Home > Real Estate > Why Wealthy People Buy Real Estate
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Most people spend their lives working full-time jobs to earn a regular paycheck. Yet, the wealthy seemed to have figured out how to work less and make their money work for them.
What do they know that the rest of us don’t?
Well, one of the wealthy’s biggest secrets is tapping into the incredible power of real estate. Real estate can generate passive income and provide a path toward building wealth.
How?
Well, every dollar invested in real estate works for you in these five ways:
- Cash flow
- Leverage
- Equity
- Appreciation
- Tax benefits
#1 Cash Flow
One of the greatest benefits of investing in real estate is passive income or cash flow. When you invest in a building, tenants pay rent, property expenses are paid from the rent and the rest is your cash flow.
For example, If you bought a rental for $200,000 and put $50,000 down, the mortgage payment would be about $1,000 per month. Let’s say you rent the unit out for $2,000 per month. Every month, you will receive $2,000 in rent, pay the $1,000 mortgage, and pay maybe another $700 for expenses. The remaining $300 is money in your pocket or cash flow.
#2 Leverage
In the example above, the bank loaned you $150,000 to buy the rental. BUT the cash flow you earned is based on the full $200,000 home, not just the $50,000 of your down payment.
That is the magic of leverage. While the bank paid 75% of the money and you must pay the mortgage and interest, you get to keep all the excess cash flow or profit. No sharing with the bank.
#3 Equity
When you receive monthly rent and use it to pay the mortgage, your equity in the property increases. In this way, the rental property generates income to pay for itself.
Imagine buying a car that generated money to pay for its gas!
As a bonus, once the house builds significant equity, you can borrow cash against that equity and use that cash to fund even more investments. That makes your money work even harder for you.
#4 Appreciation
While there are no guarantees, real estate values tend to rise over time or appreciate.
In our above example, we bought the home for $200,000 and in time might appreciate to $325,000 and then is sold. The profit of $125,000 was generated through appreciation and you would have paid down the mortgage that will generate even more cash for you at the sale.
Appreciation is nice, but not guaranteed. Many invest for cash flow primarily with appreciation providing the icing on the cake.
#5 Tax Benefits
With real estate investments, you also get the benefits of depreciation and mortgage interest deductions, as well as a whole host of write-offs for several other related expenses.
Investors often show losses on paper, while making money through cash flow. The losses play a big part in helping to offset other income; this is a major reason real estate is so lucrative.
If you invest in commercial properties, you also could take advantage of cost segregation and accelerated depreciation, further increasing your tax benefits.
Advantages of Investing in Real Estate
With each dollar invested in real estate, you can generate passive cash flow, use the bank’s money to increase your returns, increase your equity by paying down the mortgage, earn appreciation, and reap tax benefits. These fundamentals hold whether you invest in single-family rental, industrial warehouse medical office building, or anything in between.
To Learn More about diversifying your portfolio by investing in real estate, click here: Prevail Innovative Real Estate Investment Opportunities.
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