Investing in real estate has proven to be an incredible wealth-building tool, with the world’s richest investors in 2021 choosing real estate over stocks according to a recent report in Bloomberg. However, despite its success, there are still some investors who shy away from real estate because of market volatility, fears about being a landlord, and concerns about repairs. For them, the stock market or simply working a regular job and having a 401K and retirement accounts gives them peace of mind. Here’s why the benefits of investing in real estate for wealth-building far outweigh the downside.
1. The Same Investment Can Be Recycled Over and Over Again
You might have heard of the BRRRR (Buy Rehab, Rent, Refinance, Repeat) method of real estate investing. One initial down payment can be refinanced out of a property to use as a down payment on another once the project has been renovated and rented. BRRRR investing applies to any size property from a single-family upwards and is one of the most often used vehicles to generate wealth.
2. Cash Flow
Who doesn’t like cash flow? It’s probably the number one reason, ahead of equity appreciation, to invest in real estate. Cash flow is the profit you make from the gross rental income once the expenses (taxes, insurance, mortgage, repairs) are deducted each month. When your cash flow matches your living expenses, you have become financially free.
3. Tax Advantages
Any type of real estate investment — from a single-family rental to an industrial warehouse — has tax advantages tied into the ownership. If you pay high taxes through your job or other businesses, owning real estate will help to offset them.
4. Forced Appreciation
Buying an undervalued property or one that needs work and then adding value by fixing it up is the fastest and one of the most effective strategies for building wealth. Forced appreciation applies both to a flip and a buy and hold which you can then cash out refinance or get a home equity line of credit to use to generate more income. This is a big advantage over the stock market where the entire value of the stock must be purchased in full.
5. Leverage
If you purchase a $400,000 property with an $80,000 down payment and finance the remaining $320,000 you are using leverage. Similarly, you can purchase five houses that are each priced at $400,000 (a total value of $2M) using a down payment of $400,000. If the market increases by 10% the value of the 5 houses increases by $200,000.
6. Equity
While real estate investors often choose to force appreciation by upgrading their property, real estate can also increase in value (as shown above in point 5), sometimes dramatically, based on the market, without owners having to do anything, other than keeping the property in good condition and may the bills.
7. Control of Investment
Unlike the stock market which individuals have no control over, real estate owners can control many of the downsides of being a landlord. If a tenant doesn’t pay the rent they can be evicted. If the property needs repairs, they can be attended to and if a property is vacant, it can be rented.
Any investment has potential risks. However, with real estate, it is possible to mitigate those risks while realizing huge profits through cash flow, equity, and tax savings. When done correctly, investing in real estate can create tremendous passive income, allowing owners the chance to retire on their terms or leave their 9-5 jobs and enjoy the kind of lifestyle they desire.
Here’s to your journey and your success!
