How To Build Wealth With Real Estate?

Many people who have reached financial independence have done so investing in real estate (in fact, it's one of the most common ways to become a millionaire). This might seem like an impossible achievement if you’re only looking at the end result, but by starting out with small steps and making continued forward progress, you can make your way to “real estate mogul” even if you only have a smaller dollar amount to start investing with.

Today we will discuss how you can get started in real estate investing without breaking the bank, even if you don’t have hundreds of thousands of dollars.

Set Your Goals

After doing your homework, you will have a range of the initial investment you can expect to make in getting started. It's possible to get started with just $1,000 (or even less in some circumstances). But you should also  have a goal and know yourself.

How much risk do you want? How much work do you want to put in?

Write down your goal. Next, reverse-engineer what you need to do to get to that point – what is the initial investment amount required to get started?

Creating tax write-offs by investing in real estate

Some Hollywood stars live in Los Angeles or the other parts of Southern California who earn in millions. With this much earning, there comes the other aspect of paying massive amounts of taxes. So what they do is they invest in lavish mansions in Los Angeles and take a loan from the banks which give them a substantial amount of wave in the taxes they have to pay on their earnings.

Long-term rental property

Long-term rental is the bread and butter of real estate investing. It is the most sustainable strategy and probably generates the most money as a long-term investment, if you are willing and able to stick with it long-term.

The strategy with a long-term rental is simple – buy a property, renovate if needed, then hold on to it and rent it out for the rest of your life, continuing to maintain it in a good state. Financing and carrying costs (mortgage, taxes, insurance, maintenance) should be covered by your tenants’ rent payments and, ideally, you should have a bit of money left from each payment collected after all costs are covered, to create additional cash flow for yourself, which is a part of your overall return on investment.

There are many benefits with this strategy:

•             Your tenants finance the property you will own in the end, free and clear.

•             You gain from long-term property appreciation if (or when) you decide to sell (or refinance and extract equity for other projects) in the future. Now, this is not guaranteed, but historically, real estate – especially in booming areas – has been growing in value.

•             Generating income from a long-term rental property is usually subject to more beneficial tax treatment, compared to, say, house flipping discussed above. Not only do you get to offset rental income with carrying costs (because you incur them in generating business income), but you also typically get to amortize the cost of your property to expense each year for tax purposes, thus offsetting it even more (obviously, tax laws differ from country to country, so make sure you check yours before making any decisions).

•             In countries with progressive tax brackets (i.e. – where you pay a higher percentage in taxes the more income you earn), you get to minimize annual tax impact (whereas with strategies that provide a windfall payment – such as, again, flipping, you will have to pay tax on the full amount in one year).

Flipping houses

Flips (or flipping) are a way torealize a quick gain from creating additional value in a property. Typically, people think of it as buying a property in a dilapidated state, renovating, and quickly selling it. However, there are no hard and fast rules – as long as you create additional value with the intent of realizing it on sale, your starting point can be anything (you can buy a perfectly fine home for $2m, but as long as you redesign and renovate it and later sell it for $4m – this is still considered flipping).

Despite various TV shows that glamourize the process and make it seem very easy, flipping houses involves a lot of risk and is often not for novice investors and, probably, not the most recommended introduction to real estate investing.

The goal with flipping houses is to make a quick gain based on forced appreciation, which is the difference between what you paid to acquire the property plus all costs of renovating it and bringing it back to market (contractors, designers, engineers, building materials, sales agents, advertisers – and don’t forget the value of your own time) and what you ultimately sell it for.

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