Some real estate careers or businesses are more difficult to navigate than others. That’s why I never encourage investors to become real estate agents. Would you want to spend your weekends putting out cookies at open houses, hoping for a sale? Of course not. Instead, the best way to build wealth in real estate is to buy and hold cash flowing rental properties. This is a more reliable and surefire way to build wealth.
There are five main ways of building wealth in real estate:
- Cash flow
- Appreciation
- Equity
- Tax benefits through depreciation
- Hedge against inflation
Understanding both the real estate market as well as how to invest in it can create such a lasting impact on you financially. With a couple of ways on how to build up that wealth, you will be able to go from zero to one hundred doors in no time.
How Do You Build Wealth In Real Estate?
The most common way to build wealth in real estate is to understand the market flow of your neighborhood, comparing them to other neighborhoods, and from there, see if there is an investment to look forward to. Sometimes, especially after the events of the recession back in 2008-09, the real estate market can become somewhat of a frustrating workplace to deal with, as there can be some high prices and low profits depending on the county and state you live in. If you’re not into searching for the perfect housing market and property, you can always utilize a full-service real estate company such as Morris Invest, that does all that research for you, and provides you with a cash flowing new construction property.
No matter what path you take in obtaining a property, you’ll want to be familiar with these key ways to build up your wealth through the real estate market that can help you invest and build that wealth both short-term or long-term.
Generate Substantial Cash Flow with Rental Real Estate
Cash flow typically means the money that is often left over after the expenses are paid. Be it from the rent that was collected to other needs that were to be taken care of for the property at large, once these expenses are dealt with, the additional money is yours to keep (and invest in more properties). In many of our rental markets we can increase rents every few years. However, cash flow isn’t always as stagnant as it can be.
There can be times where the cash flow has an increase, but also a decrease if there’s a decline in demand or value. That’s why we only like to invest in expanding or appreciating markets to avoid decreases in rent. For instance our new construction properties we’re building in Texas are in neighborhoods with incredible demand for housing. See for yourself.
Rental Properties Become Worth More Money Through Appreciation
While I’m more interested in cash flow, appreciation is a powerful hedge against inflation. Perhaps you’ve seen how the federal government can print money like, well, you know. That means every day the value of a dollar is going down thanks to inflation, while the value of real estate goes up. It’s why I like to say, “savers are losers.” When you put $1 in the bank at a paltry .01% interest rate and the inflation rate is 2% you are losing money. But if instead you put that $1 into an appreciating piece of real estate you’re coming out smelling like roses. You’re a hedge against inflation.
Use Your Rentals to Buy More Properties Through Leverage
Speaking of leverage, what leverage can do create an economic flow system between the bank, the tenant who rents or buys the property, and the real estate agent who introduced the tenant to the property.
Think of it like this: you decide to get money from the bank to buy a cash flowing rental property. You brought a 25% downpayment to the closing table and the bank brought 75%. You get all the glory here. You get the cash flow, the tax benefits, the appreciation, and the list goes on. The bank only gets your monthly payment. Using other people’s money is a powerful way to build wealth. And interest rates have never been lower!
Save Thousands of Dollars Through Depreciation
Though it sounds quite negative, depreciation is quite the opposite. With depreciation, it writes off some parts of the property’s assets on a yearly basis. This helps with any possible tax burdens and can give you far more reasons to build up your wealth in real estate properties. Of course, like all tax-related issues and/or situations, it is best to consult with professionals on the matter in order to see how much cash flow you will receive from that specific year. The bottom line is that a property can wear down over time, allowing for expenses to kick in for replacements and updates, which can be written off as well.
Another powerful tool in the depreciation game is called cost segregation. It’s like the ultimate ninja trick for building wealth in real estate. Check out this deep dive video on cost segregation.
Able to Utilize a Loan Pay Down
Typically this method requires that you take a loan from the bank and have it paid off from the rent money that the tenants pay in a given property. This allows some room to breathe and investments to flow in nicely as well as passively, but it is one that can be complicated to deal with.
The reason as to why it is complicated to deal with is mainly because of where the payments are going. Sometimes they are paying back the interest of the loan and not the principle, so it may take some time for the interest to be paid off and then the principal to be paid.
Normally this is when a loan is being paid out in its beginning phase and once that phase is over, the passive income begins to increase as the payments are being done through the money of the tenants residing or using the property, giving you more of a running profit to yourself without doing much work in the process.
Create Forced Equity Through Improvements
If you are a fan of the Property Brothers, then you have somewhat of an understanding of what forced equity is. What forced equity does in terms of investing, however, is that unlike appreciation where it is up for the market to increase the real estate value, you have the ability to increase its value through home improvements (see what we did there?).
Forced equity is a method often used when buying fixer-upper properties, which are properties that are usually in the wreckage and are salvaged in order to increase its real estate and price value. With that said, it is you, the investor, that can provide the tools and expenses to increase the property’s value either through buying new appliances, updating the property’s features such as electricity and water, and even add major improvements and additions such as extra bedrooms if it’s a house.
With forced equity, the investment property is in your hands, and there is no need for luck but rather good choices and decisions to make while investing the fixer-upper and turning it into a grand investment. Find out what makes sense to upgrade in this post I put together – Rental Property Upgrades That Make a Landlord’s Life Easier
Start Your Journey Building Wealth in Real Estate
Rental real estate is really the number one way to build wealth, especially in today’s volatile economic climate. If you’d like to invest in a rental property to begin the wealth-building process, but unsure of how to make it all happen, feel free to schedule a call with Morris Invest so we can answer any questions you may have. We offer new construction rental properties located in lucrative housing markets. Morris Invest takes care of all the steps to make owning a cash flowing rental property a reality – we even place a tenant for you.
If you’re serious about building wealth, in addition to starting the process by reaching out to us, dive into our power resources below to kick-start your investment journey the right way:
Before you go, check out my video – Wealth-Building Masterclass Part 1: The Key To Wealth:
