Real estate is a great way to build wealth. It is said that 90% of self-made millionaires invest in real estate.
How does real estate build wealth?
There are many reasons that real estate builds wealth. Real estate is a great source of cash flow! The market rents should cover all of the expenses of a property including mortgage and interest, property taxes, insurance, and other expenses. Real estate also appreciates in value. This can be done by normal market appreciation and/or by forced appreciation (adding value to the property after renovations, increasing additional income, or reducing operating expenses).
Real estate also benefits from depreciation, which is a paper loss, not an actual financial loss. Depreciation helps reduce the tax burden and is completely legal! Leverage is also a great way to buy a property using some of your money and most of Other People’s Money (OPM). Banks and financial institutions will front the majority of the cost for a property as long as the property will cash flow.
As renter’s pay down the loan each month, the real estate investor is gaining equity. As appreciation occurs, the investor gains more equity. Cash flow, appreciation, tax benefits through depreciation, and the equity gain all work together to make real estate the best wealth builder.