A house is typically the biggest expense the average American will undertake, but, it is also the biggest asset most will ever own. I’m certainly no financial advisor, but there are a couple of reasons why I personally think Real Estate is the best investment anyone can ever own. Better than stocks, crypto, and even that never-opened pack of Pokémon cards at the bottom of your sock drawer.
There are plenty of benefits when using Real Estate as a method to build wealth. Housing will always be needed, and with the population steadily climbing, there will always seem to be less and less inventory available. This causes house prices to typically increase, rather than decrease. Homes in the US typically appreciate 3.5-3.8% per year. That number of course can fluctuate by year. For instance, home owners that bought in the year 2000 have witnessed on average an almost 90% increase in value. Even at the historical industry typical 3.5%-3.8%, the equity you have in your house is making you more money than keeping that money in a regular old savings account (the current average interest rate of savings accounts is a measly 0.6%), and it’s appreciating at a higher rate than typical inflation rates, so it really is making you money. Not just sitting there stagnant.
Leverage is another aspect of Real Estate that makes it so appealing to so many investors. Leveraging is using debt or borrowed money to purchase a property. For example, let’s say you go out and buy a $100,000 house for $10,000 down, and borrow the rest. If that $100,000 house is not your primary residence, you can rent it out. Typically when buying a property to rent, you ideally want your rental income per month to be about 0.8-1% of the purchase price. So on a $100,000 home, if you could rent it out for $800-$1,000 a month, that is a solid investment property. Of course, I’m not saying it is easy to find these properties (especially in this market) but it can be done. So on our example property of $100,000, since you put $10,000 down, your monthly payments will be around $550 (depending on your interest rate and other variables of course). If you are bringing in .9% of the price, or $900 a month, the tenant is paying off your mortgage which will increase your equity and net worth every month, and they will be giving you an additional $350 a month to do as you please with.
That sounds pretty fun, but the beautiful thing is how it can add up over time. If you owned just this one investment property and bought it how we discussed, you would have spent $10,000 of your own money (the tenant would be paying the rest). If you held it for 15 years, you would have collected about $63,000 in extra cash, and the tenants would have paid the loan down to around $60,000. The house would also be worth about $167,000 (appreciating at 3.5% a year for 15 years). If you sold it right then for $167,000, you would have to pay off the remaining mortgage of $60,000, so you would make about $107,000. If we include the cash you’ve received over the years in rent that wasn’t aimed at the mortgage, you would have made $170,000 from your original investment of $10,000. Those numbers don’t account for any vacancies, but they also don’t account for any rent increases. If a 16x return on Investment isn’t enough, imagine if you saved $5,000 a year and did this once every two years, you could have 6 or 7 properties all making you this kind of return.
Or, instead of selling, maybe you really want to hold onto your Real Estate portfolio but you want some extra cash to buy that new car, or upgrade your kitchen. Once you have owned your property long enough for the mortgage to be lowered enough below the appraised value, you will have the option to refinance that property. This is a process where the bank will basically give you a new loan on the property. Lets go back to our example, where after 15 years you owed $60,000 on the property and it was worth, as we stated, $167,000 after years of appreciation. You could refinance that property and pull out $40,000 you have in equity, and the bank will add that $40,000 back onto the mortgage. It’s basically borrowing against your property, and investors use this trick all the time to get some quick cash to buy more investment properties. Refinancing means you will be adding to your mortgage, but remember, a tenant is paying that for you.
Another benefit of building wealth through housing is that there are all kinds of tax incentives as well. This is a conversation you should have with an accountant to see how you can best maximize the tax benefits (I am not an accountant and I do not make investing advise, I’m just a guy on a computer discussing some ways it is possible), but real estate gives you options such as a tax deferrals when upgrading from one investment property to another, deductions on things such as property tax, insurance, and interest, depreciation, and selling the property for more than you purchased it for could have the money taxed as capital income, which often times is a lower tax rate than income tax.
As you can see, Real Estate can be a great wealth-building vehicle to use, whether you are looking to buy and flip, or buy and rent out, there is always money to be made IF you buy right. Finding the right property to invest in is not easy, and you can rarely find deals like the example we discussed through typical searches and online listings. If this is something you are interested in doing, it is important not to rush into your first investment. If you buy the wrong property at the right price or the right property at the wrong price, it can be a huge headache and cost a lot of money. It is important to really understand the market trends in your desired location, and the process of buying, repairing, renting, and selling. When buying an investment property, a professional Realtor is going to be your best friend. They will save you time, money, and offer a lot of knowledge of the industry. If you would like to discuss further how you can get started making money in Real Estate, give me a call and lets chat- (828) 855-6514.