In today’s real estate market, you CAN build wealth by investing in real estate!
Purchasing a property and using it as a rental property is still a great way to make money. The five wealth building principles are IDEAL: Income, Deductions, Equity, Appreciation and Leverage. These principles can take a small investment and make money for you on a yearly basis, both in up front cash and in hidden benefits.
Income is the easiest to realize. The rent you receive monthly is actual cash income. When a property is rented out, it basically pays for itself. Now anyone who has owned a home will tell you that there are always things that need to be fixed and taxes to be paid. These expenses lead to the next principle.
Deductions. All interest payments, real estate taxes paid, and items that are fixed on the property are considered deductions against the income. Another deduction is depreciation of the fixtures on the property. For residential properties, the fixtures are depreciated over 27.5 years, for commercial properties, 33 years. Deductions offset tax expenses which saves money at tax time each year.
Equity is gained in a property as you make your mortgage payments. In the case of a rental property, the rent paid from the tenants pays the mortgage. Paying the mortgage each month lowers the principal owed and builds equity in the property. Equity is realized once the property is sold, and is considered a hidden benefit. It shows up as a positive on a balance sheet, but isn’t like cash on hand. To build wealth, equity has to be part of the equation.
Appreciation is what happens to your property over time. Over the last 25 years, properties have averaged a 6% appreciation, or rise, in value. Even with the bad real estate situation over the last few years, properties are still appreciating in many areas of the country, and in others, they are back to holding value as opposed to losing it. Owning and investing in real estate is usually an investment over a longer period of time, so even in a bad economy, it will appreciate.
Lastly, is leverage, which is what happens when we purchase a property using borrowed money. The out of pocket money used to invest is leveraged, meaning the money earned on the property isn’t based on what you invested, but instead on the value of the property.
To build wealth through real estate investing all of these five wealth building priciples must be present.
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