Cash flow (check), Tax deductions (check), OPM (Check). The finest attributes to any investment is the positive cash flow it generates. It is paramount to any investment.
Add in the ability to use OPM (other people’s money) makes this investment sweeter by increasing the ability to leverage your available cash to buy larger income producing properties or multiple income producing properties.
To further sweeten the pot there are the tax deductions. A penny saved is a penny earned and tax deductions will allow you to keep more of your investment returns further adding to your overall ROI.
The latest tax reform has made changes to these deductions, some are changes for the better, while some have restrictions. It very much depends on your situation and type of change, so you want to understand how these changes will affect your investments and strategies with your tax planner.
Cash flow is the Queen Bee and paramount to even consider an investment. Tax deductions and OPM are great additional benefits.
I find much more interest in the least talked about benefit to real estate investing. The Equity. Equity is what has created more millionaires than any other investment available.
But wait there’s more: Building Lifestyle by Building Equity
Since I was teenager I was infatuated with the ability to create equity. While I was a young kid, my dad had bought a lot of houses and duplexes to rent out as an investment. At the time I did not understand much about this. All I knew is I spent many of my weekends helping him do handyman projects around these properties. I found this interesting and obviously as a child I began asking many questions.
What I rapidly learned was the concept of building equity. I found that as he bought these properties and did basic fix ups he would increase the value of the property. A few years later as he would sell the properties
I was stunned to learn that he often doubled his investment. Back then he was buying property for as little as 7k and selling it for 14 k a few years later.
Wrapping my brain around this concept I thought how cool it was to double your money. Dad said, “That my son, is known as Equity,” a term I would always remember.
I asked him if this is such a cool thing how come everyone does not do this. He responded with a smirk and suggested that not everyone knew how. It is not a secret he shared but many people just do not take the time to learn all the benefits available to them. He proceeded to explain that while we spent our weekends buying and working on improving properties. Most people simply take the weekends off and spend money. He then explained there are other ways to build equity. I, of course, was a sponge as I found this so fascinating.
Over the following years I learned much about ways to build equity.
Numerous ways to build equity:
This is where it gets real interesting. There are so many ways to manifest and grow your equity position. It is almost like printing money, only it is legal.
- Sweat equity: buying property and putting your own sweat (hard work) into improving the property for an increased value. My favorite as a child, I actually learned to enjoy sweating.
- Value play equity: basically the same as sweat equity but with a multiplier. When you repair or update something you increase its value, but when you convert something to highest and best use you generate quick accelerated value increase to the property (known as a value play).
- Debt reduction equity: Dad called this tenant paid equity. As you pay down the mortgage (or your tenant pays down your mortgage, the mortgage total is reduced. Every month the equity builds larger.
- Acquisition equity: Experience tells you that when you buy the property correctly you will have equity day one. Essentially paying less for the property than it is currently worth.
- Make your money going in equity: Some refer to this as path of progress equity. As an example, you buy a property in the path of progress, with property values increasing as the demand for properties in the area rise, your equity also rises.
- Appreciation equity: Appreciation is its own term of course, but as the appreciation occurs you are accruing more equity.
These of course are not all technical and dictionary real estate terms, but they illustrate how many different ways to build equity that you can engage in.
Building equity I believe, is the easiest and most lucrative way to build wealth and it is the principle used by over 90 percent of the wealthy people today to build their lifestyle portfolios.