I love standing next to an ocean and hearing the waves crash against the rocks. It reminds me of when I visited “The Blowhole” in Ensenada, Mexico. It’s an incredible sight to see the water roll into ever decreasing crevices but the force must go somewhere. It ends in a magnificent explosion of water straight up into the air.
I’m attracted to powerful things and real estate is no different. I spent YEARS trying to get ahead by investing in the stock market, buying bonds, and putting my money in CDs. And it didn’t work. Fast forward to now, and investing passively in multifamily syndications is helping erase all the time I wasted before. But why is investing in real estate so powerful?
Every dollar invested in real estate works for you in these five ways:
● Cash flow
● Leverage
● Equity
● Appreciation
● Tax benefits
#1 – Cash Flow
The greatest benefit of investing in real estate is passive cash flow. When an asset is purchased and rent is collected from tenants, the remaining value after property expenses are paid 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. Now let’s say 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 (i.e., money in
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. The cash flow you earn is based on the full $200,000 asset, not the $50,000 portion. This is the magic of leverage. Even though the bank contributed 75% of the money, all you have to do is pay the mortgage and interest, and any excess cash flow or profit is all yours. No need to share it with the bank.
#3 – Equity
As you receive monthly rental checks and use them to pay the mortgage, your equity in the property increases. In this way, the rental property generates income to pay for itself. Imagine buying a laptop that generated money to pay for its own wifi!
Once your rental builds significant equity, you may have the opportunity to use a home equity line of credit (HELOC), which allows you to borrow against your existing asset. HELOC fundscan be invested into another asset, which allows you to make your money work even harder for
you.
#4 – Appreciation
Real estate values tend to rise over time, which means your money can also work for you in the form of appreciation. For example, consider a property purchased for $580,000. In time, the duplex appreciates to $750,000, at which point it is sold. The profit at the sale, or $170,000, will have been generated via appreciation, plus any additional equity that you had built through paying down the mortgage. That being said, while appreciation is nice, it’s not guaranteed, which is why you should always invest for cash flow first and foremost, with appreciation as the icing on the cake.
#5 – Tax Benefits
When you invest in real estate, you get the benefits of depreciation and mortgage interest deductions, as well as a whole host of write-offs for a number of other related expenses. Investors often show losses on paper, while actually making money through cash flow. The losses play a big part in helping to offset other income, which is a major reason real estate is so
lucrative.
Further, when investing in commercial real estate syndications, you have the opportunity to take
advantage of cost segregation and accelerated depreciation, further increasing your tax
benefits.
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, appreciation, and tax benefits. This is true regardless of whether you invest in single-family rentals, large syndications, or anything in between.
Financial health is not only achievable, it is inevitable if you put your money into real estate. So what are you waiting for? Take control of your money before it controls you.