Updated: Jul 14, 2020
Massive wealth can be built through real estate investing, however just like anything it isn't always as simple as buying and renting your neighborhood property. There are however lots of tools that can be utilized to help expedite the return of your money.
Rental properties are the bread and butter of real estate. These real estate investments involve purchasing a property and renting it out. Typically investors start with a single family home, maybe one that they recently lived in and renting it out to tenants. This can quickly scale to multifamily properties such as apartment building or leasing commercial real estate like a strip mall. The rental income covers the mortgage and other expenses while leaving some left over for profit. This method of investing generally requires minimal effort and can become almost completely passive income if you hire a property manager. Property manager will help fix up the property and also help find new renters when the lease is up. They generally will take approximately 8% of the rental income as compensation for their work.
Flipping homes has become a new favorite ever since HGTV started gaining popularity. Flipping a home involves purchasing a fixer upper property and then fixing it up. The key to this is knowing what improvements will gain more value than the money you put into it, knowing good contractors that can provide a quality product at a reasonable price and/or knowing how to complete a wide variety of construction projects yourself. These properties are generally purchased with hard money which has a high interest rate that is not loaned through a typical bank. Hard money provides the money to purchase and flip these properties however due to their high interest rate means that the home must be flipped quickly. If you sell a home before 12 months means that you will be paying regular income tax and it doesn't qualify for the longer term capital gains tax. Flipping a home requires hard work through managing contractors or completing construction yourself. If you can have a steady stream of Realtors® providing you leads, contractors completing the work and have the proper finances this method of real estate investing can lead to large returns.
Leverage is one of the best ways to build wealth through real estate investing. Leverage works by using a loan on an investment property that is at a lower interest rate than you are gaining from it. For example if you have a $100,000 property with a rental income of $6,000 per year. This means that you are currently gaining 6% of your investment. If you get an $80,000 loan with a 4% interest rate you are paying the bank $3,200 per year interest how ever only $20,000 of your money was invested on the property. This means that your $20,000 is making ($6,000-$3,200=$2,800) $2,800 per year. This equates to a 14% cash on cash return! Using leverage increases your cash flow and return on investment on both residential properties and commercial properties. This same effect works on your property appreciation over time farther leveraging the investment returns. Utilizing loans on these properties also increases your risk if things trend downwards so it is even more important to fully understand what you are doing so that when there is an inevitable crash you can bounce back. This leverage can farther be utilized when interest rates fall you can refinance the mortgage. This will lower your monthly bills even farther and increase your cash on cash return even more!
Through inflation, your real estate property will generally appreciate and be worth more than you purchased it for. This is the epitome of a passive wealth building tool, in the United States home values generally increase approximately 3% per year.
1031 exchanges are a massive tax benefit used on investment properties throughout the United States. The 1031 exchange allows you to defer the profits from one property and roll them into the next similar property. This means that you defer taxes until the final sale of a property which can allow you to compound building wealth without the hit if capital gains taxes.
Tax laws allow you to depreciate your real estate investment over a course of 27.5 years for residential rental property and 39 years for commercial property. This means that you can deduct a large portion of your income. This provides just another tax benefit for real estate investors.
Wholesalers and Pocket Listings
Great real estate deals can be hard to come by which is why wholesalers exist. Wholesalers will work hard to get pocket listings or also called exclusive listings. These listings don't make it onto the MLS (multiple listing service) and aren't exposed to the greaterreal estate market. This is common for listings that occur with we buy ugly houses or we buy houses cash signs that you will see around town. Thesereal estate businessescan generally purchase these properties and then sell them during the inspection period to other investors or choose to flip them themselves. If they sell to other investors they may assign the contract for a higher price which means they never even own the property themselves!
Real estate offers a variety of ways to utilize tax advantages, loans and appreciation. Your personal finance choices and investment strategy could utilize multiple of these strategies to compound your return. One example is that you can flip a home and then rent it out for a higher rent. This can even be done with a mortgage to farther leverage your investment. If you property flip a property by establishing more equity than you put in, it is possible to take back out all of your money as a loan which means you can own a property with no money down! This is often referred to as the BRRR method. This stands for Buy, Rehab, Rent, Refinance. Real estate investing can offer great returns that are greater than the stock market and can lead you to financial freedom.