Real estate is a great way to build wealth and can be a great option if you’re looking for ways to build long-term assets. It might sound intimidating if you’re new to it, but it’s surprisingly straightforward and accessible. There are lots of different ways to start investing in real estate and you’ll likely be surprised how little money you need to get started.
If you’re interested in getting started as an investor, it’s hard to overemphasize the benefits of investing in real estate.
From Andrew Carnegie’s observation,
“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate”;
to Armstrong William’s more recent advice,
“Now, one thing I tell everyone is to learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values, and the least risk,”
Successful investors agree that investing in real estate is a good bet.
The Buy, Hold, Rent Approach to Real Estate Investing
For the purposes of this article, we’re going to focus on buying an investment property that you’ll hold and rent to Tenants – a “buy, hold, rent” approach to real estate investing. As we get into the details of this type of investing, keep in mind that it’s not just for the wealthy and it’s more accessible to you than you might think.
To help you decide if it’s right for you, here’s an overview of some of the key benefits of this type of real estate investing and some ways you can start preparing to purchase your first investment property.
Benefits of Investing in Real Estate
Historically, real estate has been one of the most lucrative and reliable long-term investments. Here’s a brief look at some of the reasons it’s done so well and why acquiring a rental property is particularly appealing to investors right now.
Unlike many other investment tools, real estate offers a way for investors to earn a steady cash flow. Here’s how:
If you have an investment property, you have ongoing expenses, for example, mortgage payments, property taxes, insurance, maintenance, and any management costs. If the property’s monthly rent payment exceeds monthly expenses (which it should!), then any extra rental income is cash flow for the Landlord.
Appreciation is often one of the first things that comes to mind when thinking about the benefits of real estate. While that’s certainly important and we’ll talk about it next, don’t overlook the benefits that come from cash flow.
At the outset, savvy investors focus less on appreciation and more on purchasing a property that will generate steady cash flow. Once they’re “cash positive,” there’s no need to worry about market shifts or other factors. Instead, investors can just sit back and enjoy cash flow that can be used to save for another investment, build a bigger rainy-day fund, or supplement retirement savings.
While everyone loves cash flow, appreciation is often the way that real estate lets you build real wealth. Your rental property’s value will appreciate, or increase, over time. While real estate prices might fluctuate some due to market conditions, they’ve always trended upwards, and there’s no reason to believe this trend is going to change.
If you buy, hold, and rent real estate, you’ll see substantial returns when you’re ready to sell. On average, homes appreciate by 50% over 10 years. While this is an appealing number in and of itself, investors that use leverage will benefit even more from real estate’s steady appreciation.
Leveraging other people’s money to make more money is one of the key benefits of real estate investing. Leverage simply means borrowing money to increase your return, and while leverage involves some risk, its risks are pretty low as long as your rental property generates a steady income that exceeds your monthly expenses.
Real estate loans are some of the easiest to get and the most attractive for borrowers. While interest rates are rising, they’re still low by historic standards. Plus, down payments of 20% or less and loan periods amortized over 30 years present lots of opportunities for investors.
To understand how leverage can help your returns, let’s consider an example. If you bought a rental property for $100,000 cash and it appreciated 10% over the first year, you’d have a return of 10%, which isn’t bad (especially if that’s in addition to your monthly cash flow). That said, if you got a loan for $80,000 and just invested $20,000 for the down payment, you’d have a 50% return on your investment after the first year.
While that sounds pretty good, these numbers are even more attractive over the long term. Think about these same numbers over the course of 10 years. If your property appreciates by 50%, meaning it’s worth $150,000 after 10 years, you’d have a 50% return on your investment if you made a cash purchase. However, if your investment was only $20,000, you’d have a return of 250%, on top of your monthly cash flow.
It’s important to note that investors, especially first-time investors, should be cautious when utilizing leverage. But, when used correctly it can be an effective and safe way to build wealth. The basic idea is that you’re using other people’s money, or the bank’s money, to grow your own wealth. Not a bad concept!
One of the great things about investing in real estate is that for tax purposes you can depreciate your rental property over time. For rental properties or any property that’s not your primary residence, take the total value of the asset and divide it by 27.5 to come up with the annual depreciation amount. You can then deduct this amount every year to offset income and reduce tax liability.
Let’s think about that $100,000 investment property again. Start by finding the annual depreciation rate, which is 100,000 divided by 27.5, or $3,636. When doing taxes, you can depreciate your property by $3,636 every year and reduce your tax liability by this amount. Sometimes your cash flow might be equal to or less than this amount, meaning that you won’t have to pay any taxes on this income.
The bottom line is that this means an increased return for investors and more money to invest in other things.
Opportunities to Buy Distressed or Below Market Value Properties
One additional benefit that comes with buying real estate is the opportunity to buy distressed properties or properties that are below market value. If you purchase below the full price and then make needed repairs and upgrades, you immediately will have equity in the property. This is what we call forced equity when you speed along with natural appreciation by improving the property.
The chance to find below-market properties, improve them, and then hold and rent them is an effective way to quickly build equity in a property and a great way to start building wealth.
How to Get Started
Time has shown that real estate is a reliable, long-term investment and a great way to build wealth. If you’re interested in purchasing a rental property, now is a great time to do so because rental prices are increasing and real estate does particularly well during periods of high inflation.
Here are a few steps to help you get started.
- Once you’ve got enough for a downpayment, then you’re ready to purchase your first rental property. With that in mind, the first step is figuring out how much you can comfortably spend on a downpayment, keeping in mind that you’ll want to keep some cash available for needed repairs, maintenance, and expenses. In addition, you’ll want to have some extra cash on hand to cover one to two months of expenses until you have a Tenant in place.
- Once you’ve got your down payment ready, it’s time to find a lender. Securing a mortgage will let you know exactly how much you’re able to spend on your first rental property.
- With financing secured, it’s time to start looking for a property. But, before purchasing a property, it’s important to do plenty of research. Make sure you’re familiar with the area where you’re considering investing and how much rent you can charge. Once you’ve found a specific property you’re interested in, calculate the monthly expenses and ensure that they don’t exceed the amount of rent you’ll be able to charge.
- Once you’ve got a budget, secured financing, and done plenty of research, you should be ready to buy your first rental property.
Tools to Make Landlording EZ
After you’ve purchased your first rental property, the next steps are finding a qualified Tenant and creating a great Lease Agreement. Visit ezLandlordForms.com to learn everything you need to know about screening Applicants and creating a Lease Agreement that protects your investment.
Emily Koelsch, ezLandlordForms Contributing Writer
Emily Koelsch is a freelance writer and blogger, who primarily writes about business, real estate, and technology.