CAUTION: The contents of this post may be Rated ‘D’ (as in, Duh! That’s obvious).
It wasn’t that obvious for me till I paid close attention to the returns from my real estate investments and compared those to my startup paycheck where I was putting in 10 hours daily. The same day someone has posted this quote on social media –
“If you don’t find a way to make money while you sleep, you will work until you die.”
It was an AHA moment.
The vast majority of people spend their lives working full-time jobs to earn a “steady” paycheck. Meanwhile, the wealthy have somehow unlocked the secret to working less while making their money work for them. So what is it that the wealthy know that the rest of us don’t?
One of the biggest secrets that the wealthy tap into is the incredible power of real estate. Real estate has the ability to generate passive income and provide a path toward building wealth.
Every dollar invested in real estate works for you in these five star ways:
- Cash flow
- Tax benefits
Let’s look at these a little more …
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 $650 for expenses and reserves, and keep the remaining $350 as passive cash flow, Cha Ching !!
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.
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. Once your rental builds significant equity, you may have the opportunity to use a home equity line of credit, which allows you to borrow against your existing asset. These funds can be invested into another asset, which allows you to make your money work even harder for you.
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 $500,000. In time, the duplex appreciates to $700,000, at which point it is sold. The profit at the sale, or $200,000, 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.
Note: This is not a tax advice. You should always consult your CPA for all tax related decisions.
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 attractive.
Also, 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. We will talk more about cost seg and accelerated depreciation in another post.
RECAP: 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.
If after reading all this you are saying .. “Duh! That was so obvious” – Well, you had been warned.
To learn more about how to diversify your portfolio by investing in real estate syndications, please visit us at SmartCapitalMgmt.com. You can also join the Smart Passive Investor Club to get an early peek at our investment opportunities.