5 Ways to Build Wealth through Real Estate Investing
Updated: Aug 21
When people talk about real estate investing, they often only talk about whether
the value of the home goes up or down. While that may be true if your only investment was in your primary residence, it completely misses many strategies for creating wealth through investment properties. The fact is, there are five different ways owning investment real estate can help create wealth for you.
5 Ways to Real Estate Wealth
1. Appreciation of the asset- Residential real estate appreciates on average about 4%-5% a year that is generally about 1%- 2% above the inflation rate. It is a great place to park money in order to stay above rising prices of the costs of living. Also keep in mind that properties appreciate; it compounds the return that you receive.
For Example a $200,000 home becomes $210,000 the first year, and then $220,500 in year two.
2. Cash flow- through renting. Think of rent like a stock dividend. Whether the market goes up or down, the dividend (rent) is paid out every month.
3. Principal pay-down- When you have a mortgage on a property, part of the monthly mortgage payment (that you pay from your rent) goes toward the loan principal. Over time, the principal that gets paid off builds up equity in your property. When you sell, or if you ever refinance the property, you will collect that equity at the closing table.
4. Start-up equity- When you buy property at a discounted price (foreclosure, short sale, estate sale, etc.), fix it up, and sell it. You will have immediate equity.
For example; buy a home for $350,000 and spend $100,000 on improvements. Sell the newly remodeled home now worth $530,000. You have created $80,000 worth of equity.
5. Tax benefits-There are many tax benefits to owning property. You won’t see that money in your pocket immediately but it will come back to you in the form of deductions.
For example, deductions include; mortgage interest, insurance, repairs, Travel to and from and association dues is all tax deductible. Another way is to defer taxes on properties you sell by either using a Self-Directed IRA or a 1031Tax Deferred Exchange.
So now that we see all the different ways to build wealth, let’s take a look at the actual potential return we can generate in our first year on an investment property:
For example; buy a foreclosure home for $350,000 in a neighborhood worth $500,000 after repairs are made. We put $80,000 down, spend $40,000 on repairs, and $10,000 on closing costs ($130,000 total). We finance the remaining $370,000 over 30 years at 3.375%.
Our $370,000 loan payment is approximately $1500 per month for principal and interest, plus another $300 for taxes and insurance. Our total monthly payment is thus $1800.
Let’s say the home rents for $3,500 per month, so after subtracting the monthly payment, we have a $1700 positive cash flow.
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