Most people spend their lives working full-time jobs to earn a “steady” paycheck. Meanwhile, the wealthy have somehow unlocked the secret to working less while making their money work for them.
So… what do the wealthy know that the rest of us don’t?
One of the biggest secrets that the wealthy use is the incredible power of real estate. Real estate has the ability to generate passive income and provide a path toward building wealth. When you invest in real estate, your money works for you in these five ways:
- Cash flow
- Tax benefits
#1 – Cash Flow
The greatest benefit of investing in real estate is passive cash flow. When an asset is purchased and rent is collected from tenants, the funds remaining after property expenses are paid is your cash flow.
If you put down $50,000 to buy a single-family rental home for $200,000, your mortgage payment might be about $1,000 per month. Now let’s say you’re able to rent the unit out for $2,000 per month.
When you receive the $2,000 rent payment each month, you pay the $1,000 mortgage, use $500 for expenses and reserves, and keep the remaining $500 as passive cash flow (i.e., money in your pocket).
When you invest in a syndication as a limited partner, this is truly passive income (i.e., mailbox money), because the general partners do the work, while all you have to do is decide to invest.
#2 – Leverage
In the single-family rental example we just discussed, you hypothetically bought a $200,000 rental, but you didn’t have to pay $200,000 in cash. Instead, you put in $50,000 as a down payment, and the bank contributed the remaining $150,000 as
But…the cash flow you earn is based on the full $200,000 asset, not the $50,000 portion you put down. This is the magic of leverage!
Even though the bank contributed 75% of the money, all you have to do is pay the mortgage and interest, and any excess cash flow or profit is all yours. The bank doesn’t get a cut.
#3 – Equity
As you receive monthly rental checks and use them 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 laptop that generates money to pay for its own Wi-Fi!
Once your rental builds significant equity, you may have the opportunity to use a home equity line of credit (HELOC), which allows you to borrow against the equity in your asset. Then you can invest the HELOC funds into a new asset, which allows you to make your money work even harder for you.
#4 – Appreciation
Real estate values tend to rise over time, which means your money can also work for you in the form of appreciation.
For example, consider a tri-plex property purchased for $620,000. In time, it appreciates to $840,000, at which point you sell it. The profit at the sale, or $220,000, will have been generated via appreciation, plus any additional equity that you had built through paying down the mortgage.
However…while appreciation is nice, it’s not guaranteed, which is why you should always invest for cash flow first and foremost, with appreciation as the icing on
#5 – Tax Benefits
When you invest in real estate, you get the benefits of depreciation and mortgage interest deductions, as well as a whole list of write-offs for other related expenses.
Investors often show losses on paper, while actually making money through cash flow. The losses play a big part in helping to offset other income, which is a major reason real estate is so lucrative. Who wouldn’t want to earn more money while paying less in taxes?
Further, when investing in commercial real estate syndications, you have the opportunity to take advantage of cost segregation and accelerated depreciation, further increasing your tax benefits.
With each dollar you invest in real estate, you have the opportunity to take advantage of cash flow, leverage, equity, appreciation, and tax benefits. This is true regardless of whether you invest in single-family rentals, large syndications, or anything in between.
Further reading: How to Stop Trading Your Time for Money by Creating Passive Income