In many ways, real estate investing mirrors the game of Monopoly. In the game, it is imperative to understand the core concepts of investment, economics, and risk. To be declared the winner, you buy properties, avoid bankruptcy, and generate rent so that you can buy even more properties.
If you've ever played Monopoly before, you know that simple does not mean easy. Little mistakes and missed opportunities can often lead to dire consequences. The game is not for the faint of heart, in the worst-case scenario, it may result in a family going days without speaking after a particularly brutal game. The winner, however, experiences a high like no other. They start the game investing their money and fearing their potential loss, but by the end, they are consistently generating passive income as they seamlessly travel across the board. When played right, the success of the Monopoly winner is not unlike the success of a savvy real estate winner, just with higher stakes.
The benefits of investing in real estate are endless. As an investor, you can build your wealth through predictable consistent cash flows, excellent returns, tax advantages, diversification, and financial freedom. If you're on the fence about entering the real estate investing realm, we are here to help. Here are five reasons why real estate investing might be a good fit for you.
#1: Generate recurring passive income.
What makes passive income "passive"?
Active income is when you work for money, passive income is when money works for you. One of the key benefits of real estate investing is the ability to generate consistent cash flow. Most people have experienced a housing situation in which they paid a fixed monthly rental rate to a landlord or property manager. Imagine if you could be on the other side of the equation.
As the owner of a property, you can rent out your property to tenants. Their rent pays for the mortgage and all operating expenses, then the remaining cash flow is your net income. This cash flow will only strengthen over time as you pay down your mortgage and build up your equity. Cash flow income can be generated by multiple types of real estate such as apartment buildings, storage units, office buildings, retail establishments, and single-family houses.
Fixed income? You won't find that with Real Estate!
One of the key benefits of real estate investing is that there is no such thing as a fixed salary! Real estate is scalable improvable. As a tangible man-made asset made of wood, brick, concrete, and glass, you can improve the value of any property with some good old sweat and hard work.
Construction isn't your cup of tea? No worries! Do yourself a favor and hire someone who has the skills you need, the principle is the same. Do what you do best, delegate and invest, and let an expert in home improvement make your real estate worth more by making those cosmetic or structural changes.
#2: Building Equity.
Where do you think generational wealth comes from?
If you ask some of the wealthiest people you know where a lot of their money comes from, nearly all of them will say they have invested in real estate at some point in time. It all starts with one generation, with one person leaping to begin the wealth-building process.
Every month you will make a mortgage payment from the rental income you are bringing in. Part of that payment goes toward paying interest on the loan and part of it goes toward paying down the principal value of your property. With every payment you make, you will own more and more of the property, making that asset part of your net worth.
When you finally pay off your mortgage, you will own that whole property. Your tenants have paid the majority of the cost of the mortgage and now you will receive great cash flow monthly.
That's a huge win for your net worth that will be passed down generation after generation! The wealth you build today can be passed down and built on. Think of the wealth you build as the winner of Monopoly, after a while, you have so much you almost don't know what to do with it.
What asset is almost certain to appreciate?
As the owner of real estate, you not only benefit from the equity built, but also from the increase in property value. Real estate has a positive relationship with inflation and GDP growth, meaning that over time as economies expand, demand for real estate increases. This drives up rent and also the value of the property.
Since 1960, there has not been one single year of decline in median U.S. home prices. Appreciation levels have always been around 6% year to year, with some on the rise U.S. cities yielding nearly double that. When looking at a potential investment property, it is wise to also look at its appreciation potential.
#4: Leverage is a powerful tool.
Passive income sounds great… but don't you need a lot of money to start?
Technically, no. You can start very small! Let's go back to our game of Monopoly, the first few properties are the cheapest and generate the lowest amount of cash flows. But sometimes that's all you can afford. As you start to generate consistent income from those smaller properties, you can then sell them and move up to the bigger and heavier cash-flow generating properties.
In the real world, you can put down as little as a 3.5% down payment on a property! With interest rates as low as they are right now, there isn't a better time to dip your toes in the pool. This is where the concept of leverage comes into play. Leverage is when you can pay for something without coming up with the full cost. In this case, you are using leverage by taking out a mortgage to buy a property and only putting down a fraction of the total cost. Even though you've only paid a downpayment and still owe money on the mortgage, you are entitled to ALL of the benefits.
This is why real estate is considered "good debt". You are the owner of all of the income generated, all of the equity build-up, all of the appreciation of the property, and you get to utilize all of the tax write-offs. These unique characteristics are what sets real estate apart from other investments.
#5: Bring on the tax benefits!
As the owner of multiple properties, won't you have to pay heavy taxes?
There are actually endless tax benefits when it comes to real estate.
Starting with tax deductions, several tax codes allow deductions for the normal expenses incurred in owning real estate, lowering your overall taxes. These deductions include property upkeep, property taxes, insurance, maintenance, improvements, and even the interest paid on the mortgage. You can even deduct advertising expenses that were required to acquire tenants.
The accounting practice of depreciation will also lower your overall taxes as a property owner. Depreciation is a non-cash expense permitted by a tax code that depreciates the value of your investment property over time. For example, if a farmer owns a tractor, the value of that tractor goes down over time. The farmer can deduct a depreciation expense every year because of that.
However, as we discussed, the value of your investment property appreciates each year. You can still use a depreciation deduction that allows you to generate a larger positive cash flow while technically reporting a lower income for tax purposes.
Perhaps the greatest benefit of real estate investing is that it is simple and understandable. While wall street is increasing in risk and mystery, it is comforting to know that real estate investment stays constant. Owning real estate can diversify your portfolio, allow for consistent cash flows, certain returns on investment, tax breaks, and passive income to take you to financial freedom.
However, as we mentioned earlier, Monopoly isn't for the faint of heart, and neither is real estate investing. It requires serious commitment, consistent learning, and an ambitious personality. If you are seriously interested in building wealth, investing in real estate is one of the best ways to do it.
As an investor, you are going to be continuously working with mortgage lenders throughout your career. At Wilkes Mortgage Group, we want to maximize your potential as an investor. By working with our trusted advisors, we will provide you with the necessary guidance and connections to generate profitable returns on your investments.
If you have any questions about getting started as a beginner investor, feel free to schedule a call to learn about your options here.