How You Can Build Wealth In Real EstateTax AdvantagesAppreciationLeverageCash FlowTypes of Real Estate DealsYour Personal GoalsConclusion

Note: This is Chapter 1 of an entire guide on How To Buy Your First Investment Home.

90% of the world’s millionaires have attributed their wealth to real estate investing and yet homeownership rates have gradually declined to all-time lows.

💡 90% of the world’s millionaires have attributed their wealth to real estate investing and yet homeownership rates have gradually declined to all-time lows.

Real estate investments offer a number of advantages. We discuss all of the benefits on our other guide, Why Real Estate?, but we'll go over a summarized version in this chapter 1.

To start, real estate offers tax advantages, appreciation, use of leverage and other people's money (OPM), and the holy grail: cash flow.

Tax Advantages

This is a summarized version of a longer article we wrote on the Tax Advantages of Real Estate Investments. If you want to read the more detailed version, click here!

There are three common tax advantages: deductions, depreciation, and the 1031 exchange.

Deductions are one of the primary advantages as it allows you to decrease your rental income on paper by calculating the expenses you may incur while owning real estate. For example, here's a list of the most common things real estate investors deduct.

1. Loan Costs and Interest
2. Property Taxes
3. Insurance Premiums
4. Maintenance and Repairs
5. Utilities
6. Legal and Professional Fees
7. Travel and Transport
8. Office Space

You'll need to maintain solid records of these expenses so that you can write it off on your tax bill!

Depreciation is a type of deduction that allows you to tax away the lifespan of a property. If you purchase a house, you can depreciate the cost of the structure (the home itself), but not the land it sits on over a 27.5 year lifespan.

For example, if the rental home is $100,000, you can deduct the home using the formula (Cost of Structure / Lifespan). For this property, this would be ($100,000 / 27.5) or $3636 per year. This can be deducted from your rental income and lower tax liability.

The 1031 Exchange, AKA a "like-kind exchange" or LKE, is a tax tool that allows you to defer capital gains taxes like you would in a retirement account like a 401K upon the sale of your investment home. Using a LKE allows you to avoid capital gains tax for a period of time, and instead, you use the capital from selling your investment home to "swap" it for another investment home.

There are rules associated with the 1031 exchange that are discussed more in-detail in our other article found here.

Appreciation

Appreciation is the growth of a property's value over time. For example, a home purchased in the 2008 recession at $100K may be now worth $500K now. The growth in value is what is appreciation.

It depends on your local market. But historically, real estate prices across the United States have increases year over year making it an attractive and low volatility investment vehicle. Experts estimate a conservative 3% return on average each year. But when investing in growing locales, you may be able to beat this return!

Appreciation, combined with the next session, Leverage, is an amazing tool to use in your real estate investment journey.

Leverage

Leverage is the ability to use borrowed money (e.g. your mortgage loan) to expand a person's asset base. This typically increases and amplifies any potential returns.

For example, if you had a home purchased at $150,000 with a 20% downpayment of $30,000, and we expect to be at the historical average growth of 3% mentioned above, we would effectively earn $4500 in appreciation. But because you only put $30,000 down, your effective return due to leverage and appreciation is ($4500 / $30,000) or 15%. This is known as a levered return.

Because of leverage, you're able to earn growth on the home price of $150,000 but only putting in $30,000 which amplifies your potential returns.

Cash Flow

Cash flow is one of the holy grails of real estate investing, which is basically the money left over after all expenses. There are not a lot of investments that allow you do gain both in appreciation and in cash flow.

For example, taking our old example of a $150,000 home. The mathematical breakdown would look something like this:

Home Price: $150,000

Mortgage: $120,000, financed at $564/mo with 3.875% interest

Taxes + Insurance: $330

Total Expenses: $894

Net Cash Flow = $1500 - $894 = $606 / month

In essence, that $606 is going directly into your bank account. It's your income or profit after all expenses of owning your rental home.

Types of Real Estate Deals

Above, you learned about the ways you can make money in real estate. But there's a lot of ways to go about it. This is a summarized version of our more in-depth article you can find here.

At Doorvest, we focus and specialize in single-family rental homes. But there's more out there!

You can invest via:

Flipping

Flipping is basically a full-time job. You purchase homes, renovate them, and sell them for a higher price. This has become a fan favorite with TV shows often popularizing experts who do this to get six-figure paychecks from single deals.

Wholesaling

Wholesaling is another active form of real estate. You basically become a supplier to Flippers. You'll find a home that needs renovation, put it under contract, then sell it to a Flipper at a higher rate. You'll end up profiting the difference.

Long-Term Rental Properties

This is what we specialize in at Doorvest. This involves purchasing a home that is able to bring in cash flow as well as appreciation. Then, you'll need to maintain the property and keep a tenant in the property to pay a rental income.

Short-Term Rental Properties

In some cases, this is a newer idea. While we've had hotels and motels for long periods of history, companies like AirBnb allows you to rent a home to tenants on a nightly or weekly basis (typically less than a month).

REITs or Other Passive Sources

REITs, or Real Estate Investment Trusts, is a company that trades similar to a stock. By purchasing a REIT share, you provide the company capital to go out and buy real estate on your behalf. The REIT will then pay you a monthly or quarterly dividend.

Your Personal Goals

With all of this in mind, you'll need to decide on what you want to do and if you are able to do it. As you can see, there is a lot of ways to break into real estate and there are a lot of wealth that can be generated from it.

Ask yourself:

1. How much time do I have to actually get into real estate? Some forms of real estate investing are more passive. And some are basically full-time jobs. You'll have to decide your commitment level.
2. What are your monetary goals? Are you looking for higher cash flow or are you looking for more appreciation? Sometimes they go hand-in-hand, but sometimes you might trade higher cash flow for less appreciation and vice versa.
3. Do I even want to do invest in real estate? You might just want a more passive investment like Doorvest, where most of the steps are taken care of for you. Or maybe you'll decide you want to do it all yourself.

You'll need to decide what your own personal goals are and move forward from there.

Conclusion

Getting an idea of the type of investor you are, the amount of time you want to invest, and how much you are looking to financially gain from this will be the first step to investing in real estate.