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4 Key Wealth Factors That Make Real Estate Appealing
In any discussion about wealth, the topic of real estate inevitable pops into the picture as if there can be no meaningful dialogue without it.
But these days, the definition of wealth has been blurred due to the overuse of the word in the media and other marketing channels.
Wealth is the abundance of valuable resources or valuable material possessions. – Wikipedia
It’s not personal income. It’s not money. It’s not sports cars. And it is definitely not health as in the saying “health is wealth”.
Although there are many sources of wealth in general, real estate (especially rental property) hits 4 big sources where other assets pale in comparison.
Among the list of top tier investment-grade asset classes, real estate is probably the one with the highest probability of appreciation in value.
Their market values tend to go up over time. And even if there is a recession that causes it’s value to drop, the economic cycle tend to drag it back up when the tide turns. This is referring mostly to developed economies.
This is partly due to the inflation hungry capitalistic world too.
And even if a property’s value stagnates, there are methods you can do to force value to rise.
In fact, real estate is the single most common factor that has made millionaires throughout the world. And it’s key reason is appreciation.
However, do note that long term appreciation is not a given especially in bubble economies. If you had bought a house that is already overpriced, the odds of exiting that investment with a surplus of profits is pretty low.
This is why rental property is advantageous as it brings in another factor that will help buffer any negative impact an investor might face in a crisis.
That that is…
2) Cash flow
In layman terms, cash flow basically describes the cash coming in and going out in your business operations.
If you unable to grasp this term definitively, consider this:
A company that is making a million dollar profit might have zero or negative cash flow due to it giving generous payment terms of 180 days to it’s customers. This scenario can put a huge strain on operations and working capital. And might even be the catalyst for it to go into administration.
Cash flow is the name of the game in real estate. Not profits.
The goal of veteran investors of rental property is always to maximize cash flow instead of profits. Higher profits will also mean more taxes anyway.
You can still get by comfortably if your apartment’s value decreases by half but it’s still bringing in positive cash flow overall.
The main cash inflow usually comes from rental collection.
While cash outflow can be made up of various expenses like:
- maintenance and repairs
- agent fees
- telephone and utility bills
The item that usually takes the biggest bite on your cash is the mortgage or the form of financing you have used to acquire the property.
Appreciation can be unpredictable. Yes, you could probably foresee appreciation within the next 5 years. The puzzle becomes more complex when you have to determine… by how much.
Rental however, can be much easier to predict and budget. If you are renting the place at $1,000/month, it doesn’t take a genius to figure out that you are going to get $12,000 in the year to work with.
Try figuring these numbers out with dividends from stocks. You can’t.
3) Tenants paying for your house
I guess most people will figure this part out… even if they are tenants.
The rent collected is essentially paying for your mortgage. And therefore the asset itself.
What other investment in the world allows you to “own” an asset that have other people paying for your ownership?
Don’t get me wrong. There might be. For example, a car rental business is one.
But what can be as strong an asset as real estate and achieve these financial benefits? None.
Rental paid towards the mortgage is also not exactly an expense because it essentially goes into the house as home equity. This means that in times of financial hardship, you can always tap onto the equity locked in the property by getting a home equity loan.
The money used to pay for the property is liquid in a way thanks to credit facilities like equity loans and lines of credit.
And if the opportunity arises, you can always use this money to get into investments that give you a higher return than the interest on the loan.
That will instantly make you an investor at a higher level than the average home owner.
The government is usually favorable to real estate investors wherever you are in the world.
When it comes to tax planning, you should get the advice of a professional CPA as loopholes and benefits vary from state to state and country to country.
You can see some of the situations where your accountant can play a huge role in tax planning here.
The wonders of retained earnings can help you make more money and accumulate more wealth over the long term. And that is without mentioning the accounting phenom that is depreciation.
Just take note that tax benefits are never a key criteria for acquisition activities. What they can do is make your best deals even better!