Real estate is in a class of its own when considering other investment assets because compared to other asset classes, it builds wealth more consistently. The statement holds good despite the 2008 financial crisis experience still fresh in our minds when the real estate market was in the doldrums, and it was common to see almost 25% of real estate assets up for sale. However, the market recovered in much less time than expected. Today, real estate investment has proved to be a great wealth creator, according to the experts at Gray Capital’s services that have helped many people build massive wealth by investing in real estate.
How the wealth grows will become clear on going through this article.
Appreciation
In plain sight, appreciation of the property over time is the most visible mark of wealth creation as most wealth flows from it. At times, people stand to make windfall gains from real estate assets, which they term as a home run. Despite price fluctuations, real estate values have always headed north in the long run, and the trend would remain. To calculate the ROI on real estate investment, you must consider the down payment made to acquire the property through bank financing, in which case you would experience double return, which translates into 100% gain.
Depreciation
Depreciation does not mean erosion of the asset value. Instead, it is a term used by the tax professionals to describe your ability to write off a specific portion of the asset every year. As a result, the tax you pay for the money you make from the investment reduces every year, which protects your wealth as it keeps growing. According to the tax rules, you can write-off 1/27.5% of the asset value every year against the income generated from it. If the amount is more than the cash flow, which happens often, you need not pay any tax.
Cash flow
Cash flow for real estate investors is the money left with you after collecting rent and meeting all expenses like mortgage and property tax payment, maintenance insurance, and property management fees. For generating a positive cash flow, your costs must be less than the total rent collected. From stocks to bitcoins to jewelry and art, you hope for appreciation and gain by selling it later in most investments. However, it involves some hard work to achieve appreciation as it happens if you buy a poorly run business, which you hope to give dividends with time. Investing with an eye on cash flow is the underlying principle to create wealth. Since asset appreciation for real estate happens automatically due to the market forces, you need to maintain and manage the property well to enhance the value and ensure favorable cash flow.
In addition to rental income and cash flow, another attraction for real estate investors is the aspect of leverage. It is easy to leverage real estate assets from the financing angle, and the terms are unbelievably favorable compared to a loan. You can buy real estate and then improve its value and even cover your entire capital through refinancing, which significantly boosts the ROI.
