One of the most effective ways to drive personal wealth is to invest in real estate. The smartest way to achieve your dream of becoming a millionaire or a billionaire is to focus on this asset class.
Real estate provides a safe vehicle that will weather market volatility and has an increase in value each decade. It's very different compared to the low interest-bearing savings account, stock market, and other avenues.
The following are the five ways real estate drives personal wealth. If you want to invest in real estate, here are the most substantial benefits you'll be able to enjoy.
1. Cash flow
Cash flow refers to the net income from real estate investment after paying the operating expenses and mortgage payments. If you invest in real estate, you'll be able to generate cash flow and earn from the first day you bought tangible assets. In most cases, your cash flow will only be strengthened over time. It happens as you pay down your mortgage and build up your equity.
2. Appreciation
A huge factor that builds wealth is rapid market appreciation. Even if you don't rent out your investment property and you decide to live there, the long-term appreciation would transpire.
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In real estate, as they always say, the most important thing is the location. If you do your research correctly and buy a property where home values rapidly increase, your investment will increase in value every year without additional capital expense. Parts of California, for example, have homes that grow in values much faster than inflation.
3. Real Estate Leverage
Leverage refers to the use of the borrowed capital or different financial instruments to maximize the potential return of an investment. For example, a 20 percent downpayment on a mortgage gives you a leverage of 100% of the house you want to purchase.
Real estate is one of those tangible assets that can serve as collateral. It is the main reason why financing is readily available.
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4. Tax advantage
In the United States, real estate investors pay the lowest taxes of any for-profit group. In some cases, purchasing real estate allows you to avoid capital gains tax if you sell using a 1031 tax exchange.
Married couples can grant up to $500,000 in tax breaks, or $250,000 as an individual if they own their home. Investors in real estate may also qualify under tax codes to deduct certain expenses. It pertains to your investment properties like interest paid on maintenance costs, mortgage, and the like.
5. Equity capture
Equity capture happens when you purchase a property for less than its value. In real estate, when you buy a home for $50,000 in a $100,000 neighborhood, fix it up for $20,000, so you are all in for $70,000.
In that scenario, you captured $30,000 in equity. It goes straight to your net worth.
Equity is vital; without it, you are exposed to the risk of a falling market. It is important to keep in mind that whenever you buy assets, make sure it has equity. This will be your protection from a down market.
Real estate investors use primary strategies to create wealth. But, do not forget that there are also risks in real estate investment. The key is to invest smartly, manage professionally, and don't get over-leveraged.
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