Real estate is a powerful wealth building tool that has made millions of individuals millionaires.
Could you be the next?
Here are four primary “wealth generators” at play when you invest in real estate, depending on the strategy you get into:
- Cash Flow. This is the extra income you’ll get to keep each month (or year) that you own the property. Cash flow can be deceptive because it fluctuates when certain repairs are higher or lower in different months, so it’s important to factor in non-monthly costs like vacancy (the amount of time the property sits vacant), repairs, capital expenditures (expensive projects that need to be replaced on a home every so often, like appliances, roofs, windows, plumbing, etc.), along with the regular expenses (utilities, management, etc.).
- Appreciation. When the value of a property increases, we call this “appreciation.” While appreciation is not always guaranteed (just ask people who bought in 2006 and sold in 2010!), over time, historically, real estate has always increased in America, averaging 3% per year over the past century. Another type of appreciation that can come into play is known as “forced appreciation,” the concept of increasing the value by physically improving the property.
- Loan Pay-down. When you buy a property with a mortgage, each month your loan balance decreases. This means, over time, your tenant is essentially paying the loan down for you, helping you build wealth automatically. To make this concept clearer, pretend for a moment you owned a property that you bought for $1,000,000 with a mortgage for $800,000, and it made $0 in cash flow (it “broke even”) and never climbed in value. However, after that thirty-year mortgage is paid off, you’ll now have a property worth $1,000,000 that you didn’t actual save for. Your tenant paid it off due to the “loan pay-down.”
- Increase your Asset Portfolio– With properties you have, this increases your asset appeal to the market. With this, you can make this as your back up or support for businesses you might like to venture on in the future using it for bank loan or gaining good deal with the appraisal value of the property.
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