“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.” - Marshall Field, American Entrepreneur
“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.” - Andrew Carnegie, Billionaire Industrialist
Most of us have heard similar quotes and maxims promoting the advantages of investing in real estate to create wealth, but why? The answer is that investing in real estate combines 5 unique benefits into a single investment:
Let’s dive further into each:
1. Cash Flow
Cash flow is the net amount you, as the investor, get to keep after all expenses have been paid on your investment property. Unlike other investments, real estate generates a significant amount of passive cash flow (7-10+%) as the rent from tenants more than covers the expenses of the property. This is why real estate investors brag about “making money while they sleep”.
2. Equity
As you collect that passive income from your tenants, you are also paying down the loan on your investment property. This has the effect of increasing your equity on a monthly basis with your tenants essentially building that equity on your behalf. Your personal net worth is increasing passively, without any additional capital contributions. Equity can also be forced by improving the property through “value add” upgrades that lead to an increase in rental rates.
3. Leverage
While you continue to gain equity in your investment property, you are also taking advantage of another unique benefit of real estate investing: leverage. Using leverage is as simple as adding a mortgage to your investment property in order to increase your return. For example, if you buy a property for $200,000 with $50,000 (25%) down and your property increases in value to $250,000, you have actually doubled your investment, making a 100% return. Good luck finding another investment that allows you to control 100% of the asset with only 25% cash.
4. Appreciation
In addition to gaining equity on your asset, the value of your real estate investment will tend to increase over time without you having to lift a finger. This is known as appreciation and is caused by various market conditions such as a population and wage growth, increase in rental rates, and the overall demand for quality housing. Real estate is one of the unique assets (unlike your car) that will gain, not lose value over time.
5. Tax Advantages
With all of this cash flow and equity you may be wondering “how much will I have left once Uncle Sam gets his piece”? The reality is that investing in real estate offers investors significant tax advantages that help shelter your income from traditional taxes. This is because our tax code is written to incentivize certain investments that have a benefit to society, one of which is providing housing. There are various tax write-offs such as depreciation, mortgage interest, and other related expenses that can help investors offset their investment gains. In fact, many investors can show a “paper loss”, while being cash flow positive, which leads to real estate investors significantly reducing (or completely eliminating) the taxes on their real estate income.
These 5 unique benefits are why investors love real estate and why it is the best asset to build wealth passively over the long term.