Why Real Estate? - The Value
Real quick...if you haven't read Chapter I of "Why Real Estate?" I'd strongly recommend you go back for some context. You'll see the journey I took to arrive at real estate and why it's best for my long-term goals.
Now that you know I'm 100% ALL IN on real estate, let's talk about the amazing value this investment vehicle provides. Here are 11 great benefits of investing in real estate:
1. Consistent cash flow. This is the primary reason that got me hooked on buy-and-hold real estate. Don't get me wrong, this is by no means guaranteed. You need a lot going your way to achieve this, but with a great property manager (that finds great tenants and is quick on maintenance requests) and a property with sound infrastructure (limiting capital expenses), you'll watch the rent checks roll in every month.
2. Gain more leverage. Real estate is an investment where using the bank's money is a great option (but make sure to run your numbers!). The ability to make a down payment, leverage your capital, and increase your overall return on investment is amazing.
3. Tax-free Growth. Even if you buy a property with the purpose to hold it, long-run appreciation is realistic and you must consider a tax-deferred strategy. As an exit strategy, you can consider a 1031 exchange, charitable trust, or an installment sale to lesson your tax liability.
4. Tax free cash flow. Because of operating expenses, property taxes, insurance, mortgage interest deductions, and depreciation (even if the property gains value) your cash flow could be tax-free.
Don't forget that rental real estate is a business. This means that travel expenses to check on your properties and payments to family members who manage your properties can be deductible as well. Often, an investor will never pay taxes on their cash flow and can wait for capital gains on the sale of the property in the future.
5. Tax write-offs against your other income. Depending on your classification as an Active Investor or Real Estate Professional, an overage of tax deductions can be used against your other income. But, before you dig too far here, please, please, please discuss this with your tax professional before investing. They're the experts.
6. Rental real estate is a forced retirement plan. Americans are terrible savers. But, we're great at consuming (read: The Millionaire Next Door...seriously). I read that most of America doesn't have $1,000 in savings...YIKES! Well, here's your chance to start thinking long-term. Saving for a rental property and acquiring one takes a significant commitment and determination. Jumping In to real estate in the long-run could be the greatest decision you've ever made to build future cash flow and wealth.
7. You have control. In real estate, you choose the investment market, you select the neighborhood, you buy the property, you agree on an acquisition price, you decide on renovation specifics, you pick a property manager, whom selects your tenant. This is your company. You are the CEO. Responsibility is 100% on you and with that, comes complete control.
8. Appreciation. Not always guaranteed, but rental properties normally appreciate in value with inflation. Increased value = reinvestment in higher value properties after you sell. Or, a sale can provide an equity line of credit to use for other investments.
9. Inflation-proof investment. Rents usually increase with inflation, while mortgage payments on the property remain stable if you have a fixed loan. This increases cash flow, without the increased expense for holding the property! When inflation goes up, it can mean more renters (as mortgages become more expensive). More renters = more demand for your rental = ability to increase rents.
10. Paying down loans - Paying down loans frees up more investment resources to increase leverage. You have can use the increased equity in one property to free up funds and invest in others.
11. Property improvement for equity (forced appreciation) - Many investors intentionally purchase properties below market value, because they require renovation. If you're smart, a nice little rehab will increase the value of the property, resulting in an immediate increase in equity.
Now that you've read just a few of the greatest benefits of Real Estate, take a look at my in-depth journal of buying, renovating, and renting my first out-of-state property!
Why Real Estate? - The Journey
Why invest in Real Estate anyways? Why not just leave money in a safe savings account accruing a consistent (but, TINY) return? How about playing the stock market? Or giving it to Fidelity to let them do their thing?
Well, to completely understand the "why real estate?" question, we have to start from the beginning. Let's start with The Journey.
It all started in 2016, when I made a concentrated effort to invest in myself. I was stuck in the routine of waking up, heading to work, coming home, eating dinner, falling asleep, repeat, repeat, repeat. While I was getting great short-term work experience in my industry, I wanted to better myself, grow, and gain overall knowledge in areas such as business, finance, and long-term investing. Because knowledge is power.
What jump started everything? PODCASTS and BOOKS. Listening to podcasts at the gym instead of music became my norm. Reading books every night before sleep was part of my new routine.
My Favorite Business Podcasts
I started REALLY thinking long-term. Where did I want to see myself in 10 year? 20 years? 30 years? What's my ideal lifestyle? And the answers were really simple...I wanted (and still want):
How would I achieve those three long-term goals? It came down to finance and investing. I needed to:
Increase monthly income: in addition to my W-2 salary, I began working for Instacart as a side hustle. A couple times a week (after work and on weekends), I was a personal shopper and delivered groceries. I also made a conscious effort to purge my old junk/clothes and sell them on Craigslist. $20 here and $15 there add up and helped me acquire My First Property.
Reduce monthly expenses: for most of us, rent/mortgage is our biggest expense of the month. I was paying $1,300 a month in rent and needed to get that number down ASAP. SO, when my lease ended, I moved to a new apartment with 3 roommates for $800 a month. That's an additional $500 per month in my pocket! What else did I do? Common sense things...like brought lunch to work everyday instead of eating out. Also, bought a moped, which gets 90 miles per gallon, and limited my car driving. I could go a full month on one gallon of gas!
Diversify income streams: I had to find multiple ways to bring in income so I wasn't relying solely on my full-time 9-5 job. This was partially addressed with my Instacart side-hustle, but I needed to do more. So I started a travel website and produced content, which brings in revenue.
Take a look at yourself, and see where you can provide true VALUE to the world. Do people always ask you specific questions around certain topics? If they do, there's the foundation of your next business model.
Bring in reoccurring income while not having to work full-time: well, this was ambitious and the ultimate goal. And I'll admit, I was struggling to address it.
While I began to focus more on personal finance and long-term goals, I was frustrated every month. I'd get my pay check on the 1st, but watch half of it disappear straight to my landlord. However, through that frustration appeared the greatest gift. I saw the opportunity of real estate. My landlord was sitting back, relaxing, and collecting monthly checks, so why couldn't that be me? *BOOM* there was my answer to bringing in reoccurring income. I had to become a landlord.
One big problem: every property in my area (San Francisco) was well over $500,000. I didn't have that kind of money!! But, did that stop me? I had to get creative and think outside of the box. Three words: Always Keep Learning.
Jumping head-first in to Real Estate, I started soaking up real estate podcasts, blogs, books, and anything I could get my hands on. Through my educational journey, I learned that buying out-of-state, where properties were more affordable, was a realistic possibility.
I guess the rest is history. I jumped in, found a property in Indiana, renovated it, got it rented, and now collect monthly rental income. Read My First Property for an in-depth journal of buying, renovating, and renting my first out-of-state property, or continue to Part II below:
What's been your "Journey" into the world of Real Estate investing? We'd love to hear your story in the comments section below!