Many people favor real estate as their investment tool for it’s relatively low risk and high rates of return. The reason for these trends is that real estate makes you money six different ways- equity capture, tax advantage, cash flow, forced appreciation, market appreciation, and principle pay down. While other forms of investing may fall into one or two of these categories, real estate is unique in its power to build wealth and protect itself from market fluctuations.
For people who are investing with the goal of financial freedom, cash flow is by far the most important of the six ways. Savvy real estate investors learn never to touch a property that has negative cash flow, no matter what they expect to gain by appreciation. Cash flow in real estate comes as the rent you receive from a property minus any expenses associated with owning it. While it may end up amounting to only $200, you’ll find that this extra income means a lot when it comes with the security of knowing it will always be there (unlike your job, or appreciation on speculative investments). Equity capture is another crucial element of investing in real estate. While investors know never to buy a property with negative cash flow, they also know never to buy a property without a significant discount just because they expect it to go up in value. By always buying at a discount, investors can protect themselves from market fluctuation. In addition, equity capture allows investors to build wealth almost immediately. For example, if your house is in an area where similar homes are worth $100,000, but you buy it for $70,000, and repairs are only $5,000- then you’ve added $25,000 to your net worth almost instantly!
The third great advantage to investing in real estate- forced appreciation, is remarkable in that it allows you to change the value of your asset. In single family homes this means that by making repairs to a property you can increase it’s value significantly (up to a certain point, as the market value of a house is usually set by comparable sales in the neighborhood). This is unique to how to invest in real estate and one of its greatest appeals. In no other investment- the stock market, bulk candy vending, etc. can you affect the value of your asset in such a way. This advantage is exaggerated in multi-family investing where the value of your property reflects the profits and not necessarily comparable sales.