In my experience, people become entrepreneurs for several reasons, including: To achieve financial freedom Build a business to leave to family The ego satisfaction of building a successful business Yet, most overlook what is arguably one of the fastest, most proven, most profitable businesses there are, real estate investing. Over the years, more people became millionaires by investing in real estate than any other business. Guess it is too close to home for many, like the Acres of Diamonds story. One of the big reasons real estate investing doesnt get considered, is that many people believe it takes a lot of money to get started. Another group of people have heard of the difficulties in managing rental properties and dont want any part of them. Yet another group disdains real estate investments because they are supposed to be illiquid. These issues, though real, are not insurmountable, but are not the subject of this article. Here, we are here examining the tremendous wealth building capacity of real estate investing for the budding entrepreneur. First, lets make sure we are talking about the same thing. There are many ways of making money in real estate, but not all of them are classified as real estate investment. If you buy undervalued properties and sell them for more; or buy properties, fix them up and resell them, these are active businesses and not investments. A real estate investor acquires properties as is or fixes them up and holds them for income for the long term. Let see what makes this such a great way to achieve financial independence. Leverage Whatever amount of money you are starting with can be magnified, or leveraged with bank financing by a factor of ten to one, or even infinitely! Your $25, 000 cash investment can purchase a quarter of a million dollar asset. Your $100,000 investment will give you ownership of a $1 Million dollar asset, right out of the box! Few industries enjoy such trust from the banking establishment. Ever try to get a loan from a bank to start a restaurant? These days, if you have good credit, you can get started with Zero Down, just as they say on late night TV. As a matter of fact, I am currently in the process of buying a $260,000 3 family investment property in Philadelphia with 103% financing! High returns Real estate builds wealth in many ways. Positive cash flow, monthly passive income exceeding expenses Your tenants pay off your mortgage, thereby increasing your equity in the property every month! Appreciation, or increase in value of the property over time Tax shelter-the depreciation deduction can cut your tax bill, increasing your net income Lets look at appreciation a little closer. If the property you bought for $100,000 with 10% down appreciates 5% to $105,000 in the next year, (the historical appreciation rate in the US), this represents a 50% return on your $10,000 down payment! Not your average stock market return. But wait, there is more! Say you collected $300 per month positive cash flow during the year, or $3,600 and paid off $800 of your mortgage. That is $4,400 more or another 44% return on your cash. Tax benefits You are able to write off not only your mortgage interest expense, your real estate and insurance costs but you can write off depreciation as well. The government allows you to write off depreciation, a certain percentage of the buildings value against its income each year. This expense can partially shelter your cash flow. Or even be used to reduce the income from your other sources of income, like your job. In the above example of the $100,000 house, your depreciation allowance would come to about $3,000 per year, which, if written off against your salary, would yield another $1,000 in cash if you are in the 33% tax bracket. The total return on your $10,000 investment would therefore be: Appreciation $5,000 Equity build up $ 800 Cash flow $3,600 Depreciation $1,000 Total return $10,400 That is a 104% return! As an investor, you can shelter 100% of the gain from taxes when you sell your property, allowing you to invest all the gain into the next property! Summary As far as the potential drawbacks mentioned above, management and illiquidity, they can be handled. There are management companies to handle property management and illiquidity can be managed like any other financial variable. Dont step over the real estate Diamonds at your feet in pursuit of entrepreneurial success. The low start up costs, the bank-ability of real estate and its high, tax favored returns to most other businesses can catapult you to unbelievable heights in a few years. I was able to retire from my National Sales Manager job in computers in only 5 years after my first real estate investment! |
