096: The 5 Pillars of Real Estate – Friday Fundametals
Getting started investing in real estate can be a mental challenge for some people. There are people who know they want to invest in real estate, but get caught up in the weeds looking at only one page of the book. So with that, today we’re going to paint a full picture of how real estate investing can benefit you, and provide you with some points to focus on.
Real estate investing checks many boxes. Previous guest Keith Weinhold breaks down the 5 ways real estate can pay you. These are:
- Cash Flow
- Appreciation
- Principal Pay Down
- Tax Benefits
- Hedging Inflation
By now, we all understand at least most of these. Cash flow is the money left over every month after collecting rents, and paying all of the property’s expenses. Appreciation is the increase in value of real estate due to rising prices, inflation, supply & demand, and a number of other factors. When a tenant pays rent, they’re actually paying your mortgage for you. Part of this mortgage is the principal loan balance. Every month that tenant pays your debt for you. The tax benefits of real estate are an often overlooked benefit. The IRS allows you to depreciate an asset over its lifespan, therefore giving you a phantom deduction.
Inflation erodes the purchasing power of your dollar. 10 years ago you could by a movie ticket for $5. Today, a ticket to that same movie theater might be $9. Inflation has the same effect on your long term mortgage. That $500 mortgage payment today, which you have locked in for a 30 year period, will become much easier to pay in 5, 10, 15, and 30 years. Combine that fixed rate mortgage with increasing rents over time, and you can start to see why locking in long term, fixed interest rate debt protects you from inflation.
It’s important to figure out which of these 5 pillars are the most important to you. Do you want to replace your earned income with passive income in the near future? Then investing for cash flow would make the most sense. Perhaps you just want to diversify your retirement savings. Then investing in historically appreciating markets with good job growth projections and population immigration is the best approach. If investing for tax benefits is important, then buying real estate at your favorite vacation destination might be advantageous to you, as your vacation could become partly tax deductible.
Beginning and season real estate investors alike can get caught up only looking at one aspect of real estate investing. Perhaps this is appreciation, or cash flow. Understand all of the ways in which you can financially gain from investing in real estate. Make the most of these 5 financial foundations and you’ll be on your way to wealth and financial freedom!