Owning your own home is an indicator of many life stages: Independence, adulthood, fiscal responsibility. By owning your own home, you are actively investing in your future foundation rather than sharing your financial future with a landlord.
Did you know, though, that owning real estate other than your home can also play an important role in building wealth—and this type of investment is different than the investment in your home. While you are paying the mortgage on your home, the only fund you have supporting that mortgage is your personal income. Real estate investment operates differently and can help you build wealth through a variety of avenues including passive incomes, long-term growth, and portfolio diversification.
One of the key advantages of real estate investing is the potential to generate passive income. Rental properties, for example, can provide a consistent stream of income that requires relatively little effort once the property is properly managed. There is a formula in real estate to help you determine whether or not you can afford to invest. Generally, you need access to funds that will cover 15-25% of the purchase price of the property. The rental rate will be determined by multiple factors and should cover the management of the property, real estate taxes, and repairs, among other things.
Investing in real estate allows individuals to allocate their capital in a tangible asset that has the potential to appreciate over time. Unlike other investments, real estate provides both income and potential long-term growth. By purchasing properties in strategic locations and managing them effectively, investors can generate substantial returns on their initial investment.
The opportunity, though, to create passive income is a good one if research is done to find the right property. Do you want to own and rent a condominium? A vacation home? A multi-family house? Or an apartment building? All of these have their own unique challenges and rewards. Understanding your own personal interests help point you in the right direction. By following real estate trends, being aware of neighborhoods and their assets, and charging a fair rent that also allows you a profit, rental property can add to your wealth portfolio.
Historically, real estate has demonstrated the potential for long-term appreciation. Property values can increase over time due to various factors, such as market conditions, development in the surrounding area, and improvements made to the property itself. Property appreciation allows investors to build wealth through capital gains, which can significantly contribute to long-term financial goals. In other words, your investment is working for you all of the time. Depending on how long you want to hold onto it sometimes influences the overall growth opportunities.
The longer you own the property, the greater the overall cash flow. Cash flow refers to the income generated from an investment property after deducting operating expenses and mortgage payments. Positive cash flow occurs when rental income exceeds expenses, resulting in a surplus. Positive cash flow properties can contribute to monthly income and be reinvested to acquire additional properties, thereby accelerating wealth building.
Passive income from real estate can supplement other income sources and contribute to long-term wealth accumulation. In many cases, rental income, especially if it is supplemental to your primary income, can be used to make other real estate investments. This means your wealth portfolio can have a variety of layers. Maybe you want to invest in a commercial real estate opportunity. This is generally a passive way to create income. Your money is working for someone else. While you cannot divest yourself of this investment quickly, it is generally a good way to create long-term growth and can generate income of 10-15% or more of your original investment.
Creating a portfolio may well be crucial for wealth building. A portfolio that includes various types of properties, such as residential, commercial, or mixed-use, can help spread risk and capture different income streams. Additionally, a well-balanced portfolio can provide stability and mitigate potential losses during market fluctuations. In other words, you are protecting your wealth by being open to a variety of opportunities. And in building a portfolio, you are creating equity—just like the equity in your house. It allows you opportunities to refinance, to leverage other properties for investments, and to sell the property at a profit.
So the big question is this: can you afford to invest in real estate? Probably. Generally, the financial threshold might be lower than you think. Remember, you are letting a property work for you, just like you work for someone else. The best thing you can possibly do is talk to a REALTOR®. They are the experts, and no one is better at helping you figure out the best path forward than the Yosha Snyder Group. They want to help you build your future and will assist you on the way to securing a strong financial foundation.