I love real estate investing.  After reading Rich Dad, Poor Dad in my late teens, I knew I was going to own rental properties across the country.  While it took over a decade to start after reading the book (read about that here), I was finally able to make my dream a reality.

Real estate investing is an effective wealth-building strategy because there is a multitude of ways to make money in the process.  For example, you can:

• Buy distressed homes, renovate them, and sell at a profit (Flip)
• Rent out the property and generate cash flow (Landlord)
• Rent out rooms in the property to several tenants to generate cash flow (House hack)
• Purchase the mortgage and earn income (Notes or Loans)
• Pay the back taxes on a property and own the property if the owner doesn’t pay (Tax Lien Sales)
• And More!

In addition to the various ways to make money, the government favors real estate investors.  You always know what the government wants you to do by the tax incentives they offer.

Why does the government provide incentives to real estate investors? Besides the fact that the current President has tons of real estate, more importantly, they provide a tax incentive because you are providing a service.

You are providing one of the fundamental needs of every individual – housing.

Because the government wants you to provide housing, they offer you multiple incentives that can help you create wealth.  In addition to the government providing incentives, there are a few other benefits as well.  Here are 5 benefits of real estate investing.

Cash flow

Cash flow is the amount of money received after all operating expenses have been paid.  In real estate, they call this mailbox money. This is one of the fundamental criteria you should evaluate to know if you should purchase a property or not.

The property must pay for itself and pay you.

One primary way to generate cash flow is through rental payments.  Investors can also earn cash flow through parking fees or operating a laundry facility on the property.  This additional stream of income should pay the operating expenses of the property (maintenance, taxes, insurance, etc.) and provide you additional income to invest.

This additional income can be used to reinvest into the property, increase your income, or saved to purchase more rental properties.

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Equity

“Pay Me in Equity.  Watch me Reverse Out the Debt.” – Beyonce’

When you purchase a rental property, you will continue to gain equity in the asset as the tenants pay down the mortgage.  As the mortgage decreases, your net worth increases.  You are leveraging other people’s resources to increase your net worth. This is the basis of capitalism.

Typically, when you purchase a property, there will be equity in the property.  Equity is calculated as the difference between what the property is worth versus what you owe.  For example, if a home is worth $100K and your loan is $80K, then you have $20K of equity in assets.

Depending on how much equity is available in the property, the equity can be converted to cash to purchase additional properties.  This process is called a cash-out refinance.  Equity can also be used through a home equity line of credit (HELOC).

Appreciation

In addition to building equity in the property as the mortgage decreases, the asset can also appreciate. Unlike cars, houses typically appreciated.  Appreciation increases the value of the property usually influenced by market conditions or improvements to the assets. However, for commercial properties (5+ units or a business), owners can force appreciation on the unit by improving the property and increasing the rent.

Appreciation is a bonus and not always guaranteed. A prime example would be during the Great Recession in 2008.  The housing market collapsed and a lot of properties lost their value.  However, since the recessions, the prices of homes have increased.

So, when evaluating a real estate deal, appreciation should be the cherry on top of a deal, not the primary factor in your decisions unless you are purchasing a commercial unit (5+ units) that you can create value.

Depreciation

Typically, deprecation sounds like a bad thing, but not in real estate investing.  Regardless if the market is up or down, your rental property will depreciate in the eyes of the IRS.  Depreciation is a special incentive for business owners and real estate investors.

It is considered a paper loss, meaning the value of your property is not actually declining, but since someone is using your asset, there is some wear and tear that is involved. Even if you have not physically renovated the place, the IRS allows you to depreciate your asset which decreases your tax liability. Depreciation allows you to reduce your tax liability without specific write-offs.

Additional Tax Write-Offs

In addition to writing off depreciation on your taxes, the IRS also allows you to deduct operating expenses for the property.  This is huge and one of the biggest differentiators in owning your own home to owning a rental property.   There are very few tax advantages to owning a home. For example, if you own a home, and something needs to be repaired or replace (ex. a refrigerator), you will have to pay it with no tax write off.

However, with a rental property, every expense that you need to operate your place is a write-off. Other than mortgage interest and property taxes, homeowners only have these two options.  However rental property owners have those options, depreciation, and a variety of other operating costs to include transportation for traveling to and from your property.

Thank Uncle Sam for making maintaining the property a tax advantage.

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Disclaimer – I am not a tax accountant and these examples of write-offs. Work with your tax account for deductions for your specific situation.

Conclusion

Here are 5 benefits of real estate investing that helps you create wealth.  Not only are you able to provide a basic need for your community, but you are also able to create wealth for you and generations to come.

Consider real estate investing as a part of your wealth-building strategy.

That’s getting your FINANCES ON POINT.