While looking for a great way to drive personal wealth, you may have stumbled across real estate investing. While the learning curve is pretty steep, you can flatten it by doing you research before you jump in with both feet. And, while there are risks involved, it is far less risky than investing in the stock market. Investing in real estate is one of the best ways to further your personal wealth.
Long-term appreciation in property increases your wealth. Even if you live in the property, it will increase in value. If you bought a property for $100,000 and lived in it for 15 or 30 years, depending on the market, it could significantly increase in value.
Depreciation is the amount you can write off on your investment. This saves you money because you won’t have to pay taxes on that amount of income from your investment. If the depreciation amount is higher than the amount of cash you earn from the property, then you avoid paying taxes on your investment.
The concept of inflation is difficult for some people to understand, thus they don’t think of inflation when investing in real estate. In a nutshell, inflation is when the value of money decreases but goods and services increase. Since your mortgage amount is fixed – for the most part – for the years you own the property and rents continuously increase, you can see huge results in wealth-building after just a few years.
Once you buy a property and rent it, your tenants are paying the costs of owning the property. If your rents are higher than your outflows, you have cash flow. Outflows include your mortgage, taxes, insurance and maintenance of the property.
When you buy a fixer-upper and make the repairs, you increase the value of the property. This is forced equity. With appreciation, you are at the whim of the market, but forced equity uses hard numbers. When you buy a property that is sold at lower than market value because of the repairs it needs, then you make repairs, you add to your equity.
Every dollar you don’t have to pay taxes on is another dollar that increases your bottom line. When you have real estate investment properties, you can take certain deductions that lower the amount of taxes you pay. The tax code changes often, so you should always enlist the help of a tax attorney or a CPA. Common tax benefits include deducting the interest on your mortgage and maintenance costs for your investment property.
Paying Down the Loan
Every payment you make on your loan decreases what you owe and increases your net worth. However, the initial payments are mostly interest. If you plan to keep the property for the long-term, you’ll increase your net worth over time. However, if you have the means, you can pay extra on the principal of the loan and increase your net worth much faster. And, because you are not borrowing as much over the 30 years, you’ll save on the interest payments. You can use any one of the mortgage payment calculators out there to see just how much interest you’ll keep in your pocket if you pay extra on the principal every month.
Combine any or all of these wealth-building tactics and, even with one home that you live in, you’ll find that you increase your personal wealth significantly. When you have several rental properties, you’ll find that you can drive personal wealth rather quickly if your initial investments are sound.