After a decade of saving and investing, I think real estate is one of the best ways to make money and build wealth. Here is why.
There are many ways to turn a profit with real estate.
When you buy a stock, the only way you can make money is if the stock appreciates in value, and you sell it at the good time. With real estate you can make money in many ways, I can name those 12 off the top of my head, and there are many more.
- Rental income. That one is the main source of profit investors are going for when buying a rental, and doesn’t need an explanation.
- Buying low. You turn an instant profit if you manage to buy a property for under market value. Think foreclosures, quick sales, and awesome negotiation skills.
- Selling high. You can make extra money if you stage the property to attract buyers over market value. With stocks, you always buy and sell at market value. With real estate, you can try to beat the market.
- Increasing equity. If you take a mortgage to finance a rental, you are increasing your equity with every mortgage payment. I put down 25% on my last rental and with mortgage repayments am around 33% equity at the moment, those 8% of the property value were paid by rents and are increasing my net worth every month.
- Leverage increases returns. If you put 20% down on a property, you will still receive rental income based on 100% of the property value, making it a great return for your 20%. Say your property is worth $100,000 and you charge $750 in rent with $500 in mortgage, taxes and fees. You have a $250 profit on $20,000 down. That is $3,000 a year, or a cool 15% return on your deposit. Good luck trying to get an almost guaranteed 15% on stocks.
- Leverage makes you profit on the full selling price. If that same $100,000 property you bought with $20,000 down sells for $120,000 a few years later, you get your $20,000 plus principal payments back, and a $20,000 profit. It is only a 20% profit over the full value of the property, but thanks to your leverage, you are making a profit of 100%, minus principal payments to the $80,000 mortgage. The bigger the leverage, the greater the return.
- Renting smaller units. I rent three rooms by the room, to three tenants. I can charge more than if one family was renting the whole place. You can divide your family house into a duplex or a triplex and increase the rent.
- Renting to businesses. Businesses are a different type of tenure and rents are generally higher. They are also safer if you choose a well known business to rent to.
- Tax benefits on interest. Depending on your country of residence, you can often deduce the mortgage interest from the rental income, and create a tax free profit.
- Tax benefits on improvements. You can also deduce the cost of the improvements from the rental income, while the added value to the property is yours to keep.
- Profit from a lump sum on a refinance. So you bought your $100,000 place, and put $10,000 worth of improvements, that the tenants paid back with rents. The property is now worth $125,000 because your contractor did a great job, you can refinance to get the $25,000 cash and put 25% down on your next $100,000 rental!
- Profit from extra cash flow on a refinance. If you are able to refinance the property to lower your mortgage bill payments while the rent stays the same, you are generating more cash flow every month. You can build a cushion for maintenance, save up for a deposit on a new rental, or have more passive income to live off.