You’ve watched a lot of HGTV and you’re interested in investing in real estate or flipping homes… but you don’t know where to start. You’ve seen those pesky FB ads for a free webinar on how to become a real estate millionaire, but it didn’t feel right.
Let’s be honest, there’s a lot more to becoming a real estate investor than winning the bid at an auction, making a few repairs, and hosting some open houses. But there are also tremendous benefits and lots of money to be made.
We’re going to give you the real deal.
Everyone who buys property doesn’t strike it rich.
Many women actually find themselves stressed out and out of money. Some never accumulate wealth and find themselves wondering if they made the right choice. The truth is that there’s a method to the madness. Buying right is the key to success. In order to do that you’ll need to be well informed before you start investing.
In this article, we’re going to jumpstart your real estate investing education by showing you the 4 primary ways to make money by investing in real estate.
There are four primary ways to make money when investing in real estate:
If you buy an investment property using a mortgage loan, with each monthly tenant rent payment your loan balance will decrease. Over time, your potential tenants are essentially paying the loan down for you. They’re essentially building wealth for you automatically.
Let’s say you owned a property that you purchased for $500.000 and had a mortgage of $450,000. Even if you made no monthly rent profit and only broke even on the mortgage payment and the property never increased in value, when your mortgage loan was paid off, you’d have a property worth $500,000 that you didn’t pay for. Your renter would have paid for the property for you!
When the value of a property increases, it’s referred to as appreciation. Appreciation in value is not a guarantee, historically, real estate has always increased in America. Ove the last century, real estate has appreciated at an average rate of 3% per year.
There’s another way experience appreciation. It’s referred to as forced appreciation and it’s the idea that by increasing the value of a property through improvements you create appreciation. It’s what home flippers do. They buy low – usually the properties no one else is interested in. They fix up the property to appeal to buyers (thus, increasing its value) and cash in on the profits.
Tax benefits & exemptions
The U.S. government favors those that invest in real estate and our tax code encourages the purchase and leasing of properties. Wondering how that’s possible? Well, from an abundance of tax write-offs to the 1031-exchange and more, real estate investors can pay significantly fewer taxes than other entrepreneurs; especially, if they use the profits to buy more properties or pay off their mortgage debt faster.
Keep in mind that these benefits also apply to your private residence and even holiday lets. So if you’ve been eyeing a vacation home, make it a part of your investment strategy. Consider renting it out when you’re not using it and allow your seasonal tenants to pay off your property, while you enjoy the tax perk!
Different strategies = different results
Keep in mind, that while all of this sounds amazing, just buying any old piece of real estate may not provide all of the above benefits. There are different types of investments and different strategies that each have different results. For example, if you decide that you want to ‘flip homes’, you’re not going to pay off the loan over time. So you won’t benefit from monthly cash flow, accrued appreciation, loan pay-down, or annual tax benefits. Instead, you’ll earn lump-sums of money with ‘forced appreciation’.
One of the reasons I love the concept of purchasing rental properties is the potential to capitalize on all four wealth generators — but only if you buy it right. Here’s a real-life example:
Amaya decides that she wants to invest in rental properties. She finds a duplex for $125,000 in an area that she likes. After getting a thorough property valuation and analysis back from her realtor, she determines that she’s ready to proceed. Amaya puts $25,000 down and secures a 30-year loan for $100,000. Both units combined bring in $1500 per month and her expenses are about $100, resulting in $500 in cash flow – which goes up every year with rent increases.
She’ll also be able to avoid that additional income from being taxed, because of the depreciation deduction she can claim for the property – a tax benefit of owning the duplex. Over the next 30 years, the property value increases to $300,000 (appreciation increase of 3% per year). In addition, Amaya paid more per month on the mortgage payment and within 15 years the loan has been paid down – by the tenants. She now owns the duplex free-and-clear and has an asset worth $300,000. Plus she generates a monthly income of $1500 per month from this one investment.
This example above is not an unrealistic scenario. These are real-life possibilities when you buy right and utilize all four of the wealth generators. Imagine what your net worth could be in 10, 20 or 30 years if you were to start purchasing property now. Then, think bigger. Consider how much faster you could accumulate wealth if you purchased several properties a year and compounded the results!