Real estate is a fantastic way to build wealth; investing is a wonderful way to become financially free. In order to fully understand this article, we’ll have to discuss exactly what net worth is so that you can understand why it is so great that it will make everything you do in real estate worth your while. It doesn’t matter where you are in your real estate investing career right now, this will help you.
What is Net Worth?
So, what is meant by “net worth?” Well, net worth is basically your own personal balance sheet that lists how many assets that you own. Having a balance sheet is incredibly important.
To build a net worth in real estate, you’re going to have to be buying and owning a property for a minimum of one year. You’ll still be bringing in a profit, because you’ll be renting it out. You can purchase property and hold onto it without doing anything to it, and you can also buy raw land. However, this usually isn’t a fantastic idea when it comes to building net worth in real estate. Why? Because you want the property to take care of itself.
When you own and rent a property, you’re making an actual income. Of course, you must be bringing in good income, meaning cash flow. You shouldn’t be just breaking even, otherwise you’re losing; and certainly not building your net worth. It’s actually all too easy to purchase properties that aren’t sustainable themselves.
A property (specifically a house) has a lot of expenses that come along with it. Just the mortgage payment, taxes, and interest can add up to a huge amount. If you own a property that has an HOA (Homeowner’s Association), you’re going to have monthly dues. And, those are not fixed. When purchasing an HOA property, read the fine print in terms of fees, but know that they aren’t going to stay fixed. Aside from these expenses, you’re going to have maintenance, and repairs (which will come up more frequently than you expect). Many people aren’t prepared to financially handle when something goes wrong with a house that they just purchased. Remember, if you’re only able to afford the price of the house itself, you can’t afford to buy a house. With all of these expenses, you’ve got to still have cash flow at the end of it. Otherwise, you should not invest in that property.
With depreciation, the structure of a single-family home (not the land) deteriorates steadily over twenty-seven years. Now, if a property is maintained the right way, it is going to last longer than almost thirty-years. Depreciation is great, because you can take it against the income of the house which has tax advantages.
You want to purchase properties that have equity. For example, you might pay $200,000 for it, but it’s really worth $275,000. You CAN find amazing deals, and don’t let anybody tell you otherwise. They are out there. It is possible to get instant equity right when you buy a house. This can easily help you build net worth; just by having immediate equity before even having to touch the property.
The easiest way to access leverage is to use your own money. In the case of a mortgage, a standard 20% down payment gets you 100% of the house in which you want to live. Some mortgage programs let you put even less money down.
If you are purchasing the property as an investment, you may be in a position where your partners furnish some (or even all) of the money. Similarly, some sellers are willing to finance some of the purchase price of the property they wish to sell. Under such an arrangement, you can purchase a property with little money down and, in some cases, no money down at all.
The final wealth generator from real estate are the tax benefits associated with owning property in the United States. The U.S. government likes real estate investors and uses the tax system to encourage our purchase and leasing of properties. From extra tax write-offs to the lack of “self-employment tax” to the 1031-exchange and more, real estate investors can pay significantly less tax than other business owners, using the extra cash to buy more properties or pay of the loan faster — helping to build greater wealth.
Tax situations vary for each person, and when it comes to real estate investments, the tax advantages can be great if the investing is done well. Talk to a tax professional or CPA when looking at investment options to determine if this is the case for your own personal financial situation and your plans for real estate investment. Ask your real estate partner if they have in-house tax personnel and CPAs, as well.
Single-family homes (as assets) are not going to appreciate. Remember that. Actual properties can appreciate, but not single-family homes. However, they don’t appreciate in the exact way that you are thinking.
A property has to be able to sustain itself. If the property doesn’t bring in a cash flow, you’ve got to get money elsewhere. The entire point of building net worth is to grow your wealth. You can have great investments on paper, but if you they aren’t profiting…you’re going to be broke. When you own rental properties, you’re going to have to do some work. You can’t just buy it, rent it, sit back and let it bring in cash. It doesn’t work that way. Unless you’re a professional real estate manager, leave this important task to the experts. Real estate managers are in charge of managing any changes to the property, finding valuable tenants, ensuring tenants stay put, and handling dividends. This is incredibly important in order to get the highest returns possible for your real estate; trust an expert to get it done, and get it done well.
You could hire a property manager, but on the other hand, you have less control over what happens to the property if you do want to be involved. The company who handles everything usually takes a percentage of the monthly rent, which could cut into your actual cash flow.
You’re going to have to manage the property; even if you hire a property manager, you’ll still be dealing with them. You aren’t going to get out of managing the property, even if you’re paying someone. It’s going to require your time, not just your money. Therefore, it should be making some money!
As long as the property has a nice cash flow, you’ve got to prepare yourself for potential emergencies. Like floods, tornados, and the like. You’ve absolutely got to have the right kind (and amount) of insurance. You also might have to evict a tenant. You should take this all very seriously. Building your net worth does not mean how many properties you own. It’s how profitable those investments are. Many investors make the mistake of thinking they’ll be wealthier if they have several properties. Actually, it’s better to have one property that is a money-making machine, rather than twelve or thirteen properties some of which are breaking even, and others are making a little money each month. That’s a huge waste of your time. Quantity is not always better.
For the part-time investors
Flipping houses is a great way to build your net worth. However, if you only do real estate part-time and have no desire to flip houses, you’ll want to own long-term properties. In order to do this, you’ll have to find great ones, then build on that for the long term. It will take a while for you to build your net worth this way, but you can. As long as you do good deals; ones that will cash flow. It’s also nice because you can work out deals directly with sellers, rather than dealing with other people in the game that you have to work with in other types of deals. If you want to build your net worth, you’ve got to have cash flow.
Any investment poses risk
Whether you’re investing in real estate, the public stock market, or even bonds, there’s always risk to consider. Be prepared for this risk by setting aside non-invested funds as a cushion to fall back on if necessary, and manage your portfolio to maintain the level of risk you’re comfortable with. While owning a rental property leaves you in charge of many factors—like the location of your property, who you rent it out to and for how much—investing always poses some sort of risk.
In this case, the risk may involve taking on an additional mortgage and dealing with costly repairs and maintenance. The property may plummet in terms of value or you may have to evict a tenant or scurry to find a new one when your previous tenant leaves abruptly.
You’ll also need insurance and legal protection if a worst case scenario occurs and a tenant tries to sue you. Most of these risks can be controlled. You can carefully screen tenants and create a detailed lease with the help of a lawyer. You can put more money down on the property upfront to gain equity more quickly and add to its value so it appreciates over time. Some improvements and expenses associated with your property may be tax-deductible and you can deduct the interest you pay on a rental property on your taxes as well.
Liquidity is based on how fast you can get your money back as cash. Real estate is a very illiquid investment, meaning it can take a long time to get your money out of an investment. You can’t sell it tomorrow at a market price. It could take a long time to sell. There’s a “cost” to not being able to get your money out quickly; investors in private real estate are putting their money away, typically, for a longer time without having access to it. Prepare yourself for this commitment to ensure that you’re able to live the life you’d like while some of your funds are working via investments.
Ask questions before buying
Always be learning when it comes to your money. Many investors don’t bother to ask because they’ve already formed a relationship with a property owner; however, you should always be asking questions related to how your money will be spent, the business’s or firm’s practices for investing, and how they handle your capital. It’s an important part of trust building, but it’s also due diligence for your own money.
Don’t expect immediate results
Real estate does not give instant gratification. If you think that’s the case, you’re in the wrong business. Building a net worth in real estate investing takes a while. Sometimes you’ll have to take the income from the properties then put it back into that same property. For example, if you need a new roof, you’ve got to paint, fix something that went wrong. Even if you increase the rent, it will still cost you. Yet, it will also allow you to keep the property for longer as it appreciates, and hopefully becomes a good asset.
After carefully weighing the pros and cons of a few different real estate investment risk factors, it’s clear to see that there is risk and reward all throughout the market. Real estate investing can help increase and diversify your income as long as you are consistently bringing in profit each month.
Each option allows you to have a certain level of control over the situation but it also opens the door to some risk. Finding the right property and managing it well takes time, effort, and some money. Paying someone else to do it can cost even more. If you’re worried about tax liabilities and benefits, you may want to talk to a tax advisor to discuss your options and goals when it comes to real estate investing so you can make the best decision for your situation.