3 Ways to Build Wealth in Real Estate Investing
Today I’m going to share 3 ways you can make money in real estate…and get rich. If you follow these 3 cardinal rules, you’ll do alright:
- Buy under valued property to build instant equity
- Hold property long term in good locations and reap increases in value
- Re-invest cash flow from rental properties & flips to scale your wealth
Buy Real Estate for Equity Gains
When you purchase a house, you can either pay all cash or pay a down payment on the property.
If you make a down payment you will need to finance the remainder with a loan which typically is a mortgage.
Each time you make the monthly payment on your mortgage you are building equity in your home.
Those who elect to rent out their properties receive income from tenants that is then used to pay for the mortgage. So essentially your tenants are paying your loan off for you and building you equity.
Another way to earn equity is to find houses under market value.
Usually these are distressed homes that need fixed up. Other times it may be foreclosed homes that the bank wants to sell to get off their books and they’ll accept less than market value.
Upon purchasing an under-valued home you build instant equity if you were to re-list it on the market at market value.
Rehabbers will often improve the home instead of just re-listing it and their improvements allow them to sell the house for even more money depending on the upgrades and the comparable sales in their local area.
Buy Real Estate That Will Appreciate in Value
When you buy a home you pay what you think it’s worth. As the market increases around you, your house increases in value.
If you then decide to sell it you’ll receive more than you paid for due to the house appreciating (increasing) in value.
An example of this comes from an article I read of a man who bought ocean front property in Miami for $25 million in 2006. He held onto the property for several years and decided in 2013 the time was right to sell. That ocean front property in Miami sold for $125 million, appreciating $100 million over those 7 years.
Re-Invest Your Cash Flow
When purchasing a property, you can rent it out to others creating you income in the form of rent. The goal of rental properties is to achieve positive cash flow.
Positive cash flow occurs when your income (rent) received is greater than your expenses.
Expenses are considered negative cash flow as your money is flowing out from your pockets. Some common expenses include taxes, insurance, utilities, and maintenance.
If you crunch the numbers and the property appears to yield a negative cash flow (expenses are greater than market rent) then you should avoid that property.
Once you buy a few rentals you can save up money quicker to buy the next one. You can pool cash flow from each rental property to pay off the mortgage on one of the properties, then rotate to the next until all mortgages get paid down.
I prefer to refinance initially and use the funds to buy more rental properties, a strategy known as the BRRRR Real Estate Method.
If you do your homework and understand your local market you can purchase a property that achieves all 3 types of income.
You could buy a home under-valued and touch it up before renting it out.
After years of renting it you’ll have built substantial equity in the property using other people’s money to pay down the mortgage. And, you’ll have pocketed monthly cash flow.
You should also receive more money than you paid for the house upon selling due to annual appreciation from year to year in the real estate market as prices inflate.
Historically, the real estate market has appreciated at an annual rate of 4% keeping in line with inflation.
With upside there is always downside. Beware of market cycles.
If the economy is headed south, expect housing prices to be affected as a result. This may mean holding onto investments long term provided you can afford it in order to wait out a bad phase of the economy cycle.
Once housing prices recover you’ll be able to sell for a profit possibly or increase rents again.
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