Andrew Carnegie famously stated that 90% of millionaires became wealthy through owning real estate. Almost as famously Grant Cardone even published a book on “How To Create Wealth Investing In Real Estate“
Our own journey & plan for financial freedom is heavily dependent upon real estate, especially since we are compressing our timeframe to getting there in 10 years or less.
But what are some general ways that real estate can help you build consistent wealth? That’s what we will explore in this article.
How Real Estate Creates Wealth
Buy & Hold real estate produces wealth in four main ways, including cash flow, appreciation, tax benefits and through leverage. A fifth way has come come to the forefront recently as well, inflation hedging.
Cash Flow & Predictable Passive Income
Real estate makes an excellent source of passive income. You buy it once, and it produces income forever on a fairly consistent basis.
Moreover, it produces predictable income. You can predict your cash flow accurately, but not on a monthly basis. Your expenses will vary from month to month as well as potential vacancies and other capital expenses.
This allows you to know what your expected return on investment will be before you purchase a property. If you want to avoid making bad real estate investments, you need to know how to forecast expenses and calculate ROI. Usually in our own investments we include roughly 5% for vacancy & 5% for ongoing maintenance expenses. All total 40% of the rent we set aside for expenses other than mortgage.
Appreciation
Appreciation is influenced by a number of factors, such as: -The overall real estate market -The location of the property -The quality of the property Appreciation is the increase in a property’s value over time. It is influenced by the overall real estate market, the location of the property, and the quality of the property. Even though it is not as predictable as cash flow in the long term, it can still result in large profits.
Renovations and updates can force appreciation for investors. This principle refers to the buying and selling of houses in a short period of time in order to make a profit.
Our own approach is to let appreciation come naturally since we utilize turnkey real estate as the main way we purchase real estate.
Tax Benefits
Every legitimate expense related to your real estate investing can be deducted, from mortgage interest to repairs to property management fees to your home office expenses to the travel costs associated with visiting properties.
The cost of the building and any capital improvements can be spread out over 27.5 years. This does not mention more sophisticated strategies such as investing in a self-directed IRA or deferring capital gains taxes through a 1031 exchange.
A dollar saved through real estate tax benefits is the same as a dollar earned.
Our general framework for including expenses for tax purposes is if it is ordinary and necessary to spend money on that for the real estate business we are in.
Leverage
You can use someone else’s money to finance your real estate purchase.
It is just as important to be able to use your current assets to invest in new opportunities. Other assets classes could include but are not limited to a business venture or your living expenses in the event of a personal crisis.
People who are cynical often say that “you need money to make money.” While this is not always true, there are times when having money can make a big difference. Real estate investors have far greater access to capital than most due to their ability to borrow against real estate equity at any time.
Inflation Hedge
Since real estate is a hard asset, it generally increases with inflation. Just witness the dramatic rise in home prices in 2020-2022 when inflation took hold.
Rents also adjust for inflation. Inflation is often driven by increases in the price of oil, which can exceed the official CPI rate of inflation. Meanwhile, your monthly mortgage payments remain fixed. This means that the difference between your mortgage payment and your rent will increase, giving you more money to work with over time.
The increase in the spread of rent is growing at a much faster rate than the increase in rent itself. If your property rents for $1,000 and your mortgage payment is $500, your monthly profit would be $500. The rent on the property will be increased by 4% the year after it is purchased, raising the rent to $1,040. The difference in what you pay for your mortgage and your rent increases from $500 to $540: an increase of 8%.
The ever-improving cash flow helps protect against the effects of inflation.
With all of that said, what are some specific ways to grow your wealth using Real Estate?
Ways to Leverage Real Estate to Build Wealth
There is no one “best” way to become wealthy through real estate. There are advantages and disadvantages to each of the following options, so start with the simplest one and then progress to the others.
1. Public REITs
One of the simplest ways to invest in real estate is to purchase shares of a Real Estate Investment Trust (REIT). You can buy and sell shares of stock instantly through your brokerage account.
Publicly traded REITs have great liquidity, however this liquidity comes with increased volatility. The prices of these companies’ stocks tend to move strongly in the same direction as the stock market. The reduction of benefits from diversifying diminishes any advantages of investing in real estate.
You should be aware that public REITs are required to distribute at least 90% of their profits each year to shareholders in the form of dividends. One advantage this provides is relatively high dividend yields. On one hand, it allows these companies to reinvest their profits into building their portfolios, which limits their growth potential. On the other hand, it limits these companies ability to reinvest their profits, which then limits their growth potential.
2. Private REITs
One easy way to invest in real estate is to buy shares of a Real Estate Investment Trust (REIT). Private REITs are usually offered by real estate crowdfunding platforms.
Only qualified investors are able to buy shares from some of these companies. non-wealthy investors can participate in some real estate crowdfunding platforms such as Fundrise and Streitwise.
These companies either own real estate directly or own debt that is secured by real estate. You have the option to buy shares in either a portfolio of property or a portfolio of secured debt. You buy shares directly from the company instead of from public stock exchanges. While it is easy to buy shares, it is not as easy to sell them; most crowdfunded REITs require you to own shares for a minimum of five years and charge you a penalty if you sell early.
This makes the shares less volatile and more stable, as well as less correlated with stock markets. REITs that are funded by crowds have more flexibility to reinvest their profits and expand their portfolios, although many of them also pay strong dividends.
3. Live-In Flip
House flipping is a process where you buy a property, renovate it, and then sell it for a profit. While it may not be the laziest real estate investing strategy, it is one of the most well-known. Although this strategy requires a lot of money and happens quickly, it can be very tiring for new investors. The profit from flipping a house is taxed as ordinary income, which can reduce the profit significantly.
An alternative to the traditional house flipping model is the live-in flip, where you live in the house you’re flipping while you renovate it. The strategy of fixing up a house to live in and selling it for a profit involves purchasing a house to live in and fixing it up while living there.
One of the benefits of using this approach for investors is that they can access a loan such as an FHA or VA loan. You should bear in mind that the house you’re buying must be in good condition. If the home is in major disrepair, a traditional lender may not approve the purchase.
The significant tax advantages of a live-in flip over a traditional flip make it a great option. While a house that has been flipped is taxed at the tax bracket rate of the investor, the profit from a live-in flip is usually exempt from any taxes. The homeowner must have lived in the property for two of the last five years. This investing strategy is most successful when used repeatedly over a two-year period.
4. House Hacking
Young investors are increasingly interested in house hacking, especially as a way to acquire their first investment property. An investment approach that involves purchasing a property to live in, which can take advantage of lower interest rates and down payments.
House hacking is the process of buying a multifamily property in order to live in one of the units while renting out the others. This is often done with properties such as four-plexes. The income you make from renting out your property will usually be enough to cover the mortgage payments, as well as giving you some extra money each month. The cash flow from this investment can be saved to purchase another investment property.
This model is primarily used for multifamily properties, but can also be used for single-family homes. The investor would rent out the extra bedrooms to roommates instead of renting out separate units.
An added benefit of house hacking is that the investor is able to monitor the property’s condition since they live there. This could become a problem if the tenants are very demanding.
5. Wholesaling
Wholesaling is a type of real estate investment where the investor buys a property and then quickly sells it for a profit. The investor does not put any money into fixing up the property or making any repairs. Many investors begin by investing in index funds. The process first involves locating distressed properties. After that, it is important to have a contract with them for buying at reduced prices. Lastly, charge other investors a fee for the contracts.
One advantage of wholesaling real estate is that it does not require any money or credit to get started. The wholesaler is the person who buys products from the seller and then sells them to the end buyer. Since they aren’t using their own money, they don’t have to worry about funding the deal. They allow someone else to purchase the property before the closing date.
Being able to find distressed properties is one of the most important skills for wholesalers. Properties need to have owners who want to sell in order for that to happen. In order to be successful with this lazy real estate investing strategy, you must be good at negotiating. The deals that wholesalers bring to landlords or flippers must be good enough that the landlord or flipper is willing to pay the assignment fee to the wholesaler.
Wholesalers who are new investors may find it helpful to have experience with real estate deals and home renovations. Wholesalers must determine how much a house is worth. After that, create a budget for repairs that will help set a reasonable purchase price.
With this investment strategy, investors can make an assignment fee between $5,000 and $10,000. Despite never owning the property or making any repairs, this is not a bad outcome.
6. Real Estate Crowdfunding
Crowdfunding for real estate is a new investing strategy that has become popular due to online platforms like Fundrise and RealtyMogul. Crowdfunding platforms allow people to pool money together to fund projects that they would not be able to do on their own. This is possible because many people with different skills and levels of financial resources can come together to work on a project. By combining investors’ money, commercial and residential real estate projects can be funded.
Crowdfunding for real estate investing does not require any experience with renovating properties or managing rentals. Although it is not essential, it is beneficial to have experience with deal analysis since it will enable you to better assess risks and rewards for prospective lending opportunities.
Each crowdfunding platform offers different features and requirements. For example, many require lenders to be accredited investors. An accredited investor is someone who has an annual income of over $200,000 or a net worth of at least $1 million. However, some platforms allow nonaccredited investors to contribute.
You can invest in crowdfunding with as little as a few thousand dollars. This is a much better deal for them than if they tried to buy a property on their own.
7. Lease Option
Lease options are not only structured as sandwich leases. An exit strategy is a plan for how you will sell an investment. Lease options are a type of exit strategy where you give someone the option to lease your property for a set period of time.
Tenant-buyers who use a lease option typically take much better care of the house than renters. The couple plans to buy the home, so they see it as their own.
Additionally, most lease options agreements contain a clause specifying that the tenant-buyers are responsible for minor maintenance issues. The landlord won’t have to stress over a faulty toilet or a dripping faucet if it’s dealt with in this manner. This means that you usually don’t have to hire a property manager. Ten percent of the monthly rent is saved on average by doing this.
The average option fee for a lease option is 3-5% of the purchase price. The fee is not refundable and will be credited to the purchase price if the tenant-buyer decides to buy the property. Since the tenant-buyer has made this investment upfront, they are more likely to follow the terms of the lease. Additionally, this option fee provides the investor with more leeway than a standard security deposit would if they need to file an eviction and make repairs.
8. Buy & Hold Real Estate
Our own personal favorite is buy and hold real estate . It’s more of a get wealthy over time strategy. You take advantage of how real estate creates wealth (referenced above), but do so over time.
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