Do you want to increase your wealth if yes then chances are you've considered
different ways to increase your income and improve your ability to save however
obtaining a high paying job or automating your savings will only
contribute so much towards you future rich lifestyle and one asset that many
people neglect when growing their wealth is real estate maybe it's due to the
high upfront costs of a down payment or the assumption of that in the form of a
mortgage but many people shy away from this asset class not realizing how
lucrative buying and holding real estate can be and in this video I will share
with you four reasons you must invest in real estate and if you're new to the
channel then hit the subscribe button below for more life-changing content now
before we get into the financial benefits of using real estate to grow
your wealth I think it's important to go over a few reasons why owning real
estate makes sense as an investment option you see from a common-sense
standpoint there are some surefire reasons why real estate makes for a
great investment choice the first is that everyone needs to live somewhere
whether you were renting or owned the home you're in
we all need shelter as a basic human need and investing in an asset that is
needed by more than 7 billion people on earth just makes sense now while the
need for shelter grows as the population expands what doesn't grow is the space
for housing to be built the earth only has so much free space to build on and
as supply of houses decreases the prices of housing increases meaning that the
property you invested in will only rise in value over time not to mention unlike
digital assets no one can hack or copy your house it's a physical property and
as long as you maintain adequate insurance you can be sure to continue to
benefit from its appreciation over time now without further ado let's dive into
the four reasons that real estate will help you build your wealth and allow you
to build your dream rich lifestyle reason number one ongoing cash flow
let's use an example to illustrate the cash flow that you can obtain by
leveraging the power of real estate assume that you find a three-bedroom
home for $300,000 that you want to buy and rent a residential property of that
size in an average city can house roughly 3 people meaning that you can
have 3 different tenants under one roof or have a family inhabit your house now
chances are you don't have $300,000 in cash lying around and you must borrow
money from the bank in order to cover its cost this is normal but the bank
won't just give you the total value of the home you will have to contribute a
portion of the total cost through what's known as the down payment to avoid
private mortgage insurance you typically have to put down 20% of the down payment
yourself with the bank floating you the rest at these stated interest rate
therefore on a $300,000 home you need to come up with $60,000 for the down
payment and a few thousand dollars more for closing costs luckily you are a
diligent saver and have the cash on hand to cover this amount and accept taking
on a mortgage of $240,000 at 3% interest for 25 years using these numbers leaves
you with a monthly mortgage cost of roughly $1100 now when you own a house
you will also have to pay for home insurance and property taxes which
usually equate to one to two percent of your home's value or in our example will
be three thousand dollars a year split up over twelve months would increase our
fixed expenses to roughly thirteen hundred and fifty dollars not to mention
their upkeep costs that you need to bear as a landlord and these will run you
another 1% of the homes property value bringing us up to $1,600 a month in
fixed fees once you have these seats covered the home now becomes inhabitable
for a tenant or group of tenants which is where the revenue side of the
equation comes into play let's say you can rent that property for $2,100 a
month to a family of four every month you would be collecting $2,100 in rent
payments which would be offset by the $1,600 in fixed fees that property will
cost you for a net cash inflow of $500 a month
well $500 may not seem like a ton of money to profit per month when
annualized it's six thousand dollars that you otherwise wouldn't have but it
gets better that's six thousand dollars says you
returned on an initial investment of just sixty thousand dollars meaning that
the property is netting you a ten percent ROI another thing to keep in
mind when it comes to the cash flow produced by real estate is that over the
years rents will increase meaning that the $2,100 you are charging now will
become twenty two hundred and twenty three hundred dollars over time and with
your mortgage payments staying the same you will be profiting more and more
every single month reason number two equity formation when you break down
what it means to own a property from a financial standpoint you are effectively
paying down debt in exchange for full ownership of the unit in the example I
just used this will be the two hundred and forty thousand dollar mortgage that
you assumed when you bought the three-bedroom house so in effect when
you own a piece of real estate beyond the profits you may realize every
month you will also enjoy the equity that has been created in the home once
it is fully paid off the best part is that if you are renting out this
property then you won't be on the hook for any of the cost every time you
receive rent from a tenant part of that money is going to be going towards your
mortgage and when you go to sell the home once it's fully paid off all that
equity you've formed over the years will be yours to keep so after the 25-year
amortization period ends and you have fully paid off the property you will be
getting back $240,000 in equity which is roughly ninety six hundred dollars a
year in your pocket not accounting for the time value of money so when you add
that ninety six hundred dollars a year to the six thousand dollars in profits
you are receiving from your tenants every single month you will have a net
increase in wealth of fifteen thousand six hundred dollars remember when you
originally bought the home you only put down sixty thousand dollars which means
that before maintenance costs or repairs you will be realizing return of twenty
six percent that's much higher than the historical average stock market return
of 7% and while being a landlord can come with some headaches like chasing
rent payments or dealing with housing emergencies from time to time this is
worth the hassle if you can secure double-digit returns reason number three
appreciation now beyond just collecting rent and paying down your mortgage the
next way real estate can build your wealth is through appreciation
appreciation is defined as an increase in monetary value and it's when the
value of your house increases over time in the United States the historical
average of appreciation for residential properties has been 3.5% annually which
means that a year after buying your $300,000 home it would now be worth
three hundred and ten thousand five hundred dollars keep in mind that this
is just the average and that the appreciation rate could be even higher
depending on what city you live now you may be thinking that this
$10,500 rise in appreciation is a substantial gain in property value
however this is just the tip of the iceberg
let's look at this appreciation over a longer time horizon if we use a compound
interest calculator and put in the cost of the home which is $300,000 at 3.5%
over 25 years we get a future value of seven hundred and eight thousand nine
hundred and seventy four dollars for a total appreciation of four hundred and
eight thousand nine hundred and seventy four dollars this amounts to an annual
rise in value of your property of sixteen thousand two hundred and fifty
nine dollars so now lets tell you how much your property will be increasing
your wealth on an annual basis from a cash flow standpoint we know that you
will be collecting six thousand dollars a year in profits moreover you will be
building ninety six hundred dollars in equity via the payments your tenants are
giving you then with historical returns being used your home will be providing
you 16 thousand three hundred and fifty nine dollars in appreciation for a grand
total rise in your net worth of 31 thousand nine hundred and fifty nine
dollars that's a return of 31 thousand nine hundred and fifty nine dollars on
an initial investment of just sixty thousand dollars or just over fifty
three percent one thing to keep in mind is that this is not cash in hand every
year only the profits receive from rental payments will be money you will
physically possess as the rest of the financial benefit will be on paper as
financial experts would say now you are probably grasping just how lucrative
owning an appreciable asset can be but what might amaze you is how fast your
net worth rises as a result of the savvy investment decision you see there is
something called the rule of 72 which I've talked about in a past video and
it's an easy way to calculate how long it will take you for your money or net
worth in this case to double 72 divided by your annual return gives you the time
it will take in years to double your money given that you are realizing a
return of over fifty percent a year that means you will be doubling your net
worth consistently in less than two years and this is just an example where
you own a single property when you consider that you were earning six
thousand dollars a year in profits from your tenants in another ten years you
could buy another house with the sixty thousand dollars you've amassed and
duplicate this making process reason number four tax
breaks we've already gone over ways that real estate can make you money however
one thing many people overlook are the tax breaks that one receives when owning
a property these tax breaks include not only ways to reduce your taxable income
but methods to maximize the proceeds you receive when you sell your property when
it comes to your annual tax bill in the United States you can deduct all repairs
insurance legal fees mortgage interest and homeowner fees which unfortunately
are all costs associated with a home using our prior example that twenty five
thousand two hundred dollars you are earning annually as rental income which
is the twenty one hundred dollars a month we talked about earlier can be
netted against your costs in maintaining the property given that you'll be
earning a profit or rental property you will need to pay tax on a portion of
these returns what I suggest is that you put aside a large percentage of your
real estate earnings to cover your tax expenses this way when the textbook
comes you can cover its cost with ease and if you have over save for this
expenditure then you can keep the residual amount for yourself and use it
to buy your next property now there are two other ways of managing taxes that
will result in the highest returns possible when embarking on your real
estate investment endeavor and both relate to the disposition of your asset
if or when you decide to sell your property you will be incurring capital
gains which is the difference between the selling price of the home and its
initial cost so in our example we bought the house for $300,000 and if we were to
sell it years down the road for $500,000 then our capital gain is $200,000 paying
taxes on this difference could mean giving up tens of thousands of dollars
in proceeds which is where the primary residence exemption comes into play if
you live in a property for two of the five years prior to this position you
can sell the property and use your section 121 capital gains exemption
which allows you to avoid $250,000 in capital gains on the sale the real
estate in this example you have paid no tax and keep all the cash you make on
the sale the other tax management strategy is to use what's known as a
1031 exchange which allows you to sell a property and if you buy another property
within 45 days avoid the capital gains that would come as a result of the sale
either way you want to minimize your tax burden when
operating or selling a home if you want to maximize your overall wealth
thanks for watching if you want to go from the life you have to like you
deserve then hit the subscribe button now