The Benefits of Real Estate Investing: Unlocking Financial Freedom for Beginners
Real estate investing can be an excellent way to build multiple sources of income, gain financial freedom and grow your wealth. For someone who wants to get started in real estate investing, these are incentives enough. However, do you know there are other great benefits that real estate properties can provide? Here are a few common and not so common benefits and why you should get into real estate investing!
Real Estate Investing Creates Cash Flow
One of the primary (and most obvious) benefits of real estate investing is that you can generate cash flow! Each property that you invest in, can create another source of income known as cashflow. Cashflow is the amount left over after you have paid all expenses associated with owning and managing the property. Cash flow can provide a steady stream of passive income that can compound as you continue investing. Many investors focus on building cashflow.
How Cashflow Works
So how does cashflow work? Well, let’s say you purchase a rental property for $200,000. Let’s assume your mortgage, which includes taxes, interest, insurance, and principle, amounts to $1,200 per month. Additionally, if you put less than 20% of the purchase price as a down payment, private mortgage insurance (PMI) may be required.
The next step is to figure out your expenses. Expenses can be repairs or property management. The difference between your rental income minus the mortgage plus expenses will be your monthly cash flow. The best part is as you acquire more rental properties, your cashflow compounds!
Learn how to calculate cashflow with my Free Guide!
Appreciation with Real Estate Investing
In addition to cashflow, another benefit of real estate investing is the potential for appreciation Appreciation refers to the increase in value of your property over time. Appreciation along with rental income can set you up for success!
On another note, as appreciation goes up and you pay down the property, you start building equity. Equity is the difference of what the property is worth and what you owe on the property. This strategy can be effective in certain markets. As a result, the equity from your property appreciation, can be used as leverage to purchase more properties. Equity can also be used to get the funds you need to accomplish other life goals.
How it works
Referencing our first example, your rental property was purchased for a purchase price of $200,000. Historically, properties can appreciate 3% or more. We saw that in 2020-2023! Typically, it takes roughly five years to appreciate a significant amount. Therefore, over the next five years, the value of the property increases to $250,000. As a result you have gained $50,000 in equity. The added bonus is that you can then use the equity to purchase another property!
Tax Benefits
Real estate investing also comes with numerous tax benefits that can help reduce your overall tax liability. This means you can keep more of your money! Some of these benefits include:
- Mortgage interest deduction: You can deduct the interest you pay on your mortgage from your taxable income.
- Depreciation: You deduct a portion of the property’s value each year to account for wear and tear.
- Capital gains tax: If you sell a property for a profit and are planning to purchase another one, you can defer paying capital gains tax with a 1031 exchange. However, if you live in the house for 2 years out of the 5 years prior to selling, you can avoid capital gains tax!
When you take advantage of the many tax benefits you can reinvest those savings into other properties.
What is Stopping You?
What is stopping you from investing in Real Estate and buying your first rental property? With the bad rep that real estate investors get, many hesitate to start. However, you can invest in real estate without sacrificing your values.
Maybe real estate investing intimidates you or you don’t know where to start? Well there are so many resources out there to help you learn how to get started. From social media and youtube, to courses and mentorship, you can find a resource that can help you start.
In conclusion, real estate investing can provide numerous benefits, including cash flow, appreciation, and tax benefits. By building a portfolio of rental properties, you can create a steady stream of passive income, build long-term wealth, and achieve financial freedom.
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