There are many different ways to build wealth. Some paths are more viable and predictable than others. There is a lot of hype surrounding real estate. Does it live up to the hype? Is it a reliable asset class to build wealth?
Yes, real estate is a viable option to accumulate wealth. Income-producing real estate offers its owners benefits of compounding growth, tax benefits, and cash flow.
How Long does it take to Build Wealth with Real Estate?
Most strategies for building wealth in real estate are considered get-rich slow plans. They take advantage of capital appreciation, tax benefits, and rent growth to give high payouts to their investors. These strategies can take years before they pay off.
How Much Wealth Can you Accumulate with Real Estate?
Real estate is the world's largest asset class. There is basically no limit to how much wealth you can accumulate with real estate.
Many Billionaires Made their Fortune in Real Estate
Real estate was the 3rd most common way for someone to be on the Forbes billionaire list. 10% of billionaires made their fortune through real estate. This followed behind Finance and Retail.
What are some Methods to Build Wealth with Real Estate Investing?
There are many niches within real estate investing to choose from. Ultimately it comes down to which one fits your personality, temperament, and goals the best.
Here are the most popular ways to build wealth in real estate investing:
- Commercial real estate
- Multifamily real estate
Investing in Single-Family Properties
When investing in single-family properties, you have the choice between turnkey rental properties and buying properties and leasing them up yourself.
Usually, when investors are looking to buy a single-family rental property, they look for a mixture of positive cash flow and appreciation.
Investing in Multifamily Real Estate
Multi-family is one of the most popular property types for real estate investors to accumulate wealth. As opposed to many commercial real estate asset classes, there is diversification in the renter pool. Instead of renting out 100 or 30% of a property's space to a single tenant, multifamily tenants usually only occupy one unit.
Multifamily real estate is usually traded through a commercial real estate brokerage.
Investing in Syndications
Syndication is essentially a partnership between passive investors and an active investor who is organizing the deal. The investor organizing the deal is called a sponsor. Sponsors can employ various investment strategies, so picking one that is aligned with your goals is important.
Almost all syndications are looking for accredited investors. There are a few classifications of investment syndications that could be looking for sophisticated investors or could be a type of crowdfunding that would not require their investors to be sophisticated.
Most syndication sponsors are looking for accredited investors because otherwise, they would have to raise capital from far too many individuals.
Usually, syndications pay out dividends as the underlying asset cashflows. When the property is sold or refinanced, then there is usually a return of the principal plus any gains to the investor.
Investing in Crowdfunding
Crowdfunding is a great option if you are looking to make passive income from real estate.
What is crowdfunding?
Crowdfunding is a way of raising capital from a large number of small investors.
In real estate investing, crowdfunding platforms are a place where you can make real estate investments with meager minimum investments.
What are the Benefits of Accumulating Wealth with Real Estate?
What are the benefits of real estate, and how do wealthy people utilize them to grow their wealth?
1. Tax Benefits
When you sell a real estate investment, the profits can either be taxed as short-term or long-term gains. Being categorized as long-term capital gains tax can greatly reduce your tax burden on profits from the sale and benefit from investing in real estate compared to investing in building a business.
One great benefit of building wealth with real estate is the ability to defer taxes. With tools like 1031 exchanges, and opportunity zones available to real estate investors, it is possible to reduce the tax liability for real estate substantially.
2. The Power of Compound Interest
Albert Einstein said that "compound interest is the 8th wonder of the world."
Real estate has lots of opportunities to reinvest returns for growth. Where a closely held business may have few ways to earn more with reinvestment without diminishing returns, real estate usually can scale more linearly in that regard. This makes it possible to take advantage of compound interest.
3. The Power of Debt
Debt can be good or bad for your situation. You may hear financial experts talking about "good debt" and "bad debt" all the time. Over leverage is certainly a way to destroy wealth if you get into a tight spot and find yourself overleveraged and having to sell off assets quickly.
But how can you use debt to build wealth?
Wealthy people use the concept of positive leverage to build wealth. Positive leverage is where the return on an asset that you are borrowing for is higher than the rate of interest of the loan.
A quick example is if you buy a property for $1,000,000 that has a 10% return with a cash purchase. Let us say you finance 50% of it at a rate of 5%. You will now be paying $25,000 of the $100,000 annual income as an interest expense. The return of $75,000 on the $500k investment is 15%. In this example, because of the loan, the rate of return went up by 50%!
4. Forced Appreciation
Forced appreciation is a great way to accumulate wealth in real estate. Once you have properties, you can turbocharge their returns by injecting more capital into them.
If you then capture the forced appreciation through selling the property or refinancing it, you can continue to take advantage of compound interest when you reinvest into another property.
5. Market Appreciation
Market appreciation is when after you have decided to buy a property, you then build wealth simply by holding the line and not selling it. That is pretty simple, right?
The thing wealthy people know about market appreciation is that not all areas will appreciate evenly. While it is extremely challenging to pinpoint a single location that will appreciate the fastest, as a whole, investing in areas with strong growth fundamentals has been a viable strategy for many investors.
Are forced appreciation and market appreciation opportunities mutually exclusive? Nope! Strong market appreciation creates a volatility that creates opportunities for forced appreciation.
6. Real Estate is Scalable
Some businesses, industries, and opportunities have serious problems maintaining their returns as they are scaled. They could become much more complicated to manage or suffer from diminishing returns of finding lucrative markets.
An advantage of real estate that wealthy people like is that it can scale with them. They can start off investing in small multifamily properties, putting money into a syndication, buying up single-family houses, or investing in small commercial properties. As they grow, the size of their investments can grow while benefiting from the skills they learned while investing in the smaller properties.
Just how scalable is real estate? Last year Harbor Group bought 13,000 apartments in a single 1.85 billion dollar deal.