4 Ways that Real Estate Builds Wealth
Real estate is not a “get rich quick” process. However, real estate has been one of the best wealth building strategies for decades.
Ask any investor why they invest in real estate and they will probably all give you a different answer. However, all wise investors know that real estate builds wealth in a variety of ways. It’s just a matter of which strategies you choose once you get into the complex game of real estate.
Some people focus on turnkey vacation rental properties, while others focus on long-term rentals. Not to mention, there’s house flipping or finding value-add properties (for longer term flips). Regardless of your strategy, real estate has some tremendous wealth-building benefits for those looking for opportunities.
Let’s look at four ways that real estate builds your wealth.
Just the thought of paying taxes alone may scare people off at first from investing in real estate. However, it’s actually one of the best ways you could build wealth because of the tax relief it offers investors and primary residents. Real estate has all sorts of tax breaks. This list offers 5 potential ways investors may be able save on taxes. This depends on your individual circumstance, which should be discussed with tax and legal professionals. Here are some ways that real estate investors can benefit from a tax perspective:
- 1031 Exchange
- Deducting depreciation
- General business expense deductions
- Passive income
- Capital gains taxes instead of income taxes
In general, appreciation means that the property has risen in price. There are typically 3 ways that investors can benefit from appreciation depending on the strategy.
- Instant appreciation. This comes from buying low, where there is some profit baked into the transaction before ever reselling.
- Market appreciation, which is tied to how the housing market performs. In the past year, real estate prices have skyrocketed to unprecedented levels.The current average appreciation rate is 14.5%, compared to 4% in 2019.
- Forced appreciation. When a flipper purchases a house, they renovate it to add value.
Finding potential is crucial to real estate investors. There are ways to benefit from some form of appreciation in any market if you have the right strategy.
3. Loan amortization
The process of calculating your loan payments until it’s paid off. Loan amortization also breaks down how much of your payment goes towards the principal or interest. While these are the basics of loan amortization, how does it help you build wealth?
As a landlord, your tenant pays rent that can be used towards the house’s mortgage. This builds equity over time. As the early years of a loan primarily pay off interest, over time it also eats away at your principal loan. Using a loan amortization calculator can help you visualize this concept.
4. Cash flow
Cash flow, simply put, is what’s leftover after you pay all of your expenses. Investing in properties and markets that cash flow offers passive income potential. It’s important to note that not all real estate strategies produce cash flow. For investors, it’s equally as crucial to recognize that not all houses produce cash flow.
Buy and hold investors conduct real estate transactions with the long-term in mind. This means renting out one property and collecting rent every month until they are ready to buy another property. In effect, real estate creates multiple income streams that can be used for a variety of purposes.
Real estate offers wealth building opportunities
Don’t hesitate to take action in real estate if wealth building is your priority. It may seem complex at first, but millions of deals are happening any given week. Learn more about how Sundae can help investors find properties that can help with your wealth building goals.