To quote the best-selling author of Rich-Dad Poor Dad Robert Kiyosaki, “Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.”
And it seems an increasing number of investors agree. In this 2020 poll from Gallup, as of last year just over 55% of Americans owned stocks. That’s down from 67% less than 20 years ago. It’s a telling sign that more and more men and women are leaving Wall Street behind to find their fortune on Main Street.
But how exactly do real estate investors make money?
If you ask 100 people on the street, 95 of their answers would include something along the lines of rental income or flipping houses. But given the fact that you’re here reading this article, you’ve probably already done enough research or know from experience that there’s a whole lot more to it than that.
In fact, depending on your situation and personal investment philosophy, rental income may not even be the most lucrative part of your investment strategy. And flippers certainly aren’t the only investors making profiting from real estate.
So how are real estate investors collecting passive income, building long-term wealth, and achieving financial freedom? Let’s take a closer look at the top 5 ways real estate pays investors.
1. Positive Cash Flow = Passive Income
We’ll start with perhaps the most obvious… cold hard cash. Cash flow is what’s left after subtracting a property’s operating expenses (including debts and any money set aside for cash reserves) from the gross rental income it generates. But collecting rent doesn’t necessarily equate to money in the bank; cash flow can be negative too. That’s why it’s important to conduct a property analysis and look at profit margins before making an investment decision.
But luckily, even when unexpected vacancies or costly repairs sneak in and eat away cash flow.
2. Appreciation Pays
According to Investopedia, Appreciation, in general terms, is an increase in the value of an asset over time. Historically, real estate appreciates at a rate of 6%, which can happen for a number of reasons.
Economics is one driving factor, both local and on the macro-scale. Changes in infrastructure, like a new road that makes the property location more desirable can also cause appreciation. It could also come from gentrification, project improvements, or government policy (tax breaks, re-zoning, etc).
It’s also worth mentioning that appreciation leads to increased equity … which you can borrow against to fund other investments. Therefore, in a less direct but equally notable way, appreciation can help investors make more money by giving them more borrowing power to grow their portfolio.
More assets = more tenants who fund the monthly loan payments, which brings us to …
3. Mortgage Principal Paydown
The tenant, not the owner pays the mortgage on an investment property. Over time, as the principal of a loan shrinks, so do the interest payments, resulting in a decrease in the total amount a borrower pays.
This means that every rent check saves the investor thousands of dollars in the life of the loan.
And speaking of saving thousands, let’s talk about all the options for …
4. Tax Benefits for Real Estate Investors
There’s no shortage of tax benefits available to real estate investors, including deductions for mortgage interest and depreciation. Taking advantage of other incentives, like investing in opportunity zones can help decrease an investor’s tax bill.
And capital gains tax can be avoided with a 1031 tax-deferred exchange or meeting personal residence requirements. In this video from The Real Estate Guys, CPA Tom Wheelwright talks about how he used the tax code to save Apartment Investor Brad Sumrok millions of dollars in taxes.
And today, each of those millions has the same buying power as $667,857 in 2001. This brings us to the last on our list of ways to make money as a real estate investor …
Think about a standard loan with a fixed monthly payment and a 30-year term. While your payment amount doesn’t change, it becomes more affordable over time due to the effects of inflation.
Essentially, that means paying the loan back with cheaper money. Not to mention the fact that over time, wages and rental income will likely increase too.
Cash Flow, Appreciation, Loan Paydown, Tax Benefits, and Inflation are just five of the many reasons real estate can be an exceptional wealth builder. It’s no wonder investors are flocking to Main Street!
If you’re interested in learning more about real estate investing and exploring current opportunities for passive income, schedule a call!