5 Secrets the Ultra Wealthy Know About Real Estate
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The ultra-wealthy have unlocked a secret that typical investors never consider…
Whether you’re running your own business or working as an employee, you’re trading your time for dollars. Yet how could someone be 10 times more wealthy? But are the ultra-wealthy really working 10 times harder or 10 times as many hours?
One of the biggest secrets that the wealthy tap into is the incredible power of real estate.
According to Investopedia, a study in 2019 shows that ultra-high-net-worth individuals (net worth of $30MM or more) do not have their money sitting in CDs, money markets or mutual funds. Real estate is by far the largest asset allocation in their portfolio.
Real estate has the ability to generate passive income and provide a path toward building wealth. Every dollar invested in real estate works for you in these five ways:
#1 – Cash Flow
The greatest benefit of investing in real estate is passive cash flow. When an asset is purchased and rent is collected from tenants, the remaining value after expenses is your cash flow.
If you invest $100K in a project with an 8% cash-on-cash return, this means you receive $8,000 a year. Your principal investment is protected as equity in the deal and the $8,000 is simply cash flow from the investment.
#2 – Leverage
Sticking with the same $100,000 investment, if you invested in the stock market and the value of your portfolio increased 20%, you would profit $20,000 before fees and taxes.
If you invested $100,000 in a real estate deal and the property value increased 20%, the investment doubles in value. Why? Because of leverage.
We finance most of our properties with a community lender. If the investment is 20% of the purchase price and the bank debt is 80%, that means that if the property value increases 20%, investors double their investment.
Here’s an oversimplified example: We purchase a building for 1 Million. The investment needed is roughly $200K. We sell for $1.2 Million. Investors are paid $400K. That’s the power of leverage.
#3 – Equity
As you receive monthly rental checks and use them to pay the mortgage, your equity in the property increases. In this way, the rental property generates income to pay for itself.
Every month the mortgage on the property is being paid down further. There are a number of ways to increase equity in a property. Loan pay-down is only one of them. Anything from natural appreciation to value-add opportunities can increase equity for investors.
#4 – Appreciation
Real estate values tend to rise over time, which means your money can also work for you in the form of appreciation.
We never want to depend on appreciation but we do set ourselves up for success. For example, Stellar Investment Group only invests in cities with a strong population growth and job growth. We believe Indianapolis is the best market in the country right now and there are a lot of people moving there.
The growth in our market is a fair indicator of future appreciation.
While appreciation is nice, it’s not guaranteed. This is why you should always invest for cash flow first and foremost, with appreciation as the icing on the cake.
#5 – Tax Benefits
When you invest in real estate, you get the benefits of depreciation and mortgage interest deductions, as well as a whole host of write-offs for a number of other related expenses.
Investors often show losses on paper, while actually making money through cash flow. The losses play a big part in helping to offset other income, which is a major reason real estate is so lucrative.
Further, when investing in commercial real estate syndications, you have the opportunity to take advantage of cost segregation and accelerated depreciation, further increasing your tax benefits.
Real Estate Is The Key To Building True Wealth
Remember, with each dollar invested in real estate, you have the opportunity to take advantage of cash flow, leverage, equity, appreciation, and tax benefits. Real estate should be part of every investor’s strategy