It’s no secret that real estate ownership and real estate investing is one of the best ways to generate wealth and achieve financial freedom. If you’re asking yourself why real estate investing read on to learn why this maybe a great choice for you.
Real Estate Investing Versus Real Estate Ownership
It’s important to differentiate between owning real estate versus investing in real estate. For many people, the homeownership decision comes down to an emotional decision in which they want security, stability, a sense of personal pride or they want to impress others by being a homeowner. Our society looks on homeownership as something that people do when they’re successful and so by proxy. If you own a home you must be successful.
Real estate investing however is all about making a return on your money. Investing in real estate is a business and it’s one of the most common businesses done in America today. Most small landlords do not run their operations as a legitimate business, but they should. So out of all the different businesses that can be run, why is real estate investing so popular? It comes down to these poor reasons:
- Real estate investing is very common
- Real estate investing is sexy
- Real estate investing is somewhat passive
- Real estate investing provides tax benefits
Real Estate Investing is Very Common
Real estate investing is not necessarily easy, but it is extremely common. In any city in almost any town, you can find real estate investors. These individuals have meetups, have social media branding around real estate investing, host networking events and some even have paid programs in mentorships. I’m not aware of any other industry in which there are so much resources and publicly available information on exactly how to run a business. Real estate investing has a ton of exposure and is a really well worn path. This means that any challenges that you run up against you can easily find someone who has overcome that challenge and this goes a long way for an entrepreneur new in their career trying to figure things out. This also gives you a lot of options. Whether you need a lender, a real estate agent, a contractor, or some other professional in the real estate industry because it’s so ubiquitous, you can almost always find somebody to support you and your endeavors.
Real Estate Investing is Sexy
Go ahead and tell your friends about your investments in 16th century Gothic architecture paintings and watch their eyes glaze over. That sounds terribly boring and does not get anybody particularly excited. But tell somebody you’re a real estate investor and all of a sudden their minds go a totally different direction. High spending, luxurious travel, riches and wealth I’ll start to come to mind.
Now you and I know that it is only the minority of people who actually live so high on the hog. Most real estate investors are small mom and pop landlords that have saved up money over the course of many decades and invested slowly to a position of relative financial abundance.
But that doesn’t stop people from assuming that you’re the next Grant Cardone.
Not only is it really fun to be invested in something which most people find fascinating, but it’s very helpful when you’re going to raise money from friends and family. People understand real estate. They’ve lived in houses. They get it. They may not understand the nuances of how to be a real estate investor, but you don’t need to spend a ton of time convincing people that this is the next best, brilliant business idea. Show them a track record and a good opportunity and they’ll lend you money.
Real Estate Investing is Somewhat Passive
Most real estate investors I know myself included did not get into the real estate investing business because we were just in love with HGTV. Sure, there are fun things about the business such as design and seeing a renovation come to life. But we got him this business to make money. If any real estate investor tells you any different, they’re full of shit.
Real estate investing seems like an awesome passive income idea. Simply buy a house, make sure that the finances will work out so you’re making monry. Then sit back and wait for the money to Roll in and you’re rich. Sounds nice!
This is not how real estate investing actually works in reality. Anybody that tells you that it’s completely passive is either lying to you or is simply a limited partner at a much larger deal. There are ways to invest in real estate such as buying REITs, but for the most part there’s no completely passive real estate investment.
Real estate investing has become so popular as a passive income idea because there is some truth to that. You don’t need to show up every day at a property nor deal with tenants on a day-to-day basis. In fact, I have property managers that oversee my units and I haven’t spoken to a tenant in over 2 years.
Real Estate Investing Provides Tax Benefits
The biggest reason that you should invest in real estate though is because of the awesome tax benefits that it provides. To understand why this is, we need to understand a little bit about the tax code in America.
As a W-2 income earner you earn your money and then the government taxes it. You get to take home whatever is left.
But businesses operate the opposite way. They make money and spend money. They are then taxed on whatever is left.
Real estate investing makes money in four different ways: cash flow, appreciation, loan payoff, and depreciation.
Appreciation vs Depreciation
Appreciation is when you’re asset goes up in value so you would think that depreciation is when it goes down in value. That’s only partially correct. Depreciation is a paper loss on your taxes and balance sheet. It represents the loss of utility for good that can break down. What this means practically is that you can make money on your real estate operations, but according to the government you’re actually losing money because the property is becoming worth less over time.
When you hear rich people talk about paying. No taxes but making a ton of money. This is an example of how it works. Instead of getting a paycheck as a W-2 income earner, they are collecting proceeds from their company operations. Because their properties are losing money faster than they are spitting off cash flow in the government eyes you’re not making any money.
Practical Impact of Depreciation
Your property can be going up in value, Rents can be increasing and you can get all of the other three benefits but still be losing money according to the government And so owe no taxes on your income.
You need to own a business that has assets that can be depreciated to do this, but it doesn’t have to be in real estate. Real estate investing is probably the easiest way to do this. You could also start a heavy equipment rental company too, for instance, but that is a much less tried and true path.
This isn’t always easy to understand conceptually. But once you see it work in real life, you’ll understand I real estate is one of the most powerful wealth building vehicles around.
I should mention that the government will recapture this tax savings once you sell the property, but there are ways around this as well. A 1031 exchange will let you avoid these taxes right now. The taxes are still owed, but as long as you follow all of the 1031 rules, you don’t have to pay that money right now. You can just keep kicking that can down the road your whole life and once you die your heirs inherit property at a stepped up basis. Basically this entire depreciation recapture tax just disappears.
Conclusion
So there you have it. People get involved in real estate for many different reasons but people get involved in real estate investing because they want to make money. Real estate investing is one of the most tried and true paths to get there and the government will partner with you by providing some awesome tax advantages to do so.
So what are you waiting for? Get out there and buy some real estate today and if you have any questions drop a comment or a line!
