Throughout history, the wealthiest people have always been real estate investors. investors are able to hold real estate, compound their wealth, and receive rental income, all while enjoying the benefits of operating leverage and tax advantages.
there isn’t much of a difference between your neighborhood real estate investing millionaire and you? Continue reading to learn the key ways to create wealth investing in real estate.
What Does Investing In Real Estate Mean?
Investing in real estate means injecting money into an opportunity anticipating a return of capital in excess of the amount invested.For example, purchasing residential or commercial properties to rent out, lending money for a real estate transaction in exchange for interest payments, and investing in a company that brokers properties all fall under the category of real estate investing.
There are no bounds or constraints in the real estate industry. That is why so many people – with the right skill set – can create generational wealth investing in real estate.
How To Create Wealth Investing In Real Estate: (5 Strategies)
1. Wholesaling And Flipping
Some of the most popular, tried and true active real estate investing strategies are wholesaling and house flipping. Wholesaling is an investment strategy whereby the wholesaler connects buyers and sellers of properties – comparable to a real estate agent’s job.
Usually, wholesaling entails going under contract with a distressed seller at below market value prices and simultaneously finding a cash buyer or accredited investor interested in assuming the purchase agreement.
Typically, the wholesaler will bake in an assignment fee into the contract to ensure he or she gets paid for making the connection. Wholesaling is a fantastic way to accumulate capital and learn to find properties that build long-term real estate investing wealth for an active participant.
It requires little to no initial equity and the results can prove to be extremely gratifying.Another such active investing method used to build long-term wealth creation is flipping houses.
Flipping properties is the act of buying a distressed property – usually off the traditional real estate market – and injecting capital into the project to rehabilitate the structure, aesthetics, and functionality of the property to increase its After Repair Value (ARV).
By flipping or wholesaling a handful of properties a year, one can slowly, but surely generate substantial amounts of money straight to the bottom line and boost their net worth.
2. Buying Rental Properties
In terms of active real estate investing, buying residential properties is another great strategy to build wealth over the short and long-term horizons. Whether you are buying multifamily properties out in Plano, Texas or an office building in Tallahassee, Florida there are numerous avenues to leverage rental properties to generate financial freedom.
First, renters provide owners with consistent passive income. Having excess cash flow above annual expenses means the owner can use their Return on Investment (ROI) and deploy equity into more deals.
Second, rental properties can be leveraged. Leveraging a property with bank / hard money debt provides a handful of benefits.
Interest rate is a tax deductible expense. By having a loan on your property you will be able to offset the income the property produces with the interest you pay the bank.
Second, leverage allows you to minimize the down payment needed in a transaction. By putting a fraction of the equity down, you gain access to a cheap source of capital. Later, you’ll be able to pay off that debt and carve out equity for more investments as the property’s value appreciates.
The last benefit of real estate rentals is appreciation. Over time, the purchasing power of the U.S. dollar decreases due to inflation. By plowing your hard earned cash into properties, as the U.S. population grows so will your property’s value.
3. Invest In A Private Equity Fund
Private equity funds are investment vehicles used to acquire larger real estate portfolios and properties. Oftentimes, individual investors don’t have the bandwidth to acquire multi-million dollar properties. Private equity sponsors offer a solution to that issue.
Instead of putting $50,000 into a single family home, you can put $50,000 into a large pool of investor capital seeking to purchase a $100,000,000 multi-family portfolio. You’ll also have institutional backing and a management team that has experience operating large properties.
4. Investing In REITs
Another option for passive income in real estate investing is REITs. REITs are publicly traded investment vehicles – also known as Real Estate Investment Trusts – that trade on the stock market. The beauty of investing in REITs is that the investor can easily diversify his or her nest egg across a wide range of assets and geographies.
With just $100 you could literally buy 100 different REITs that cover thousands of properties, millions of square feet, across all 50 states.Take a look at this directory for a list of all the publicly traded REITs you can choose from.
5. Investing In Syndications
Another great way to create wealth investing in real estate is by participating in a syndication. A syndication is a pool of money devoted to investing under a criteria. If you would like to invest $100,000, but want to play a more active role, a syndication could be just the right vehicle for you.
Ten different investors can pool $100,000 each into a $1,000,000 syndication. With that amount of money, you can now deploy the capital into a larger deal that you would have otherwise been unable to invest in. You can be a more active participant in the syndication investment philosophy and management style – a benefit that is largely unavailable for private equity fund and REIT investments.
How To Choose The Right Real Estate Investment For You
Every investor has a different set of goals and hurdles. A retired individual looking to achieve fixed returns would likely prefer an investment that differs from that of a young single person that has a higher risk tolerance.
For instance, if done correctly, flipping a house could help an investor achieve a 100% return in 6-months, but the risk of permanent loss of capital is much higher than investing in a REIT that might offer consistent 8% dividend yields.
Once you have a sufficient grasp of your overall risk appetite, budget, and view of the housing market, you’ll have a better idea of which real estate stream you should dip your toes in.
Benefits Of Investing In Real Estate
There are tax benefits associated with owning rental properties, income benefits in owning dividend paying REITS, and appreciation benefits in flipping houses and using leverage. But, most important of all, there are macro trend benefits associated with real estate investing as a whole.
As the economy globalizes, there will always be demand for housing. The United States is – and always will be – the ultimate destination for opportunity. As long as that is the case, real estate will always be needed.
Real estate investing is a phenomenal way to create long-term wealth for yourself. Whether it be real estate wholesaling, flipping houses, brokering, investing in debt, running syndications, or buying REITs, there is something out there for everybody. All you have to do is dive right in!