appreciation. This is called forced appreciation. In other words, if investors can increase their rents, they INSTANTLY increase the value of the home. This is an exciting opportunity because if you can find a deal on a home that has been under-rented, you can simply purchase the property and improve the rents to market value to force appreciate your property's equity. You could also increase rent by improving the property.
AKA Depreciation. Depreciation is the decline in value of an asset over time. Depreciation in real estate is fascinating because we know that real estate appreciates over time, yet you are able to depreciate the value of your building to reduce your taxable income. Thus getting more money in your pocket.
The IRS says that you can treat your residential rentals as having a useful life of 27.5 years. You take the value of the building and divide it by this 27.5 to determine your annual depreciation expense. You then reduce your taxable income on the property by this amount.
For example, if you had a $250,000 property and the land was worth $50,000, you would find your depreciation amount by dividing $200,000 by 27.5 to get $7,272. You are able to reduce your income for the year by this amount to reduce your taxes. Click here for more detailed information on the IRS website. This may not seem like a huge savings for just one property, yet big investors use depreciation to save them tens of thousands of dollars and sometimes hundreds of thousands of dollars on their annual taxes.
Variety of Options
There are so many different ways to invest in real estate, so find one that you can get really good at and stick with that! You could also diversify your investment strategy to allow for more stability as the market shifts. Whether you want to flip, buy and hold single family homes, BRRRR properties or purchase a 64-unit building, figure out what works best for you, and make a ton of money doing it!
The best part about real estate investing is that it is generally passive. Sure, you have to do some work yet after you’ve acquired the property and have a tenant, you get to enjoy a semi hands-off lifestyle. This freed time is what allows investors to scale so easily or make time to pursue what they truly are passionate about.
These are just some of the justifications for how 90% of millionaires are able to become millionaires. Here’s the best part ... ANYONE can start investing. You don’t need to have rocket scientist smarts or have hundreds of thousands of dollars in the bank to get started! If you’re interested in creating more financial freedom for yourself, the very first step is to Contact Us. We are a team of realtors and investors that specialize in helping new and seasoned investors grow their portfolios and their financial independence. Let’s make millions together!