Real Estate is the preferred investment by many of the wealthiest people, as it can be a great way to build wealth and achieve financial freedom. In this post I will outline some of the many benefits of real estate investing.
1. Instant Equity
Also known as making money on the buy, instant equity is a term used to describe a situation where a buyer purchases a property for less than its current market value. This typically happens when the seller is motivated, or the property is distressed. When a buyer is able to secure a property for less than its market value, they immediately have equity in the property upon purchase. This means that if they were to sell the property right away, they would make a profit. Instant equity can be a great way for buyers to build wealth and increase their net worth. However, it's important to note that instant equity is not guaranteed and buyers should always do their due diligence before making any real estate transaction.
2. Cash Flow
You've heard it before, Cash Flow is king; it runs the business. Cash Flow refers to the amount of income generated by a rental property after all expenses, such as mortgage payments, taxes, insurance, and maintenance costs, have been paid. Positive cash flow is desirable as it means the property is generating more income than it costs to maintain, while negative cash flow means the property is costing more to maintain than it is generating in income. Cash flow is a crucial factor to consider when investing in rental properties, as it determines the profitability of the investment and the potential for long-term financial growth.
3. Leverage Real Estate is one of the only investment vehicles that allows you to borrow the majority of the money (usually 80%) required to purchase the investment. When an investor uses leverage, they are able to purchase a property with a smaller amount of their own money, while borrowing the rest from a lender. This can allow investors to purchase larger or more expensive properties than they could afford on their own. The idea behind leveraging is that the return on investment will be higher than the cost of borrowing, resulting in a profit for the investor. However, leveraging also comes with risks. If the property does not appreciate in value or generate enough income to cover the cost of borrowing, the investor could end up losing money.
4. Mortgage Paydown Mortgage paydown is the process of paying down the balance of a mortgage loan over time. Each mortgage payment made by the borrower goes towards paying down the principal balance of the loan as well as the interest owed. In the case of Buy and Hold real estate, when your tenants pay their rent each month, that rent is used to pay the mortgage, which in turn pays down the mortgage and grows your equity in the property.
5. Appreciation Appreciation is very powerful in Real Estate because the entire value increases, including the leveraged amount. In other words, you're making money on borrowed funds. There are 2 forms of Appreciation, Active and Passive
Active appreciation: This is the increase in value by doing some form of renovation or upgrade to the property. Like adding units, improving the quality/updating the existing building / units, increasing income, or reducing expenses.
Passive Appreciation: This refers to the property value increasing over time, with inflation and market conditions.
6. Tax Benefits Real estate investing can come with many tax benefits. Since owning a rental property is like running a business, you can take advantage of tax breaks provided by the government. For example, you can deduct expenses like mortgage interest, property taxes, and repairs from your taxable income. Plus, your property has the option of being depreciated every year, allowing you to defer the income until you sell the property.
By understanding these profit centers, investors can maximize their returns and build long-term wealth. Real estate can also be a great way to diversify an existing portfolio, as it is a tangible asset that is not directly tied to the stock market. Of course, like any investment, there are risks involved, so it's important to do your due diligence and work with a knowledgeable real estate professional.
If you're interested in learning more, or getting involved in any of our deals please feel free to reach out by booking a call using the link below.
Comments