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How Real Estate Builds Wealth
Updated: Dec 2, 2020
Why Real Estate Remains a Sound Investment in the US, Spokane
You’ve probably heard that real estate is the best way to build wealth, but people rarely understand why. Evidence based investments in real estate, rather than those based on speculation of future appreciation, are a solid way to establish passive income and build wealth. Here’s 7 ways real estate builds wealth and remains a smart investment even in periods of national change.
Rent Brings Positive Cash Flow
When you purchase an investment property, you need to know two things. First, how much you’re likely to bring in from rent based on what similar properties in the area are renting for. And second, what your total monthly expenses will be. Think about your mortgage, property taxes, insurance, maintenance, and property management fees.
Buy an investment property that you are sure will bring in a higher rent than your sum total of expenses, right now. Don’t buy on speculation unless you can afford to be wrong. And don't forget to make sure you have great homeowner's insurance right from the start - here's a comprehensive guide of your top options in Spokane.
Appreciation Over Time
You shouldn’t buy an investment property you can’t afford based on the expectation of appreciation. That being said, properties do appreciate over time. This is one of the biggest ways in which real estate builds wealth. While property values fluctuate from year to year, in the long run real estate values have always gone up.
This means that well maintained properties are likely to sell for more than the purchase price, given enough time.
While depreciation sounds like a negative term, it’s actually a beneficial tax practice. “Depreciation” refers to your ability to write off part of the value of the asset itself every year. David Greene at Forbes explains why depreciation matters - “This significantly reduces the tax burden on the money you do make, giving you one more reason real estate protects your wealth while growing it.”
In other words, owning a home can help you increase your cash flow on the home itself while simultaneously saving you money on your taxes.
Real estate is one of the easiest financial assets to leverage. Down payments can be only 20% and interest rates are at historic lows. And what’s more, loans are routinely amortized over 30 years, making the monthly payments manageable.
As Greene points out, “when done correctly, you can often buy real estate, improve it’s value, then refinance to recover 100% (or more) of your capital using what I call the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat). In the circumstances where I don’t recover 100% of my capital, I often find myself with an ROI in the 50-90% range—all while adding equity to the property as well.”
One of the best things about owning investment rental property is that you are creating a positive cash flow while having someone else pay down your mortgage. On new mortgages, the majority of your monthly payment goes to interest, and your principal balance changes very little.
With each payment made on the loan, a little more of that payment is applied to the principal. This means that over time, every single month a chunk of your mortgage is paid down. You build wealth in addition to your monthly cash flow. And don’t forget -- your tenant is making those monthly payments, not you!
Forced equity is created when improvements or upgrades are made on a house to increase its value. The most common way to do this is to buy a house under market value, make the necessary repairs, and resell it at a profit. This is commonly done by adding new appliances, or fixing up the kitchen and bathrooms. This can also be accomplished by buying a home that lacks the preferred number of bedrooms or bathrooms and remodeling to create a more desirable floor plan. In this way, you’re forcing the value up, rather than passively waiting for the investment to appreciate.
Inflation is a fact of life and a common griping point amongst those who remember when a cola cost 5 cents. But it’s also a powerful wealth building tool if you’re using it to your advantage. In real estate, inflation is easy to benefit from because the majority of your real estate costs will remain fixed over the lifetime of your ownership. Things like your mortgage payment and property taxes, for example, are unlikely to go up.
On the other hand, rent prices and home values will consistently go up over time. This means that over time, you’ll be charging higher rent prices on the same property, without paying a higher mortgage payment. Your monthly cash flow increases and profits can be used towards purchasing additional investment properties over time.
Investment Properties in Spokane
Spokane is an excellent market for investment properties. Rental property capacity is consistently in the high 90%, meaning there is a huge demand for rental units. Spokane is also a family-centric community, meaning there is a need for rental homes and not just apartments.
If you’d like to search what’s available right now, take a look HERE. You can set up and save a free search, too, so you never miss the perfect property.
Ready to start a more in depth conversation about your investment property options in Spokane? Call Carrie at (509) 868-1077.
The Real Estate Agent Spokane Team
Carrie Meyer, leader of the Real Estate Agent Spokane Team, transferred to real estate after a 30+ year career as a paralegal (Certified Legal Assistant). Her combined experience in law and real estate makes her a tour de force in contracts and negotiations.
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