4 Ways Real Estate Can Make You Rich
Real Estate is the best way to build wealth – period.
For the vast majority of people, starting the next Facebook or inventing the next SPANX is just not in the cards. These types of explosive-growth businesses or life-changing new products come along once or twice in a generation. Creating millions of dollars of wealth through real estate, however, that’s actually pretty simple. It is not easy, but it is simple.
This idea of building wealth through real estate probably is not new to you – you have probably heard about it since you were a kid. But WHY is real estate so effective at building wealth? Exactly HOW does real estate make you rich? I’m happy you asked!
There are four main ways real estate can make you rich: cash flow, debt pay-down, appreciation, and tax benefits. Let’s go through them one at a time!
The first-way real estate can make you rich:
Cash Flow
The first way real estate can make you rich is through the cash flow it generates. Cash flow is the money that a property generates on a monthly basis. The cash flow that a property provides is the first “wealth generator” that real estate provides. For example, if a property generates $2,000 per month in rental income, but your expenses are $1,500 per month, the property “cash flows” $500 per month. I will say, most people underestimate their expenses (they often only think about the mortgage payment and forget about maintenance, insurance, capital expenditures, etc.), but after all of these things are accounted for, the money left over, that’s cash flow. Cash flow is the lifeblood of a real estate investor.
The second-way real estate can make you rich:
Debt Pay-Down
Debt pay-down is the second way real estate can make you rich. Generally, when you buy an investment property, especially when you’re starting out, you’re going to have a mortgage on the property. This is a form of leverage. Each month, when you make that mortgage payment, a portion of the payment goes to paying down your debt – this is HUGE, especially because you will be making the mortgage payment out of the rental income you receive. What’s even better? Because those mortgage payments are “amortized,” over time, less of the payment goes toward interest and more goes toward principal. That means that your debt pay-down will accelerate over time, causing equity to build faster, and making you more money.
The third-way real estate can make you rich:
Appreciation
The third real estate wealth generator is appreciation. Appreciation happens when the underlying value of a property goes up, or “appreciates.” For example, if you buy a property for $200,000 and it goes up in value by three percent (3%) in the first year (which is very conservative in today’s crazy market), your property is now worth $206,000. The property appreciated $6,000. Hypothetically, let’s also say that you bought the property as a house-hack with five percent (5%) down, which would have been equal to a $10,000 down payment. Think about that for a second, you just made $6,000 on a $10,000 investment – that is a sixty percent (60%) cash-on-cash return – that’s AMAZING! That is the power of leverage.
The fourth-way real estate can make you rich:
Tax Benefits
The fourth way that real estate will make you rich is through the tax benefits it provides. As a real estate investor, you can deduct your expenses directly from the income the property generates. You can also depreciate the property over time, which allows you to lower your taxable income, and possibly eliminate your tax liability altogether. Finally, there are also ways to defer taxes on profits you make by doing what is called a “1031 Exchange.” This allows you to defer your taxes by rolling the proceeds from a property sale into a new property of equal or greater value.
If you have questions about any of these ways that real estate can make you rich, leave them in the comments below!