Real estate is, by far, my favorite asset class for many reasons. For one, it is dependable and less volatile than the stock market. Every month, I get a rent payment deposited into my account with a fixed mortgage cost resulting in positive cash flow. Sure, things can go wrong such as minor repairs, but savvy real estate investors know to build in these contingencies when purchasing rental real estate. Compare that to the stock market where a tweet from a CEO, missed earnings, or macro-economic events such as the current war between Russia and Ukraine can have reverberating effects on the entire market. At the time of this writing, the S&P 500 is down more than 15% year-to-date and talks of recession and inflation have been putting immense pressure on stocks.
Brandon Turner, the host of the BiggerPockets podcast and real-estate investor / entrepreneur, said it best: There are four powerful wealth-generators when investing in real estate:
Cash Flow - This is simply the net income (usually in the form of rent) minus your expenses (usually in the form of a mortgage payment to include taxes and insurance).
Mortgage Paydown - Every month your tenant is paying down your mortgage. This amount is the principal from your mortgage payment. You don't typically see this money in the form of cash flow, but it is still contributing to increasing your net worth.
Appreciation - Real estate appreciation is the increase of your home’s value over time. This is not something you can control and is usually set by the local real estate market that your property is located in as well as market conditions. Similar to stocks, holding for real estate generally results in increased appreciation over the long term.
Tax Benefits/Depreciation - The IRS provides many tax benefits for real estate investors. Simply put, depreciation merely reflects the present value of an asset by accounting for any wear and tear of a building or structure during its useful life. This means you can deduct this wear and tear when filing your taxes, and reduce your tax liability as the depreciation value can be deducted from any earnings/rent.
Brandon Turner explains the Four Wealth Generators of Real Estate:
Real estate investing is a tried and true way to generate passive income, and is also why 90% of millionaires today have built or maintained their wealth through real estate.
So how do you get started? This can be a daunting endeavor since there are always horror stories of tenants not paying on time or the thought of having to spend all your free time managing repairs. Here are some ways that you can ease your way investing in real estate:
House Hacking - This is one of the easiest ways to get started. This is a method that involves purchasing a property and renting portions of it to cover most, if not all, of the mortgage payment. You can do this by buying a duplex and renting one the units out. Another way is to purchase a property with a basement and renting the lower level out. The goal here is to be the owner and landlord at the same time to get the experience of managing tenants, leases, and marketing your property.
Save, Purchase, and Rent (SPR) - This method is the slowest, but is an easy way to transition. It involves purchasing a home for you and/or your family, and simply saving up for a down payment on another home. When you have saved enough for the down payment (plus reserves) and are ready to 'upgrade', you purchase the next home and rent out the current one. The other benefit for this and the house hacking method is that you can use conventional loans to purchase the home with more favorable interest rates than if you purchased a rental property outright.
AirBNB - This is a variation of the house hacking strategy where you rent out a room or portion of your home using AirBNB. This involves a bit more work/expenses for the frequent turnover of tenants, since AirBNB provides a platform for short-term rentals (STRs).
Real Estate Syndications - Real estate syndications are one my favorites, as they provide a truly hands-off and passive way to invest in real-estate. These typically involve becoming a Limited Partner (LP) in a real-estate deal where the sponsor aggregates funds from a pool of investors to acquire, renovate, and ultimately exit a property all while providing the investor (you) cash flow and a return on investment. Real estate syndications can provide a good way to diversify into other asset classes and markets such as multi-family properties and commercial real estate. However, there are downsides to syndications: they are only available to accredited investors, require a high minimum investment amount, and your investment is stuck in the deal for the length of the deal (typically around 5 years).
Crowdfunding - Similar to Real Estate Syndications, crowdfunding platforms like Fundrise allow you to purchase a portion of interest in in a real estate property or project, similar to owning shares in a company. This allows you also to diversify real-estate investments over different asset classes, geographic locations, and risk-reward profiles. The main difference is that you do not necessarily have to be an accredited investor and they typically do not require a high minimum investment to get started.
So, there it is. While there are many reasons you can convince yourself of what can go wrong or why this isn't the best time to invest, remember that real estate is a marathon and not a sprint. It requires time and patience to allow the magic of compounding to work, so the sooner you get started the better. Get started and let the momentum propel you to new heights!
Not convinced? Reach out and let's talk about your personal situation.