The 6 Different Ways Real Estate Investing Makes You Money
Real estate, managed and invested in wisely, can be a very strong wealth building vehicle. Because it makes you money six different ways, unlike the stock market which only generates money through at most two of these sources (market appreciation and dividends), it has enormous potential to make you financially independent and wealthy.
An important thing to note, is that real estate will only make you money in the six ways about to be listed, if it is bought with equity and the ability to cash flow, in “bread and butter” neighborhoods, and if it is managed according to the principle of “best product, best price.”
These six ways are cash flow, equity capture, forced appreciation, market appreciation, principal pay down, and tax advantage. The benefit of having these six different ways, besides their ability to work together to build a tremendous amount of wealth, is that if the investor makes a mistake and loses one vehicle, he will likely still make money.
Cash flow is one of the most important of these ways to real estate investors. Many people choose to invest in this and other passive income producing assets to get out of the “rat race,” and retire from corporate America. Without cash flow from rental property, or passive income from other investments that meet and exceed all your bills you can’t quit your job because you are still dependent on a pay check.
Real Estate Investing Makes You Money
Cash flow should always be the first thing on your mind when seeking investment vehicles- if it doesn’t cash flow you are most likely relying on speculation that the investment will increase in value over time. Cash flow is the way to ensure that you earn your money back in reliable, monthly income. The way to be sure a property cash flows, is by making sure your rent exceeds your monthly expenses by a decent margin.
Real estate allows you to increase your net worth almost instantly with equity capture. This is when investors buy a distressed home in a decent neighborhood for far less than it’s worth. Let’s say the average price for a similar home in the neighborhood is $100,000, and you buy the property for $60,000, but it needs $10,000 worth of work.
In this scenario you would be “all in” for $70,000 after rehab and would have captured $30,000 in equity. While stock’s are sold “at market,” and there is no way to capture equity, in real estate this practice is essential for protection against the market. By capturing equity you are shielded from small fluctuations in the real estate market– a security not available in most other investment vehicles.
Many people dislike certain passive income investments because they feel they lack control. As a result they turn to investing in property, which allows you to directly impact the value of your asset through how hard you work and the time you spend on the project. In single family real estate this is done by fixing up, or “rehabbing” a property. While in single family, the value of your property is ultimately capped by the value of those around it, regardless of your efforts- the value of apartment buildings are not as constrained by the concept of comparable sales. With multi family units, the value is determined by the profit margin. As long as you can continue to increase your income, and decrease your expenses the value of your property will go up.
Market appreciation is seen as a nice bonus to most real estate investors. Although it is not the first reason they purchase property, real estate does inevitably does double every twenty years. While success in the stock market is almost solely dependent on market appreciation, it is merely an added benefit to a real estate investor.
Even if you didn’t make money any of the above four ways, as long as your houses or apartment buildings were occupied, you’d still be making money. While your tenants are living in your property and paying you rent, they’re effectively paying your mortgage. As a result, your equity grows.
Lastly, is tax advantage. Real estate investors are the least taxed for profit group in the U.S., and there are many ways to both save and make money by knowing real estate tax law. Although it is complicated, make sure you are working with an accountant who specializes in this form of investing.