Throughout time, owning real estate has always been a sign of wealth. Over the centuries, those who controlled the real estate were typically those that also controlled the government, economy, and most of the population. Sadly, in past centuries, the majority of the population that did not own real estate were the Serfs – an agricultural laborer bound under the Feudal system to work on his lord’s estate. Feudalism and Serfdom was the law of the land for most of the European nations and one of the main reasons why so many immigrated to the United States where land was actually available to be purchased or claimed fairly and legally. All the farmland and most of the housing was owned by the feudal lords and the rest of the population worked their land and paid them rent and never had a chance to increase their position in the world. And the feudal lords lived off the passive income and the efforts of all the serf population that were enslaved by that horrible economic system. With the rise of the industrial revolution, the serfs were taken from the farms to the factories and coal mines, and they became perpetual renters. The wealthy still owned the real estate and had the power. Today the story is not much different. There is a lot of opportunity and anyone can work home and buy real estate, but it is much better to be a landlord than the renter.
In this article we are going to talk about some of the best reasons to use real estate to grow your wealth. Real Estate is an outstanding financial tool. It may not be as fast moving or flashy as trading stocks, options, or the Crypto market, but there are a lot of financial benefits. I’ll outline the three best reasons I see to own real estate and the passive income benefits of each one.
Well, built real estate has lasting value and can be improved to increase in value.
Don’t even get me started on the mess the US government has made of printing money and taking the value out of our dollar. Since the 1970, our dollar has been inflated to the point that the purchasing power of the dollar has lost more than 80% of its value. In 2021 inflation spiked significantly and it does not seem like our goods and services will get any more affordable anymore, unfortunately just the opposite. There are only a few things to do with your money to fight off inflation or protect your wealth from inflation. Invest in or own hard assets, scarce assets, and assets with limited supply. These types of assets tend to go up in value with inflation and the increase in value of these assets that you own can increase your wealth to be able to deal with the higher prices you’ll have to pay. An example of these assets is Stocks, Bitcoin, precious metals (Gold, Silver, Platinum), and real estate. In many markets, real estate has gone up by 20 to 50%, in some markets even more. Over the last 100 years, the real estate market has had a few declines, but overall, it has been a great store of value that also has increased very well in value.
I know the most about residential real estate and have owned residential real estate since 2003. I’ve owned some less expensive real estate, and other real estate worth well over $1 million dollars, and even the cheaper real estate has been a good store of value. And, that value can be increased by improving and caring for the home or property that you put your time, money, and effort into. Although they can always build more real estate, the population has been growing at a faster rate which keeps the supply and demand in check and has allowed real estate to appreciate in value well over time.
There are plenty of TV shows about how to improve the value of real estate, so I won’t go into that here. Suffice it to say, since there is so much value in real estate and housing that you can typically take an old, run down property, and put money and work into it and increase the value by more than the cost of materials and labor.
The first way to own real estate is for your own housing and most of us have to purchase a home through mortgage financing as the cost of housing units is more than our savings. So, we pay for the home through a monthly payment, yet unlike rent, we are slowly paying down the mortgage and eventually getting to a point where we own the home free and clear with the exception of paying taxes to the government and your insurance proceeds to protect your asset. Paying a mortgage instead of rent is a passive way for you to grow your wealth through principal balance pay down and the appreciation of real estate is another passive way for you to grow your wealth. You passively gain more equity from the combination of these passive activities. And real estate is tangible.
Other people’s money and leverage
The second way that we can own real estate is through owning rental units. We all know that the rich get rich from other people’s money. Maybe we buy our first home, and it is a smaller more affordable town home without a yard and closer to the city. We live there for a few years and start making more money and then want to move to a home with a yard and in a nicer suburban neighborhood. We decide to rent our townhome and ideally can rent it for $2000 when our mortgage payment is only $1700. And maybe we find ways to increase our income and savings and can purchase another rental property. No matter how we obtain more real estate, the financial beauty of real estate is how we can passively be gaining more equity through mortgage pay down and value appreciation and can be doing it with other people’s money. With the 11 housing units that I own, I gain more than $5000 per month of equity from the mortgage pay down that I don’t even have to pay for. I passively gain equity in those housing units and my renters put in the money to pay down those mortgages for me. Even better yet, I receive additional cash flow above and beyond the mortgage payments that I can put in my savings, or invest in other assets, or set aside to improve the real estate when needed to add more value to the homes I own. All of this is passive to me and grows my wealth slowly without much effort on my part.
I’m not a professional real estate investor, maybe someday. But there are professional real estate investors that do use other people’s money to exclusively buy real estate and build in enough profits to pay themselves from other people’s money. A good example of this is a real estate investor finding a great deal on a large apartment complex and using investors to buy the property and for the effort of finding the deal and managing the investment, the real estate investor can take some ownership and be paid a percentage of the cash flows without investing any of their own money. This is pretty much an infinite return on investment as there was no money invested, just time to find the right deal and help pool the funds together to buy the apartment complex. Real Estate has this type of potential to grow wealth even without investing your own funds.
The other way that you can use other people’s money in real estate is through using the bank’s money and leveraging your down payment. Because most real estate is so expensive and holds such value, banks and mortgage companies are happy to lend on it if you have met the required down payment. Whether that be 5 or 25%, you can put down some of your money or money from other investors and use the bank to finance the rest of it.
Passive Income / Passive growth
Real Estate has endless passive income and passive growth aspects that make it a great long term wealth building investment. I’m a big fan of owning real estate and am working to own more and increase my passive income cash flow. The biggest problem in buying real estate is the amount of down payment needed and upfront capital. Furthermore, to own real estate responsibly, it is important to have your personal finances in shape. Having a firm financial foundation with stable income and reserves set aside for unexpected problems is key to make sure you can make the most of your real estate and set yourself up for passive income and passive growth. I’ve spent over $800,000 on the real estate that I’ve bought over the years and with home prices going up ever more, I’m sure that number will continue to go up. If you want to both firm up your financial foundation and build passive income without having to save up a ton of money for a real estate down payment, then register here for a 25-minute business plan call to learn how we can work together and grow your passive income.
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