This is a guest post by Robert Schroell
Real estate has long been heralded as one the greatest ways to build
wealth. You’ve probably heard the statistic that more millionaires are created from real estate investing than anything else. But, do you know what makesÂ real estate investing so great? It’s not all hype. There’s four main benefits that investing in real estate offers and they’re outlined below.
Cash Flow Before Taxes
This is the most obvious benefit of real estate investing. Cash flow before taxes is similar to profit in a typical business, it’s simply what’s left over when you subtract expenses from revenue. As a general rule of thumb, cash flow is relatively low on most properties but often makes the difference between a moderate return on investment and a great return.
Most real estate investors finance properties with a conventional home mortgage. The loan principal is the value of the outstanding mortgage.
If the loan was on a personal home, that means the borrowers personally pays it back each month. However, on real estate investments that stay leased
out, the tenants themselves pay this money back and then some. The basic takeaway is that other people pay off the cost of a valuable asset for you!
Depreciation in real estate is a great thing! Most countries allow investors to write off a certain percentage of a property’s value each year, as if it’s “wearing out.” In the United States, this is down in equal increments over a 27.5 year schedule. It’s handled differently in other places but the benefit is always the same: you pay less in income taxes for the privilege of owning an asset! Starting to see why this is so great?
Every year, your property will appreciate in value. Sometimes this is just on pace with inflation but it’s often at a greater rate than inflation.
Wealth really starts to accumulate when you think about having appreciation and principal reduction working together on a property of a decade or two.
In many countries you can turn this value into tax-free cash in your pocket by periodically refinancing and pulling cash out.
Applying Your Knowledge
Where do these principals hold true? Everywhere! Real estate investing is one of those “simple but not easy” things. The concepts are sounds and easy to grasp but it’s tougher than it sounds. Get creative to really grow your wealth quickly. If you’re interested in the development side of things, I’d recommend investigating construction loans and learning the financing process. If apartments are more interesting, meet with some brokers and determine what markets are undervalued and find a property. The main takeaway from this article should be to do it now! If you don’t have the cash, start learning and saving.
Your future self will thank me.