The ultra-wealthy have unlocked a secret that typical investors are rarely introduced to — the incredible power of real estate.
According to Investopedia, a study shows that ultra-high-net-worth individuals (net worth of $30 million or more) do not have their money sitting in CDs, money markets or mutual funds. Real estate is by far the largest asset allocation in their portfolio.
Real estate has the ability to generate passive income and provide a path toward building wealth. Every dollar invested in real estate works for you in these five ways:
#1 Cash Flow
The greatest benefit of investing in real estate is passive cash flow. When an asset is purchased and rent is collected from tenants, the remaining value after expenses is your cash flow.
If you invest $100,000 in a project with an 8% cash-on-cash return, this means you receive $8,000 a year. Your principal investment is protected as equity in the deal and the $8,000 is simply cash flow from the investment.
Leverage is the rocket fuel to creating massive wealth. We finance most of our properties with a commercial bank loan. For example, it is much quicker and easier to invest $250,000 to buy a $1 million piece of real estate and get a loan for the other 75% of the required funds than to invest $1 million to buy the property without a loan.
You receive all of the benefits — cash flow, tax benefits and appreciation from a $1 million apartment with only a 25% down payment. Multifamily real estate allows the investor to control more assets with less of your own capital, which leads to a much higher return on investment.
As we receive monthly rental checks from residents, and use them to pay the mortgage, your equity in the property increases. In this way, the rental property generates income to pay for itself.
Every month the mortgage on the property is being paid down further. There are a number of ways to increase equity in a property. Loan pay-down is only one of them. Anything from natural appreciation to value-add/improvement opportunities can increase equity for investors.
Real estate values tend to rise over time, which means your money can also work for you in the form of appreciation.
We never want to depend on appreciation but we do set ourselves up for success. For example, we only invest in cities with a strong population and job growth. A strong growth market is a fair indicator of future appreciation.
While appreciation is nice, it’s not guaranteed. This is why we invest for cash flow first, with appreciation as the icing on the cake.
#5 Tax Benefits
When you invest in real estate, you get the benefits of depreciation and mortgage interest deductions, as well as other write-offs for a number of related expenses.
Investors often show losses on paper, while actually making money through cash flow. The losses play a big part in helping to offset other income, which is a major reason real estate is so lucrative.
Further, when investing in apartment syndications, you have the opportunity to take advantage of cost segregation and accelerated depreciation, further increasing your tax benefits. (Consult your tax expert to determine if this applies for you.)
Real Estate Is The Key To Building True Wealth
Remember, with each dollar invested in real estate, you have the opportunity to take advantage of cash flow, leverage, equity, appreciation and tax benefits. Real estate should be part of every investor’s strategy.
Make real estate a part of your portfolio with Hansen Holdings. When you are ready to get started, join the Investor Circle.