The promise of real estate transforming investors from regular people into moguls is one that has fueled those looking to get rich for decades. But do you know how real estate creates that wealth? Here are the four primary wealth generators that derive from real estate investing.
Cash Flow – When you purchase a property for rental purposes, your actual monthly tenant payments generate extra income that you otherwise wouldn’t have. However, the idea of cash flow is at times deceptive because it will fluctuate based on a variety of costs such as repairs, vacancy, large-scale expenditures (such as replacing large appliances, plumbing, roof, etc.) as well as regular expenses (property management, utilities, mortgage, etc.). While expenses will always siphon off cash, if you have invested in a promising property within a desirable neighborhood, then you should almost always see a monthly profit. Multiply that monthly profit across years of ownership, and it becomes easy to see a retirement nest egg grow for your future.
Loan Pay-down – When your purchase a property with a mortgage attached, every month the remaining loan balance decreases. What that means is over time, the tenants you have, are paying down your loan. As simple as that point is, it helps you build your wealth. Let’s say, for example; you purchase a rental property with a 20 percent down payment on a 30-year mortgage. Let’s say at worst, the property’s appreciation during that time was negligible, and cash flow was minimal, but you always broke even, and tenants paid down your mortgage. At the end of the day, you end up with a home still holding its original significant value that you didn’t have to save or pay for yourself. Furthermore, since it was not your funding paying down the mortgage, if you choose to sell it, the profit is yours entirely.
Property Appreciation – Real estate investing 101: when a property’s value increases over time that’s known as ‘appreciation.’ While appreciation is not always guaranteed at a constant rate, American real estate has usually grown in value, averaging approximately 3 percent per year over the past hundred years. One way to artificially appreciate a property is to apply ‘forced appreciation’ – increase the value through home improvements and refurbishment. House flipping falls into this category, think of it as short-term forced appreciation. Otherwise, as long as you hold onto a property, the odds that it will intrinsically increase in value are good long-term.
Tax Benefits – Being a real estate investor in America means that in certain ways, the government is on your side. The government likes you and uses our tax system as a tool to encourage real estate purchasing and leasing. From being able to use a variety of write-offs, like yearly mortgage payments, to other specialized tools like 10-31 exchanges, real estate investors often end up paying far less tax than other business owners over time. The implicit trade-off being that all that saved money can be used to buy more real estate or pay down outstanding loans quicker. Experienced real estate investors use tax laws for their benefit as long as the government still encourages it.
Now that you have an idea, in a nutshell, of how real estate wealth generators work for you over time, the next question is – what do you do with that accumulated wealth? Do you keep it all under your name? Are you setting it aside for your financial future? Your family’s future? If you’re not sure, then the fruits of your wealth generators could be vulnerable to creditors if you’re ever sued or found legally liable for damages. Many people have watched their wealth evaporate under such circumstances.
Anderson Business Advisors though knows how to handle such potential threats; our team is comprised of lawyers and advisors with experience working in real estate. We have partners who are real estate investors themselves, so we understand the concerns and help people like you protect that wealth. If you want to learn more or need help on better securing your investments, then contact us today for a free 30-minute strategy session. We’re here to help, so let us do our job for you.