Why We Invest In Real Estate

Investing in real estate is a great way to build wealth and grow your net worth. If you have ever read the book ‘Rich Dad, Poor Dad,’ then you must have heard of the author, Robert Kiyosaki. Robert outlined some thought-provoking and even controversial concepts. For instance, he challenges what many people believe; that the house they live in is an asset. His point is that if you have a mortgage on your home, then your house is effectively taking money out of your pocket each month. What you need instead are assets that bring money in. Cash flowing real estate investment properties puts cash IN your pocket.

Billionaire Andrew Carnegie famously said, “Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”

So, what makes investing in real estate such a great way to build wealth and grow your net worth? Here are ten reasons why real estate investment is a fast and safe way to gain financial freedom and why it is a crucial part of our investment strategy.

1. Cash Flow

In real estate, cash flow is the money you have remaining from collecting rent after paying all expenses; mortgage payments, taxes, insurance, and repairs. It can also be the cash profit you make when you ‘flip’ properties; that is, buy a house, fix it up, and resell at a profit. Cash flow from a rental property is more predictable than the profit made by flipping properties. However, you can use house flipping to acquire rental properties and gain steady cash flow.  If you have multiple rental properties, you create multiple streams of income that continue to flow, whether you work or not. Eventually, the cash flow from your investments would support your living expenses as well as your next purchases. Your cash flow can generate new assets, creating even more cash flow.

2. Inflation Hedge

Inflation is the general increase in the price of goods and services in an economy over time. It is often a result of strong economic (GDP) growth. When price levels increase, it reduces purchasing power. What this means is that the value of every dollar you own decreases and you need more money to purchase the same items you could have in the past. Here is where real estate has an advantage over other types of traditional investments. As price levels increase, so do rents and property values. The increase you receive in rents helps to ‘hedge’ or offset your reduction in purchasing power, thus serving as an inflation hedge. Think of this as inflation protection.

3. Leverage

When you purchase an investment property, you can do so with leverage, which is the use of borrowed capital to maximize your return. Leverage is a significant advantage of investing in real estate., For instance, if you buy stock, you must finance that purchase with 100% cash. With real estate, you can purchase a rental property with debt, or as some like to say, “other people’s money” (OPM). With 20% down and the remainder financed with debt, investors can acquire 100% of a property. Leverage enables investors to buy multiple properties since they are not tying up all their funds in just one investment.

4. Principal Reduction

When you use OPM to finance the purchase of a property, you are required to pay back the mortgage, which includes principal and interest. The benefit here is that if you own cash flowing properties, the rents you receive cover your mortgage payments, effectively reducing the principal you owe. Hence, not only do you have cash flow, but you are also building equity and wealth.

5. Asset Appreciation

While the value of other investments, such as stocks, can fall to zero, properties will always hold some value. Also, property values almost always appreciate over the long-term. A property can lose value in a recession or housing bubble. However, eventually, the economy recovers, and these assets regain their value and continue to appreciate. In developed countries like the US, with sustained GDP growth, real estate values increase with inflation. The secret to asset appreciation is holding the property for the long-term. Many cash-flow investors hold on to their properties because they want to continue receiving passive income. While you continue to receive cash flow and reduce your mortgage debt, your asset is simultaneously increasing in value, building wealth.

6. Tax Advantages

Have you ever wondered how the wealthy pay so little in taxes? The reality is that there are several ways to lower your effective tax rate. One way is through real estate investing. Believe it or not, real estate investors can pay little to no taxes on their investments. Since real estate investors fill such a crucial need in society by providing housing, the government incentivizes them with tax breaks. As a property owner, investors can deduct the costs of managing and operating real estate properties. Deductions include mortgage interest, property depreciation, mileage costs, and property repairs. The list of expenses that you can deduct is significant. You can even deduct your home office expenses, including the space dedicated to office use.

7. Managing Control

If you are a savvy investor, you may choose to invest in traditional investments, such as stocks and bonds. If you invest in the right stocks, your reward will be in the form of stock appreciation and profit-sharing in the form of dividends. However, stock appreciation is not guaranteed, and share values can depreciate. Even when you do your due diligence and thoroughly analyze a company before purchasing the stock, your investment is ultimately at the hands of someone else. When it comes to real estate, however, the performance of your investment is dependent on you. Your actions will determine whether you gain or lose money in real estate.

8. Less Volatility

Compared to the stock market, real estate has the advantage of being less volatile. Additionally, investing in real estate, as opposed to stocks, can yield better returns at lower levels of risks. The recession of 2008 and the COVID-19 crisis of 2020 have had a drastic impact on the stock market, demonstrating how much stocks are subject to economic and market conditions. When the stock market crashes, some companies never recover, and their stocks never regain asset values. On the other hand, a real estate investor mitigates this risk by holding on to a property longer. As the market improves, so does property values.

9. Multiple Options

If you invest in stocks or bonds, you have two options: hold or sell. However, with real estate, investors have several options. Investors can buy-and-hold (rentals), wholesale, or rehab. The properties can be refinanced, developed, leased, or rezoned.  By refinancing, you can take the equity out of the asset, reinvesting it while still holding on to the asset. So, with real estate, investors can have several exit strategies.

10. It’s Fulfilling

Regardless of the strategy, investing in real estate is a rewarding experience. Let’s face it; people will always need a place to live. If you own rental properties, you are providing housing to many. One of our real estate investment strategies is to flip properties, which is buying distressed properties, rehabbing them, and reselling quickly. If you flip properties, you create jobs and opportunities for contractors, title agents, architects, engineers, inspectors, and real estate agents. When you sell renovated homes, you fulfill the need of a satisfied homeowner. You also transform neighborhoods and increase property value.

One of the things we enjoy about real estate investing is working with sellers to find the best solution for them. When we buy their property, we always seek a win-win situation. Sellers have different reasons for selling their home. Sometimes it is because they have gotten divorced or at a point in their lives where they wish to downsize and get a smaller house. They may be older and want to transition to assisted living. They may also just be in a financially difficult situation (pre-foreclosure, bankruptcy, unemployed) and need a way out. We work with sellers to determine the best option for them, which may involve a different purchase strategy based on the seller’s unique circumstances. 

If you are a seller and want a free cash offer, click here.

If you are interested in learning more about real estate investing, want tips on selling your home, or want to gain insights into finance and money management, click below to subscribe to future blog posts.