How to Create Wealth Investing in Real Estate: A Complete Guide
Real estate investments are how some of the wealthiest people in the world have made their fortunes. But that leaves you asking how to create wealth investing in real estate. Successful real estate investors do their research before each property acquisition. The most important driving forces for lucrative real estate opportunities are outlined below
Inflation is usually a secondary thought, and is something we take for granted. Gradually, the prices of everyday items increase and consumers pay the often unnoticed increased price, so we don’t really focus on it. Knowing how inflation will affect employees and their families, companies generally give a “cost of living” increase in their pay each year.
Inflation can create wealth reliably and consistently for real estate investors because it consistently drives home value appreciation. When taking out a mortgage, the monthly payment will stay the same for 30 years on a fixed-rate mortgage. Basically, due to inflation, the cost of owning a home isn’t increasing, but the value of the property is - putting more equity in the home.
Inflation, as noted above, is a gradual increase of wealth, whereas rapid market appreciation is a contributing factor in building wealth. Real estate investors that do their research will purchase properties in areas where the values of homes are increasing quickly, then sell once there’s enough equity in the home for them to make a profit. Appreciation works like stock market investing: buy low, sell high. In areas across the nation, like Dallas and Chicago, home values are increasing faster from appreciation than inflation.
Annual Rent Increases
With the cost of living increases for consumer goods like groceries, the cost of housing stays in stride with inflation. Most landlords will increase rent each year at the time of lease renewal because of inflation. Even if your tenant chooses not to renew their lease, you are still able to increase the rent at the time of listing for a new tenant because the cost of living increases. While you’re increasing the rent each year, the costs associated with owning the property don’t increase with inflation if you have a fixed-rate mortgage, so you’ll find that your bottom line is more profitable year after year with each annual rent increase.
In real estate investing, personal equity is the difference between the value of the property and what’s left on the mortgage. Forced equity is the wealth that’s created when you buy a property and do renovations or rehab work to make the home worth more. Purchasing a foreclosed property for 30% less than what its comparable properties are worth, and then spending 15% on renovations like new paint, carpet, replacing appliances, and repairs/upgrades will bring it up to market value - leaving you with 15% increased equity.
You can also force the equity in a home by increasing the property’s value with additional features. For example, if you purchase a 2-bedroom house in a neighborhood where all the other homes have three, then adding on a third bedroom, you’re bringing the property up to the same market value as the other homes in the neighborhood. This scenario works if you’ve purchased the property at a discounted rate (most likely because it only had two bedrooms), and spend less than the difference adding the third bedroom.
Depreciation has a negative connotation because it means something’s value has decreased. However, in real estate investing, depreciation is in reference to tax breaks that the IRS allows to real estate investors, and not a drop in the value of the property. You’re able to deduct a percentage of the investment property’s value during its lifespan. The average lifespan for a residential property, according to the IRS, is 27.5 years.
What makes this tax deduction great is that as property values tend to go up over time, most real estate doesn’t lose value each year. With the deduction, you’ll receive a tax credit on the home, which is actually going up in value.
More importantly, the tax credit you take for depreciation is just a part of the other costs associated with property upkeep that you’re able to subtract from the income you get from renters. The depreciation shown on tax records is able to change a cash-positive rental property to a loss, which, when shown on paper, can reduce other taxable incomes, overall lowering your tax bill.
Leverage is often touted as the best wealth-creation strategies for real estate investment. Leverage uses borrowed capital to purchase another property or increase the potential return on investment for the one you’re borrowing against. In essence, you purchase the property with the bank’s money and use the income from tenants to pay the bank back. The difference between what the tenant pays and what you pay the bank is your profit. For example, if you put 20% down on a house worth $100,000, and finance 80%, the leverage will let you control the income of the full $100,000, while you only invested $20,000.
Being Aware of the Risks
As with any investment, there’s always a risk involved. But the key is to research diligently, buy smart, manage the properties professionally, and avoid being over-leveraged.
Those that want to create wealth investing in real estate should know that this type of investment is more time-intensive and hands-on than buying stocks. However, it will deliver higher gains because of the higher risk. Real estate investments, unlike other investment choices, is a long-term investment because a house is a fixed asset that isn’t able to be liquidated quickly. You should know the risks, and try to mitigate them as much as possible.
Renovo Financial has the skills and knowledge to help realize your real estate investing goals. From our Circle of Success to deep connections in all aspects of real estate investing, we can be there every step of the way so you can make profits quickly and safely. Contact us today.