Why Real Estate is an Important Tool for Reaching Freedom

What do a majority of the world’s top net worth individuals have in common? Is it that all like to play golf or enjoy long walks on their private beach; well I do not have research on those areas, but I have found that a large portion of millionaires invest in real estate and even made their start in real estate. Most of you know some aspects about real estate, whether it is from renting an apartment, buying a primary residence, or maybe buying a vacation home. However, this post will focus on the four powerful benefits real estate investing has for building wealth.

The first financial benefit of real estate is being able to leverage other people’s money to multiply the return on your investment. Some risk adverse people will say leverage is evil and it is why so many people went bankrupt in the financial crisis in 2008. There is truth in that statement, leverage only multiplies the investment action, in 2008 there were many people over leverage with bad investments. When the market turned, their portfolio of bad investments crashed, and because they were over leveraged they could not recuperate the loss and were forced into bankruptcy. Now when you make good investments, using leverage, you use $20,000.00 of seed money and buy a $100,000.00 rental property. So as long as you buy right, in a good market, for cash flow, and below the market price you can leverage $80,000.00 of the bank’s money. This increases your return on investment, reduces your cash risk, and allows you diversify your own cash into more investments.

The next financial benefit is the great tax advantages in real estate. I am not a real estate tax accountant but I am going to mention of few of the more popular benefits such as 1031 Exchange, depreciation, and expense write offs. 1031 Exchange allows the seller to differ their tax oblations, on the sale of a real estate asset, as long as they purchase a like kind asset within a 180 day window. Being able to keep all the proceeds from the sale, then leverage them into other real estate deals enables investors to quickly snowball their portfolio. Every income property structure depreciates over 27 and ½ years. The value of the structure is divided by 27.5 years and then that amount can be written off on the property’s annual taxes. Along the deprecation write off, all expenses related to the business of the income property can be written off. Drive time to the property, maintenance on the property, legal council, accounting council, and many other expense areas.

Cash flow is one of my favorite aspects of real estate investing, because it creates a stream of income that requires very little work to receive it. Savvy investors that have built robust systems receive real estate cash flow that is almost 100% passive. Real estate investing for cash flow, in my opinion, is the best paths for creating financial freedom; the ability to be free of having a work a 40 hour a week job to maintain your lifestyle. Once you have the adequate flow of cash coming in from your assets, an extended 5 month trip through Europe is now within your scope of possibilities. Also cash flow is treated as a passive income and has less tax implication than an employment salary tax.

I like to think of the final benefit, appreciation, as the bonus, the sprinkles on the ice cream sundae. I do not like investing for appreciation because no one person has control of a market. Investing for appreciation is similar to speculative stock investing, your destiny is in the hands of someone else. However, if the property does appreciate, and statistically over time property has appreciated at a higher rate than inflation, you can get a nice financial bonus that you were not depending on. Appreciation typically has be biggest benefit for the buy and hold investors. Most people that held property 30 years ago admit that they should have held onto it due to the massive appreciation it has gained.

I hope this information was beneficial and you now know why real estate investing has created a multitude of wealthy individuals. These individuals used the 4 powerful benefits, leverage, tax advantages, cash flow, and appreciation to become the top earners in the world. The path to becoming a real estate investors starts with knowledge and knowing these four benefits is a great start.