Multiple Wealth Sources In Real Estate And Property Business


If you lived through the recent real estate and economic recession, the very headline of this article might cause you some emotional pain. Less than five years ago, the country was swept with an economic crisis likes of which our generation had never seen. It felt like the market would never recover. Fast forward a few short years and now massive wealth is being built through real estate.

Cash Flow: Cash flow is the money you have left over from the rent you have collected after all expenses have been paid. Most real estate has expenses such as a mortgage, property taxes, insurance, maintenance, and property management fees. When you buy a property that pulls in more rent each month than the expenses you carry to own it, your cash flow is positive.

In the majority of investments (stocks, art, jewelry, bitcoin etc) you are hoping to buying something that will appreciate in value, then sell it later for a profit. In some it forms of investing (buying a poorly run business, for example ), you may be buying something that produces income and hoping to improve that assets performance in order to increase its values for most, this involves too much work and is undesirable. What we are left with is the subconscious understanding that to “invest” is to buy something you believe will be worth more Later. If this is based on sound principles, it can work. If it’s not, it’s really more like gambling.

Wise investors don’t bet on appreciation. They purchase properties on a sound judgment that the property will generate more income than it costs to own. For these folks who “cash flow” positively, they don’t care what the market does. If prices rise, they have more options.

Appreciation: That said, appreciation, or the rising of home prices overtime is how the majority of wealth is built in real estate. This is the “home run” you hear of when people make large windfall money. While prices fluctuate, over long run real estate values have always gone up, always, and there is no reason to think that is going to change.

Example if you buy a property for #200,000 and it appreciates to #220,000, your property had made you a 10% return. However, you likely didn’t pay cash for the property and instead used the banks money. If you consider that you may have put 10% down (#20,000), you actually have doubled your investment, a 100% return.

Depreciation: Even though the name can be deceiving, depreciation is not the value of real estate dropping. It is actually a tax term describing your ability to write off part of the value of the assets itself every year.

Example Imagine if a farmer bought a tractor for their business. That tractor is only going last for a certain number of years until the farmer needs to purchase another tractor. So the IRS (internal revenue service) be it state or federal allows the farmer to deduct a percent of the cost of the tractor from their taxes each year of deduction to offset the income the property is producing for you, helping to save money over time. How awesome is that?

Forced Equity: is a term used to refer to the wealth that is created when an investor does work to a property to make it worth more. The most common form of equity is to buy a fixer-upper type property and improve its condition.

Example of this would be adding a third or fourth bedroom to a property with only two, adding a second bathroom to a property with only one. Opportunities like this can be found with a little bit of hard work diligence, and the resulting forced equity can make a big impact on your bottom line.

Leverage: leverage is the concept that you can pay for something without coming up with the full cost. For real estate, you can use leverage by taking out a mortgage to buy a property and only put down a fraction of the real cost. Even though you only put down a small portion of the purchase price, you are still entitled to all of the benefits.

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