Why the Wealthy Invest in Real Estate

Investing in your future to ensure you live a prosperous and wealthy life is a must for everyone. While there are many different investing types, passive investing seems to be one of the most popular out there. When you look into the specific investments these passive investors are putting their money in, you’ll notice that most of them are in real estate.

 

No doubt, real estate has been a large part of some of the wealthiest portfolios out there. It can be a very fast wealth-building strategy as well as one that can bring in passive income for a long time. If you’re still on the fence about buying real property, here are some of the most popular reasons you should be.

 

Diversification

 

When implemented correctly, a wealthy portfolio includes diversity. Real property is one area that you can use to mitigate the risk that comes along with other types of assets. In general, real property is known to be a low-risk investment.

 

Within the real property sector, there are tons of ways to diversity as well. You can opt for passive niches like commercial apartments, single-family homes, or even commercial buildings. You can change up your risk by buying properties in different geographical locations or only using properties that are syndicated. Real property is a great way to help diversify risk in any portfolio.

 

Syndication Makes Investing Easy

 

As a passive investor, you may have considered buying commercial properties. However, the upfront cost of these investments can be in the millions. That’s typically out of reach for many. Those who can afford the high upfront cost find themselves limited to only buying a small number of commercial properties.

 

Luckily, commercial property investments are done, in many cases, through syndication. Syndication is when a group of investors pools their money together to make a property purchase. This strategy allows a passive investor to put their money in various large commercial investments without having to front a large sum of cash. You’ll essentially own many pieces of different pies instead of one single pie.

 

When you choose to undergo syndication, you don’t have to do any of the heavy lifting. Rather, the syndicator will be the one who researches potential investment properties and does the due diligence. You will just give them the investment money and enjoy the passive revenue that follows.

 

It Can Be Completely Passive

 

Many investors who are on their wealth building journey simply don’t have time to invest alongside their money. For these investors, passive earnings tends to be their key goal. Owning properties is a great way to invest passively. You can be completely removed from the property by having management handle tenants and various aspects of operations. You can just enjoy receiving the passive earnings that your property brings in.

 

The Many Tax Breaks And Deferrals

 

Owning actual property comes along with a whole new world of taxes. You can enjoy more write-offs for things like depreciation, expenses, and interest payments. These write-offs can help offset the passive revenue you bring in, meaning you can usually report your income as zero or even negative. There are many tax strategies like cost segregation and the 1031 Exchanges and Deferred Sales Trust that your tax accountant can utilize to keep your taxes minimal when putting your money in the real estate sector.

 

You Can Force Appreciation

 

Not all assets that you purchase can have their value increased. However, buildings and homes are assets that you can enhance the value of through operational and physical improvements. There are typically three main strategies for forcing appreciation of a property. These include increasing the property’s income, decreasing its expenses, and doing a combination of both.

 

Hedge Against Inflation

 

Any knowledgeable investor knows that they must hedge against inflation. Every dollar today will be worth less in the future. You need to ensure that the assets you invest in today will retain their value in the future regardless of inflation. Hard properties are a way to make that happen. Rent follows inflation. Therefore, as inflation goes up from year to year, so does the amount of money that you can charge for rent. This is a great strategy for hedging your passive investments against inflation to secure your future wealth.

 

Tenants Pay Off Principal Balances

 

When it comes to buying real property, most investors will utilize some of their own cash for a down payment and a mortgage loan for the remaining balance. The beauty of buying real property is that your tenants can pay for your debts. A portion of each month’s rent goes towards paying down the principal balance that you owe on the mortgage. After the mortgage loan is paid off and you receive your down payment money back, you essentially own an entire asset that your tenants paid for.

 

Low Volatility

 

If you’ve ever looked into buying stocks, then you’ve likely heard the term volatility. An investment with high volatility is subject to big swings in price often. Contrarily, those investments with low volatility very rarely make major swings in value.

 

Real property is an investment that is considered to have low volatility. It typically offers a consistent level of performance that makes the investment a particularly safe one. This is why so many investors opt for adding real property into their investment portfolio, so they don’t risk losing all their wealth overnight.

 

High Debt Leverage

 

One of the most unique parts about real property investments are that you can leverage debt to a very high level. When you purchase real property, you’re expected to bring between 20 and 30 percent of the total value to the table. This figure will highly depend on the individual investment and whether you’ll syndicate the property.

 

For this small amount of money, you can essentially purchase the entire asset. Yes, you’ll have a mortgage for the remaining amount. However, the entire asset will be under your control. As the years go by and your tenants pay off the mortgage, you can find yourself owning the entire value of the asset.

 

Compare this to other forms of passive investments, such as the stock market. You can only buy as many stocks as you have the money to do so. With real property, you can purchase multiple properties with only having a small percentage of the entire value for each property on hand. Say you have $100,000 to invest in real property. Assuming you’re putting 20 percent down of the purchase price, you can get $2,000,000 worth of real property for your initial $100,000 investment.

 

You Can Ride Out Recessions

 

The beauty of passive investing in the sector of real property is that you can ride out the times of recession. Many look to the housing crash of 2008 as an obstacle to the real property market. While the value of homes did decrease, they didn’t stay like that. In fact, the market has bounced back, and home prices have continued to skyrocket.

 

When you invest in real property, you can simply ride out the recessions that happen. You’re not forced to sell your investment at a low price. You can simply hang onto it and ride it out until the price goes back up. People always need a place to live, so you can ensure you’ll have passive income coming in no matter what the economy looks like.

 

It Builds Up Your Cash Flow

 

When you have real property that you rent out, the amount of money you receive after paying expenses like the mortgage is considered cash flow. One major advantage of real property buying is that you can receive cash flow each month. This works to boost the overall passive income that an investor can make each year.

 

Unlike other assets where you only receive income once you sell them, real property allows you to have the best of both worlds. You can enhance your monthly cash flow while, at the same time, your tenants pay down the debt owed on it. As the debt gets paid down, your amount of equity in the asset increases. It’s a win-win scenario.

 

Cash Flow Increases Later On

 

When you purchase real property, you can expect to receive a set cash flow amount each month. For example, let’s say you charge a tenant $1,000 per month in rent. After deducting your $400 mortgage payment and $150 in additional expenses like water, you gain a cash flow of $450 per month from the property. As the years go by and your mortgage on the property gets paid off, your cash flow will increase. In this case, you can enjoy an additional $400 in cash flow per month in the absence of a mortgage payment.

 

Real property has long been a popular form of investment for both the wealthy and those undergoing wealth building. The above are just some of the many reasons that investors look to real property to secure their financial future. If you don’t have real property in your passive investment portfolio, it’s time to really consider adding some.

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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Joe Fairless