The other day I had a friend ask me about investing. He has been saving up some money for a while and decided it was time to get serious about what he’s going to do with it.
A lot of the typical options came up. He asked me about stocks, bonds, mutual funds, and many other vehicles that are used for investment purposes. Eventually, we got to the topic of Real Estate.
He knows that I personally invest in Real Estate and that I think it’s a fantastic place to invest, but he wasn’t entirely sure why.
During the rest of the call I explained to him the main points of why I think Real Estate is one of the best investments you could make.
Below is a recap of the conversation, and why you should consider Real Estate as a great wealth-builder.
WHY YOU SHOULD CONSIDER REAL ESTATE
There are 5 key reason why I think Real Estate investing is so awesome. But before I go through those 5 reasons, let’s look at the big picture.
Andrew Carnegie was one of the most successful businessmen ever. At its peak, his fortune was worth over $300 billion (In 2007 dollars adjusted for inflation). Wow!
He is attributed with saying that “90% of all Millionaires become so through owning Real Estate.”
Mr. Carnegie was alive during most of the 1800’s, and passed away in 1919. No doubt, times have changed a bit since then.
However, Real Estate is currently on the list for top-ten creators of billionaires. That’s right, billionaire with a B!
When I read and hear statistics like these I immediately think there must be some reason for the high level of success in wealth creation.
On top of it being one of the top ways to amass wealth, it is an area of investment that you can have much more control over the outcome.
Think about it. If you invest in a stock, bond, or even a mutual fund, you don’t have much control over what will happen.
Let’s say you invest in xyz company’s stock, and then a report comes out about how the CEO approved illegal activities and now the company is up to its eyeballs in lawsuits. That stock price is going to plummet, and you had nothing to do with any of this! You are just a spectator, watching from the sidelines.
With Real Estate, you get to play an active role in how that investment is going to perform for you. Do you want to increase the value of the property? There are specific ways you can do this through renovations, increasing income for a rental property, and even lowering expenses.
This is of course assuming you want to be involved and have control over the outcome of your investments. Some people have zero interest in this type of stuff. Unfortunately for them, they won’t get to reap the rewards!
5 KEY REASONS WHY REAL ESTATE ROCKS
There is a simple acronym to remember. Just think to yourself that Real Estate investing is I.D.E.A.L.
Those letters stand for Income, Depreciation, Equity, Appreciation, and Leverage.
Let’s explore each one and why they are so beneficial.
The first point is that Real Estate can help create a stream of income.
I’m sure most of you are familiar with the concept of paying rent.
I own several multi-family buildings. Each one of the units is creating an income stream from the current tenants. They pay rent each month, and that monthly income flows to the owner. In this case it’s me, but it could be you.
The reason I think this point is so crucial is because of what it represents in the long-term.
Most people are focused on saving for retirement. But what does that mean, fundamentally? It means that you are trying to save up enough money so one day you can replace your current income from your job, and then stop working.
Each time you purchase Real Estate that pays you an income you move one step closer to your goal of income replacement.
You just have to get to a point where the income your properties are paying you is enough that you don’t have to work anymore.
And then boom, you’re retired!
One of the biggest issues people face when they are doing retirement planning is how to create a stream of income so they don’t have to work.
People work for years to build up a retirement “nest-egg” and then they aren’t sure of the best way to turn that “nest-egg” into an actual income stream.
Real Estate helps to alleviate this issue.
Depreciation is an accounting method that allows you to deduct the value of an asset over it’s useful life.
As an example, imagine if a farmer bought a tractor for their business. That tractor is only going to last for a certain number of years until the farmer needs to purchase another tractor. So, the IRS allows the farmer to deduct a percent of the cost of the tractor from their taxes each year as a business expense.
The magic of Real Estate is that you also get to depreciate the value of the property, but over time Real Estate tends to go up in value; not become worthless like a tractor.
Because of this, you get to take a tax deduction to offset the income the property is producing for you, helping to save money over time.
How awesome is that!?
Each time you make a mortgage payment a part of it goes toward paying interest on the loan and a part goes toward paying down the principal value of the property. With each payment, you own more and more of the property.
If you own rental properties and have properly purchased a good investment, the income from the rentals will pay the mortgage payment, and there will be left over money for repairs, maintenance, and more.
At the end of the mortgage period you will own the entire property, and your tenants will have paid for the majority of the cost.
Score another “win” for Real Estate!
On top of the build-up in equity from paying down the mortgage, you will also benefit from the increase in property value.
Over time, Real Estate prices tend to go up in value. From the 1960’s through the early 2000’s there wasn’t a single year of decline in the median home price in the U.S.
Every region of the country is a little different, but regardless of high-appreciating areas like major cities, inflation alone pushes up the costs of most things over time, including Real Estate.
Personally, when I’m evaluating a potential investment I’ll look at the appreciation potential, but I think of that as “icing on the cake.” I don’t plan for it as a certainty. This way, even if the property doesn’t go up as much as I “planned” the investment should still be a good one.
This is the final part of the acronym, and what allows for anyone to get in the game.
Leverage is the concept that you can pay for something without coming up with the full cost. For Real Estate, you can use leverage by taking out a mortgage to buy a property and only put down a fraction of the total cost.
Even though you only put down a small portion of the purchase price, you are still entitled to ALL of the benefits.
You get to keep all of the income generated, all of the equity build up, all of the appreciation of the property, and you get to utilize all of the tax write-offs.
You simply cannot do this with most other investments. There aren’t many ways to buy financial investments with leverage outside of using a margin account, and there are other issues to worry about when using those. But we’re not going to get into that right now.
The accessibility of leverage in the Real Estate industry is what helps you start investing before amassing a fortune.
You can even use an FHA loan to buy a 4-unit building with only 3.5% of the total purchase price. I’ll walk you through that strategy in the future.
Investing in Real Estate isn’t for everyone. To do it properly, you do need to put in some extra effort. But for anyone interested in building wealth, I think investing in Real Estate is one of the best ways to do it.
If this article has peaked your interest in Real Estate, stay tuned, I’ll be diving into the proper ways to evaluate an investment deal and how you can increase your chances of success.