Real estate is a great way to create wealth. You can use other people’s money to pay for your real estate investment with less cash out of your own pocket so that you maximize your return.
People often think that to invest in real estate, you have to be rich or know a lot about it. The fact is that anyone can invest in real estate in one form or another, even if they only have a little money to start.
Let’s look at ways how real estate builds your wealth.
At first, the thought of having to pay taxes may be enough to stop people from investing in real estate. But investors and primary residents can get tax breaks, which makes it one of the best ways to build wealth. Real estate has all sorts of tax breaks. This list offers 5 potential ways investors may be able to save on taxes. This depends on your own situation, which you should talk about with tax and legal experts. Here are some ways that real estate investors can benefit from a tax perspective:
- Deducting depreciation
- Capital gains taxes instead of
- General business expense deductions
- 1031 Exchange
- Passive income
In general, when something has appreciated, its value has gone up. There are typically 3 ways that investors can benefit from appreciation, depending on the strategy.
Instant appreciation. This is because when buying low, there is already a profit built into the deal before they sell it.
Market appreciation. Which is tied to how the housing market performs. In the past, real estate prices have skyrocketed to unprecedented levels. The current average appreciation rate is 14.5%, compared to 4% in 2019.
Forced appreciation. When a flipper buys a house, they fix it up to increase its value. Finding potential is crucial to real estate investors. In any market, if you have the right strategy, you can benefit from some form of appreciation.
Cash flow, simply put, is what’s left over after you pay all of your expenses. Cash-flowing properties and markets can be used to make passive income.
Buy-and-hold investors conduct real estate transactions with the long-term in mind. This means renting out one property and collecting rent every month until they are ready to buy another property. In effect, real estate creates multiple income streams that can be used for a variety of purposes
4. Forced Equity
Forced equity is the term for how much money an investor makes when they fix up a property to increase its value. Unlike appreciation, which depends on the market and other things you can’t control, forced equity gives investors a way to increase the value of their properties that they can control.
The most common way to build forced equity is to buy a house that needs work and fix it up. Paying below market value for a property that needs upgrades, then adding appliances, new flooring, paint, etc., can be a great way to create wealth through real estate without much risk.
Many investors force equity by adding features like extra bedrooms, bathrooms or square footage. The key is to look for properties that don’t have as many amenities as you would like and then add what’s missing to make the most value.
Real estate is one of the easiest assets to leverage. Not only is it relatively easy to leverage its financing, but the terms are generally better compared to any other kind of loan. Interest rates may be lower, down payments can be 20% or less, and loans are routinely amortized over 30-year periods. What else can you invest in using financing with terms like that?
Where else can you borrow money from A (the bank), pay that loan back with money from B (the tenant), and keep the difference for yourself?
Many people understand that real estate can create wealth, but not everyone understands why.