There are many ways to make money investing in real estate, but how do you create real wealth? There are four key factors that contribute to your long-term success and wealth creation in real estate investing.
Positive Cash Flow
Real estate is an investment, and your cash flow is the return on the investment. Your cash flow is the money left over after all expenses are accounted for. Whether it’s the difference between the purchase price + repairs + carrying costs after a fix and flip OR the monthly rent – expenses – mortgage on a buy and hold investment, the numbers must add up to a positive cash flow.
Potential for Appreciation
There are two types of appreciation when looking at real estate:
- Appreciation over Time: The US real estate market has traditionally shown a 3% increase year over year, and if you buy in a “hot market,” you can hope for appreciation above the average.
- Forced Appreciation: An increase in value due to improvements made to the property.
Paying Off a Loan
When you purchase an investment property using a traditional mortgage, the rent you collect from your tenant helps pays off your loan. Even if your monthly cash flow is modest, you are rewarded with the eventual payday of cashing in on the equity that you build over the years through your tenant’s rent checks.
There are significant tax benefits to generating income through real estate investing. These benefits differ from state to state and property to property, so be sure to consult a tax professional before each purchase.
Building Wealth Through Real Estate Investing
Every property will not check off all four boxes. If you purchase a fix and flip home, you will not be collecting monthly rent to slowly pay off the mortgage. A fix and flip property is all about the forced appreciation you collect when you sell the home at its increased value.
Making sure these four factors are represented in some combination in your real estate investment portfolio will help you create wealth through real estate investing.
- Cash Flow Potential
- The Prospect of Loan Pay Down
- Tax Benefits