Investing in Real Estate has long been toted as a great strategy, but why is this? The simple answer is that real estate builds wealth while you sleep, and can become a truly passive form of income!
Once I stabilize a newly purchased property it becomes easy to place it on auto-pilot and begin working on the next project! Real estate investing can generate wealth while you sleep, and we are going to show you how!
There are a lot of methods to make money with Real Estate. To name a few of these methods, there are buy-and-hold investors, fix-and-flip investors, developers, and wholesalers. All of these methods can take advantage of one, or more, of the 4 wealth-building channels of real estate.
For this post, we are going to focus on the buy-and-hold strategy because it utilizes all four wealth building channels!
1. CASH-FLOW IS KING!
Cash-flow is the amount of money left after all monthly expenses have been paid. This allows for a steady stream of income with minimal work after the acquisition of the property. True cash-flow is passive income, and I look at each rental property as a new income stream.
This is the method I use to analyze potential acquisitions. I run all of the numbers using various formulas/calculators and ensure the property will make $100 a month (per unit) after all expenses are paid.
Using this metric a Duplex should cash-flow at least $200 a month, while a 10-plex will earn over $1000 a month! It is crucial to include all possible expenses into these calculations, and be sure to leave a margin for error. For a breakdown of these calculations click here
The term amortization refers to the repayment of your mortgage or loan on real estate. Real estate loans are amortized over longer periods of time than a car loan would be but are normally front-loaded with interest payments.
Equity is the difference between the remaining mortgage balance and the appraised value of the real estate. Every payment towards the principal of your loan is a dollar of equity built. The magic of buying a cash-flow property is that your tenant(s) will pay off the mortgage too.
On my newly purchased 10-plex, every mortgage payment builds $750 in equity, and that money isn’t included in our cash-flow calculations. The beauty of this is that if I sell the 10-plex in five years I will have an additional $45k in equity ($750/month for 60 months), that I didn’t pay for!
Equity can be used to purchase additional real estate by using a home equity line of credit (HELOC) from personally owned properties. You can also conduct a cash-out refinance and pull the equity out of your property without selling it. One of the best ways to enjoy this amortization process is by doing nothing, and enjoy a large amount of cash in your pocket upon sale down the road!
Depreciation is the secret sauce of real estate investing! This wealth multiplier is one of the largest tax advantages to real estate investing and allows you to keep a larger percentage of your cash-flow. The basic idea behind this complex subject is that any physical item placed on your property has a life expectancy.
The life expectancy of a residential rental building is 27.5 years, and the entire value will be depreciated over this timespan. A $100k rental property is depreciated $3,636 each year until the end of this 27.5 years. Every year this amount will render an equal amount of cash-flow as essentially “tax-free.” This provides the benefit of minimized taxes to real estate investors, which allows you to reinvest more cash into the business.
There are many tax advantages for real estate investors, but depreciation is one of the largest. I recommend hiring a Certified Public Accountant (CPA) to maximize the many tax advantages real estate affords investors.
4. APPRECIATION (CAPITAL GAINS)
The reason thousands of people lost their house in the 2008 real estate crash is that they bought for appreciation! Do not purchase real estate for appreciation! Investing for appreciation can resemble gambling more than investing. That is because nobody can guarantee how the real estate market is going to perform over the next decade.
I view appreciation as a huge benefit, but not the reason to justify my purchases. Purchasing for cash-flow ensures that a rental will continue to be a good investment even if the market tanks. The tenant(s) will continue to pay rent regardless of the property value because they are locked into a lease.
Purchase property for cash-flow, and if the market appreciates you will enjoy unexpected capital gains when sold! Conversely, a property purchased for appreciation might not cash-flow. This property would become a mental strain if the market crashes.
Purchasing a distressed property will provide the opportunity to force appreciation through renovation. Fix and flip investors utilize this method to make an ugly house pretty and reap the benefits. Forced appreciation is the only way to justify purchasing for appreciation in my opinion.
CONCLUSION – Real Estate Builds Wealth While You Sleep
To maximize the potential of your real estate investments it is important to implement all of these wealth-building channels. Careful planning will ensure that you are able to generate passive income 24/7! I sleep easy at night knowing that my real estate portfolio is growing, and is a self-sustaining income source! I love that real estate builds wealth while you sleep. This knowledge changed my life!
The snowball effect of generating income through real estate, and then using that income to accelerate our real estate acquisitions is exciting to watch!
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Real estate builds wealth while you sleep. It does for me, does it build wealth for you?