Five Ways to Make Money is Better Than One
Real estate investing is the most powerful wealth-building tool available to the average person.
The reason it’s so powerful is: there are five ways it makes you money.
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Stocks, by contrast, only share one of these sources (two if you’re getting dividends).
Once you understand how all five of these income sources work, you will begin to see the tremendous wealth-building power of real estate bought and managed correctly.
I Said Correctly
Quick Disclaimer: These five income sources only apply to real estate bought and managed the way my mentors taught me:
A) with equity,
B) with cash flow,
C) in “bread and butter” neighborhoods,
and D) managed with best practices.
If your knee-jerk reaction is that real estate investing is too risky, you have not yet been taught how to minimize the risk. The way I was taught to invest in real estate is not the same way that many of the “gurus” teach. Most of those programs are far to risky for my taste.
Multiple Streams of Income
One neat thing about having so many different income streams is that real estate can be forgiving. Many people I know (including myself) screwed up on their first deal, but still made money. That’s because one income stream can make up for a lack of another.
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Now, I don’t recommend screwing it up. You might as well do it right as long as you’re getting in the business. That way you won’t ruin your taste for the most powerful wealth-building tool available to the average person.
Let’s run down the list of the five ways:
1. Cash Flow
Cash flow is the reason we seek Passive Income-Producing Assets. Without cash flow, you don’t have income… meaning: you can’t quit your job without cash flow.
We don’t buy a piece of real estate unless the rental income is greater than the monthly expenses by a decent margin.
For example, when your tenant pays you $1,000 a month and your monthly expenses including principal, interest, taxes, insurance, and maintenance/occupancy reserve are $800 a month; the $200 difference is now income in your pocket.
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2. Equity Capture
Equity capture is when you buy an asset for less than it’s worth. In real estate, it’s when you buy a house in a $100k neighborhood for $50k, fix it up for $20k and you’re “all in” for $70k.
You just captured $30k in equity which goes directly towards your net worth. Few other investment vehicles can create wealth so quickly.
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Without equity, you are exposing yourself to the risk of a falling market. We always buy assets with equity so that we are never hurt by a down market.
Online Businesses, Network Marketing, ( I personally have both in my Portfolio ) and vending can be good sources of cash flow, but they don’t offer an opportunity to buy an asset for less than it’s worth.
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3. Market Appreciation
Real estate doubles in value every twenty years. It might fluctuate in the short term, but it is forced to rise over the long term with inflation of building materials, labor, and scarcity of land.
The main reason most people buy stocks today is for market appreciation while it’s only the 4th most important reason we buy or invest in or control real estate.
Do you see the difference?
While stock investors live and die by market appreciation, real estate investors see it as a nice bonus to pile on top of the other four ways we make money.
=> The Top 10 Reasons Why You Must Work for Yourself
4. Principal Pay Down
Here’s a neat way we make money in real estate that most people don’t even think of.
We naturally accumulate equity in our Properties as the notes get paid down.
Even if you weren’t making money any other way, your tenants would be paying down your mortgage a little bit each month. It starts out small, like fifty or a hundred dollars a month, but it grows over time and adds to your equity in the house.
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The other asset classes typically don’t have mortgages, so this wouldn’t apply.
5. Tax Advantage
Real estate investors pay the lowest taxes of any for-profit group in the United States. The IRS allows us to reduce our earned income tax on cash flow by taking a depreciation deduction against the property. We can avoid capital gains tax when we sell by using a 1031 tax exchange.
How long can you avoid taxes with a 1031? If you pass the property to your children, they will take over at the new cost basis, which wipes out all of the capital gains over the life of that asset.
None of the other assets can claim such a huge tax advantage.
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Does it Make Sense?
Are you starting to understand why I talk up real estate investing so much?
It’s the only asset class that I know of that can create rapid wealth. All the others make money in one or two ways, but not five.
NOTE: Although educating yourself is beneficial, it’s also important to understand that to make the best real estate investment decisions or building Passive Income Streams you likely will need an Advisor or Successful Mentor who can add value with their niche expertise and vast array of resources.
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