Updated: Apr 6, 2022
Real estate is one of the most common investment strategies the rich use to build wealth because it pays in more ways than one.
Real estate investing is one of the most common ways people become rich. There are several reasons for this. One is the unique tax benefits of owning investment properties. The other is the fact that real estate pays you in multiple ways. Unlike some investments that only pay you when you sell, real estate holdings offer value in three different ways.
The first way real estate investing pays you is cashflow. Whether you buy residential properties or commercial properties, the tenants who occupy your property will be paying rent. That rent provides monthly revenue for your business. You'll use that revenue to pay expenses like property tax, insurance, maintenance, and management. Then whatever is left can be taken as profit or reinvested in the business. The more cash flowing properties you own, the better!
Beyond cashflow, investment properties also often appreciate. That means their value tends to go up. Think about it this way. Let's say you buy a house for $175,000. You rent it out and start getting cashflow. Along the way, you add value by updating some of the flooring and renovating a bathroom or installing a smart thermostat and fencing in the yard. On top of your additions, the market in that area goes up. Now your house is worth $225,000. And now you have options. You can borrow against that extra value with a home equity line of credit (HELOC). Or you may want to do a cash out refinance and pull out up to 80% of the equity you have in the home. This is a tax free money and could be used to help fund the purchase of another rental property.
3. Capital Gains
Capital gains are the profit you get when you sell a property. Let's go back to that $175,000 rental house you purchased as investment property. In that example, the house appreciated in value to $225,000. Now if you sell it for that amount, your profit is $50,000. That's called "capital gains". Unlike a cash out refinance, capital gains are taxable, unless you use what's called a 1031 exchange, which allows you to roll those gains into another investment property and avoid paying taxes on it. There are certain conditions that must be satisfied, but it's still a tried and true way to increase your payout for buying new properties by avoiding costly taxes.
It should be clear that real estate carries significant potential to increase your net worth. Because, unlike some other investments, it pays you in multiple ways. That's why so many of the rich invest in real estate. If you're serious about growing your wealth, you should strongly consider real estate investing as a strategy.
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