How to Build Wealth With Real Estate
“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” - Andrew Carnegie, billionaire industrialist
Which may have been true 100 years ago. In today’s world, only a tenth of the world’s richest people got rich by building a real estate empire. But it’s still the third largest source of wealth.
And the United States is home to the second highest number of property owners. If you’ve been thinking it’s time to build wealth with real estate, keep reading.
We’re sharing with you the ultimate cheat sheet on building wealth through real estate.
There are Four Ways to Build Wealth With Real Estate
When it comes to wealth and real estate, there are four strategies to learn and follow if you’re looking to become a serious contender. They are:
Appreciation is building wealth through real estate by allowing the value of a property to increase. Unfortunately, appreciation is not a guarantee.
There are several factors that determine how much property will or won’t appreciate over time. These factors are useful when figuring out which property to purchase.
Fortunately, historically real estate appreciation has tended to increase by an average of 3-5% over the past 100 years. But you should also be aware that there’s another type of appreciation.
It’s known as “forced appreciation”. This happens when the value of the property is increased by making improvements.
Cash flow is a huge part of accumulating wealth with real estate. Your cash flow is the extra income you keep each month and year that you own your property.
However, be aware that your cash flow can fluctuate due to expected and unexpected repairs. And if your property lies vacant for any period of time, that too will affect your cash flow.
There are also capital expenditures such as needing a new roof, windows or replacing your HVAC system and small expenses such as utilities and paying for a management company that can affect your monthly cash flow.
Those who purchase property with a mortgage has a loan balance. With each payment, your loan balance decreases.
The great part for those looking to build wealth in real estate is that over time, your tenant is essentially the one paying down the loan for you while you automatically build wealth. In other words, if you buy property for $1 million dollars with an $800,000 mortgage on the property but it made no money in cash flow but rather broke even, it wouldn’t climb in value.
But after you paid off your 30-year mortgage, you’d end up with a million dollar property you never saved for. Instead, your tenant paid off your mortgage for you thanks to loan paydown.
We’re all aware that taxes, like death, are unpleasant but unavoidable. But wealth and real estate are great partners when it comes to paying fewer taxes.
That’s because the US government likes and rewards real estate investors. As a result, the tax system is set up to encourage people to purchase and lease properties.
There are extra write-offs, no self-employment tax, the 1031-exchange and other incentives that help investors pay much less in taxes than other types of business owners. You can then use that extra money to buy more property or pay down your mortgage faster.
Things to Remember
While learning how to build wealth with real estate is exciting, it won’t happen overnight. Develop a long-term plan and count on experiencing a few setbacks.
It’s also not easy to start your own business. There are many contingencies you must consider before you start and along the way.
A good commercial real estate company like Austin McGuire can help.
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