In this episode, we are going to highlight the 7 benefits of real estate investing! These are reasons I invest in real estate and why I think others should as well. There are probably other benefits I haven’t outlined here, but here’s a good overview. Read until the end for all of the surprising tax benefits!
Below is a transcription of the podcast. This transcription was taken from Otter.ai so it might not be completely accurate:
Hey guys, it’s Sharon from digital nomad quest. And today we’re gonna talk about the benefits of real estate investing and owning rental properties. Now, if you guys are new to the channel, welcome, I’m all about teaching y’all how to build passive income become financially free and design your best lives. So if you guys are interested in that, make sure to subscribe and hit the bell button to be notified of my latest videos. So there are so many different benefits to buying rental properties. It’s one of the best vehicles to building wealth with some estimating as many as 90% of millionaires actually make their wealth through real estate. So here, we’re gonna go over a lot of the biggest benefits when it comes to investing in rental properties.
First one we’re gonna talk about is leverage and a lot of real estate investors get into real estate because of leverage. And if you don’t know what that means it is the use of borrowed money to buy a property. Real estate is one of the only assets that allows you to borrow as much as 80 to 90% of the property value to grow your wealth. For example, with stocks, you can’t go to a bank and ask them, Hey, can I borrow 90% of the stock’s value and then purchase it, they’re not going to do that, right. But they’re going to do that with real estate, which is pretty incredible, you could basically have only 10 to 25% of the downpayment saved up for a rental property, and still be able to buy it, which is insane. Now let’s go over this example, if you buy a property that appreciates in value from $100,000 $220,000, so you’re buying it 100k, and then it appreciates 220k And you bought it all cash with $100,000, you’re getting a 20% return. However, if you buy with a 20% down payment, or $20,000, your investment actually doubles. So going over this example right increase from 100k to 120k, which is 20k. In profits, you only put in 20k, which means that your 20k doubled in value. And that’s essentially the power of leverage, it basically increases your cash on cash return, you can use less money and gain a lot more. Now let’s talk about the next benefit. It’s diversification of your portfolio. When you’re investing in real estate, you’re diversifying your portfolio with another asset class. So for example, your portfolio might now have real estate stocks and bonds and other investments and what’s going on with that it really means that your eggs are not all in one basket.
For example, if you only purchase stocks, and you only purchase mining stocks, and then that sector completely crashes, your whole portfolio is going to tank. But if you have a diversified portfolio with real estate and other types of stocks, for example, your portfolio is not going to hurt that bad, maybe you are getting returns on these other asset types, while this one drops in that really makes it a lot safer. So by spreading out your portfolio with multiple asset types, you’re really reducing risk in your portfolio. And another thing is physical assets usually have less volatility compared to stocks and bonds. For example, if you’re an owner of a stock of a company that goes bankrupt, your shares are basically going to be worthless. However, with real estate, the fluctuation of the prices is not as much as stocks. So that kind of feels safer. Granted, it doesn’t mean that there isn’t fluctuation, of course, real estate goes up and down. But stocks tend to go up and down way crazier. And another way you can actually diversify is if you have properties in multiple markets, for example, not all of those markets are going to go up and down at the same time. So maybe you have properties in the West Coast, and then someone that East Coast, maybe the West Coast is going to do better over time, maybe the East Coast, one drops, but that still balances out. Because you have property in multiple locations, a big benefit to a real estate is appreciation. And that basically means that properties can increase in value over time. And if you’re doing your due diligence and investing in the right properties, that’s most likely going to be the case that your properties are going to appreciate in value. Although home prices usually don’t increase in value as much as stocks do, you can increase the amount that you actually get percentage wise by using leverage. As I mentioned earlier, for example, even though you might put 20% for a downpayment, you get to keep the appreciation profits, which translates to a lot more cash on cash return. One of my favorite benefits to real estate investing is cash flow.
You know, when I was a kid, I would play Monopoly and get all these little rental properties in the game and just get a bunch of cash flow. And that made me think I want to do this in real life. I just love the feeling of making money in your sleep. The same reason why I went into online businesses that can cash flow passively. I think it’s an incredible way to build wealth. So how are you going to get that cash flow? Basically, your tenants are gonna pay you monthly rent, which will usually cover your mortgage and expenses if you do it right. And if you’re really doing it right, it can actually profit for you. So maybe you cover your mortgage, your insurance, your property taxes, your property management fees, and even have enough allocated for repairs and vacancies. And then you still profit left over that is essentially cashflow on top of your expenses. That way you’re really making passive income in your sleep. Maybe in the next month, you start seeing all the bank deposits from your Pm company that’s collecting those rents. And it just feels really good to see you know, just come into your bank account. Now let’s talk about tax benefits. One of the tax benefits is rental property depreciation. So as your property appreciates over time, you’re also going to get that tax benefit of depreciation. So even though your property’s value is going up over time, the government has determined that the useful life of a residential rental property is 20. 7.5 years. And basically to help you out, the government’s going to let you deduct one over 27.5 of the building’s value every single year from your taxes. This is actually how many real estate investors who make money from the rentals end up owing the government little to no taxes every year. So say you bought a home for $200,000. And $150,000 is the value of the building the house on the property, while $50,000 is the value of the land, basically, where the house sits on every year, you can take that building value of $150,000 and divide that by 27.5. And that’s going to equal $5,454.54. And you can deduct that every year for the next 27.5 years on your taxes from your real estate investment profits. So your property didn’t actually go down in value. In fact, your property is going to usually be appreciating in value over time. But getting that tax break for just owning the rental property is actually really nice. Another tax benefit is the 1031 exchange.
So the 1031 exchange lets you defer your capital gains taxes on your rental property when you buy another light kind investment. So in this scenario, it’s your rental property. So instead of paying taxes on the profits, when you sell your home, it lets you roll that over. So you can buy a bigger property without recognizing a capital gain. So 1031 exchanges basically just apply when you are selling off homes and trying to upgrade to buy bigger homes. So let’s say you bought a property for $100,000 A long time ago, and then the property is now worth $300,000. If you were to sell that property, you’re normally going to pay taxes on the $200,000 profit that you just made from selling the house. And that’s usually around 15%. If you’ve held on to the property for longer than a year, that basically counts as long term capital gains. So that’s going to be 15%, or $30,000. In this scenario, this is going to leave you with just $270,000 to play with losing that $30,000 in taxes is kind of a substantial amount. But if you did a 1031 exchange, you would be able to buy property for the full $300,000 amount, and then defer your taxes. So by deferring your capital gains taxes, you can buy larger properties that generate even more cash flow. And that’s going to help you snowball your passive income even more. Another tax benefit we’re going to talk about is step up in basis. It’s one of the best tax benefits when it comes to investing in real estate. The benefit of this when you pass away is one of the main reasons why people get into real estate investing to create that generational wealth.
So let’s get into what step up in basis means let’s use an example. Imagine you purchase a property $100,000. And it’s now worth $500,000. If you sell it now you’re going to have to pay capital gains taxes of $400,000, which is the difference between 501 $100,000 That’s your profit. And if you held on to that property for over a year, you’re going to pay about 15% of capital gains taxes, which comes out to be $60,000. That’s a good amount of money. However, if you never sold the property, you pass away and you left your heirs with that property, your heirs now have a basis of $500,000. What that means is if they sold that property, they’re gonna owe no capital gains taxes. Now, if the property appreciates in value to $600,000, after they’ve gotten the property, they’re only going to need to pay capital gains taxes for that difference of $100,000 of profit that they received after they own the property. So this is why many long term real estate investors can create that generational wealth. They’re using cash flow from the rentals, the properties are appreciating over time. And they’re using 1031 exchanges to sell properties for better opportunities, maybe a bigger rental property that they can cashflow more with. And then they’re using the step up and basis tax benefit to pass their properties off to their heirs.
So that was a lot of different benefits. I hope you enjoyed this episode on all the different benefits that real estate investing offers. There are more benefits that I probably haven’t mentioned here. But these are some of the biggest ones that make investors get into real estate investing. So again, real estate is a great tool for creating generational wealth and passive income. If you’re really doing your analysis, right researching the right markets, you should be generating a good amount of cash flow every month. And if you’re hiring a property management company to manage your properties, it’s going to make everything very passive, you’re just going to be collecting the rents because they’re going to be the ones looking after your tenants and your properties. So make sure to start investing as early as you can. So you can let the effects of compound interest really grow your wealth. Now as I’m talking about all of this, if this is all like going over your head, you’re basically lost in how to research markets, how to analyze deals, how to find the right property management companies and agents to work with, and all these other things that comes with investing in your first rental property. We have a course called Remote rental riches, you can check it out in the link below. And we basically guide you step by step on how to buy your first rental property and if you want to out of state so this is an out of state investing course but it can totally apply to where you live as well. Now I hope you guys liked this video if you guys liked it, let me know in the comments below, which benefit really resonated with you and make sure to subscribe, hit the bell button to be notified on my latest videos and I’ll see you guys in the next one. Transcribed by https://otter.ai
