What makes real estate such a huge draw to investors? There are many other assets to invest in such as stocks and gold, so why has real estate built so many fortunes over the years? To understand how real estate makes so many investors rich, you have to first understand the basics of real estate.
There are 5 benefits that come with owning real estate. The better you understand these benefits, the more likely you will be able to leverage them to great results. Each of these benefits has its own formulas, procedures, and best practices. This article is meant as a simple overview to get you started in researching real estate investing.
The 5 main benefits of real estate can be found in the acronym I.D.E.A.L. This stands for Income, Depreciation, Equity, Appreciation, and Leverage. Let’s dive into each of these.
Income. Income is my personal favorite of the bunch. Income is the rent that you collect from your tenets. The good thing about rental income is that it usually goes up over time. This income can be used to fund your lifestyle. If done properly, you should be able to produce income from a property fairly quickly after buying it.
Real Estate Investing 101
Depreciation. Depreciation is a tax incentive to owning real estate. The US government allows for the real estate owners to write-off the “depreciation” of the structure over time. This means that each year, on your taxes, you can write down how much value the structure lost. There is a fixed amount per year and a maximum amount of years you can depreciate. Using depreciation, there is a chance that you will pay substantially less in taxes, sometimes even 0%.
Equity. Equity is the difference between what you owe and what the home is worth. The good part about equity is that every month the difference grows because your renter is paying down the value of your home. On top of that, you can borrow against your home equity to buy more assets. Eventually, your home will be paid off and you will have 100% equity in the home.
How to Leverage Real Estate at Any Age
Appreciation. If equity is the mortgage being paid down, then appreciation is the price of your home going up. Real Estate prices generally rise every year. This appreciation can also help build equity in your home, along with paying down the mortgage. Onwing many properties, that are each appreciating, will increase your net worth several times over.
Leverage. Leverage is another term for debt. Specifically, using debt to buy an asset. Using leverage, you can buy a $100,000 home with only $20,000 of your own money, or even less. Using leverage, you can use the velocity of money to buy more assets quickly. You take your starting money and put it down on a home. Once your money is returned from collecting rental income, you can buy another home with it. Over time, you can keep doing using this method. You can also take out some equity from earlier properties to buy additional homes. Keep repeating this going until you become rich.
Real estate is an amazing investment vehicle. However, I recommend that you become financially educated before you jump in. The more that you know, the better chance you stand to make profits. You want to know what markets to buy into, market trends, best performing types of real estate, how to calculate net operating income, etc.. There is a lot to becoming a successful real estate investor. Take your time and get educated. I recommend these books to get started: Zero Down, Build a Rental Property Empire, and The ABCs of Real Estate Investing. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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