5 REASONS WHY REAL ESTATE IS THE BEST INVESTMENT
Way back when - I bought my first house because that's what you do. I bought it to live in it. I got a roommate to help with the mortgage, and I thought, this is pretty sweet; my mortgage just got cut in half. Life took a change only a year later, and that house became a full-blown rental. Now my mortgage was not only 100% paid, but I was making a profit that was adding to my income. I didn't know it, but I had just followed the "Rich Dad Poor Dad" golden rule and had shifted my liability (my single-family residence) to an asset (a single-family rental).
Most folks spend their lives working full-time jobs to earn a "steady" paycheck. Meanwhile, the wealthy have somehow unlocked the secret to working less while making their money work harder. What do the wealthy know that the rest of us don’t? One of the biggest secrets that the wealthy tap into is the incredible power of real estate. Real estate can generate passive income and provide a path toward building wealth.
“Ninety percent of all millionaires become so through owning real estate.”
- Andrew Carnegie
Every dollar invested in real estate works for you in these five ways:
● Cash flow
● Equity Via Principal Paydown
● Tax benefits
#1 – Cash Flow
The most significant benefit of investing in real estate is passive cash flow. The asset gets purchased. The rent gets paid by the tenants. The remaining income, minus the expenses, is your cash flow.
If you put down $50,000 to buy a rental for $200,000, your mortgage payment would be about
$1,000 per month. Assume that you’re able to rent the unit out for $2,000 per month. Upon receipt of the $2,000 rent payment each month, you pay the $1,000 mortgage, use $700 for expenses and reserves, and keep the remaining $300 as passive cash flow. Since all costs are covered, and you have set aside reserves (maybe 5 -10% rainy day fund), money left over goes into your pocket.
#2 – Leverage
In the example we just discussed, you hypothetically bought a $200,000 rental without paying $200,000 in cash. Instead, you put in $50,000 as a down payment, and the bank contributed the remaining $150,000. It massively bumps your cash-on-cash return. Remember, the amount of money you have in the deal determines your COC%. In this scenario, you have put in $50,000. If you earn $4200 a year in cash flow, you divide $4200/$50,000 for a COC% of 8.4%. If you had to put up all the cash, your return dips to 2% - $4200/$200,000. Sorry, Dave Ramsey - Leverage is incredible. The bank put up 75% of your investment, but you get to keep all the profits. I pay cash for liabilities like cars, for example. Let the bank put up the majority of the money for an asset like a house, and your returns increase exponentially, plus it frees up your funds to deploy into other investments.
This 1-minute video sums it up nice and quick.
#3 – Equity via Principal Paydown by the Tenant.
As you receive monthly rental checks from your tenants to pay the mortgage, your principal gets paid down, and your equity in the property increases. In this way, the rental property generates income to pay for itself. Once your rental builds significant equity, you may wish to tap into that equity via a HELOC (home equity line of credit) or a cash-out refinance.
#4 – Appreciation: Market and Forced
There are two forms of appreciation. If you invest in a market with growth in population, jobs, and income, chances are your property will ride the wave of market appreciation. You also want to make sure you are in the right neighborhood or submarket. At the same time, market appreciation is speculative. You should always invest for cash flow first and foremost while keeping a sharp eye on the market fundamentals.
On the other hand, "forced appreciation," otherwise known as a value-add, gives you greater control over driving up your property's value. Multifamily takes strong advantage of this. When you improve the asset and operations, you can raise the rents and reduce your expenses, thereby increasing your NOI (net operating income), which increases the building's value. If you improve the square footage in residential, add a bath or bedroom, this generally results in a higher value. However, in residential, you are limited by comps (comparable homes nearby).
#5 – Tax Benefits
When you invest in real estate, you get the benefits of depreciation and mortgage interest
deductions and a whole host of write-offs for several other related expenses. Investors often show losses on paper while making money through cash flow. The losses play a big part in offsetting other income, which is a significant reason real estate is so lucrative. Further, when investing in commercial multifamily real estate, you have the opportunity to take advantage of cost segregation and accelerated depreciation, also increasing your tax
benefits. Cost segregation breaks down your property into different components (roof, appliances, HVAC, Windows, Flooring, etc.), while bonus depreciation front-loads your depreciation. Apartment syndications (group investments) as hold times can be as little as three to five years.
Advantages of Investing in Real Estate
With each dollar invested in real estate, you have the opportunity to take advantage of cash
flow, leverage, equity, principal paydown, appreciation, and tax benefits. If you are not taking advantage, start adding some (no, a lot) to your portfolio.
Be sure to get our free ebook, The Comprehensive, Quickstart Guide to Investing In Syndications, to jumpstart your real estate investments. It contains tons of knowledge, and it's free! If you want to move to the front of the line for our future investments, sign up for The Fortress Federation Investment Club. It doesn't cost a thing!