Did you know, there’s a third side to every coin? As Robert Kiyosaki, “Rich Dad, Poor Dad” author, says—there’s heads, tails, and the edge. While the first two sides are easily identified, the skill to see the contrasting edge must be cultivated. With our finances, and real estate investments, we must also cultivate this skill.
There’s wisdom to be gleaned from each of these sides, and no analysis is truly complete without seeing the wisdom in all three. Take a moment to reflect on what it is that’s important to you and be willing to think outside the box.
Then, take responsibility and ownership of your own success—don’t leave it up to chance. The control, wisdom, and even wealth that come from this sense of ownership will be all the more rewarding to you. If you’re ready to put in the work, so am I. Let’s dive in…
I’m sure it comes as no surprise—the stock market is a volatile place to be. And it’s likely to continue that way as long as the uncertainty of 2020 continues. If you’re frustrated by the lack of options to earn a decent return on your money, you’re not alone. Yet as a keen observer of the three-sided coin, you’ll see that you’re not limited to either stock market or no stock market.
In fact, there’s a third side—alternative investments. And the one on my mind today is real estate. If the first thing that comes to mind is buying a home or a condo, or even some big and complex deals, don’t give up on the idea just yet. There are a number of ways to participate in the real estate market, and not all of them are as intimidating.
Yet before we get into those investment types, let’s break down the benefits of real estate.
When it comes to real estate, there are 5 big ways to win. In many ways, you could even say that real estate investing is IDEAL.
INCOME: positive cash flow that you collect from rent, after expenses
DEPRECIATION: As your real estate assets depreciate, you can take a deduction to offset your income each year on taxes. Residential real estate can be depreciated for 27.5 years, and commercial for 39.
EQUITY: As you pay down the mortgage, you continue to build up equity. If you’re doing it right, rent will cover your mortgage and provide an income.
APPRECIATION: Over the long-term, real estate has 7% returns after adjusting for inflation, meaning it has outperformed bonds, Treasury bills, and even stocks.
LEVERAGE: You only need to put 20-25% down to own valuable income producing property.
When it comes to real estate, there are few investments with such consistently positive benefits. And, your rates of return don’t just come from one stream. Let’s look at how that works.
Let’s say you’ve found an attractive and affordable property that you’d like to purchase as a rental property. After inspection, you close on the property for $100,000. You only need a down payment, so with closing costs you invest $25,000 up front.
That means to carry the property, you only need an $80,000 mortgage. At a 30-year fixed rate of 4.5%, you’re looking at $405 a month. Furthermore, at least $1,300 of those payments are going toward the principal, annually. Which means you’re building up that much in equity per year.
Because it’s a rental property, you’re also generating an income. Let’s say the average profit of the property is $100 a month. That’s $1,200 of annual income, and due to depreciation costs you’ll likely earn this tax-free.
The final piece of the equation is the appreciation. If the property appreciates 6% a year, which is a realistic expectation, that’s another $6,000 a year. So, the rental income, equity, and appreciation combined gives you $8,500 on a $25,000 investment.
For many new investors, jumping straight into ownership can be intimidating. Fortunately, there are other ways to “get your toes wet.”
I got my own start in real estate by being a “banker.” I made private loans to other established real estate investors, in both the residential and commercial spheres. Even after all these years, I’m still collecting monthly checks from those early investors.
The trick is knowing who you’re working with and insuring that you’re investing values are aligned. And never forget to have a legal advisor draw up any contract that you negotiate. That’s how you maintain the integrity of the deal, and insure you get repaid and are protected if things don’t go as originally planned
Through this approach, you have an equity stake in the deal, as well as some tax benefits—yet you’re only held liable up to the amount you’ve invested. This works by pooling money. A syndicator will collect investments from a variety of investors, which is used to buy apartment complexes, mobile home parks, and the like. Then, the project’s business plan can be executed.
With these types of deals, there’s often a fixed minimum rate of return that you’ll receive monthly. In addition, you can partake in the profits, including a portion of some additional cash flow, and/or proceeds from the sale of the appreciated asset.
Want to own properties, but not interested in being the landlord, so-to-speak? Through this approach, providers will find and fix up the properties for you, so that you can immediately rent them out. And most of these turnkey operations will provide a management team to oversee the property thereafter.
With these deals, there are three things to consider:
Of the three, team is the most important. After all, these are the people who will be overseeing the performance of the property. Their management will have a direct effect on the property’s success.
While turnkey properties come with extra expenses—such as leasing and management fees—don’t underestimate the value of this service. If real estate is your “side hustle,” having someone else take calls from tenants and recommend repairs can be priceless.
Many people have done well with the three approaches above. In fact, even combinations of the three have benefits. Yet if you’re willing to take the leap into ownership, the payoff can be substantial.
I began my own real estate journey by reading books like Rich Dad, Poor Dad, and by joining organizations like BiggerPockets to connect with other investors and stay up-to-date. I actually met my first partner through the platform, to whom I provided a loan for an investment property.
As I became more comfortable, I took a chance after meeting with a number of turnkey providers. I purchased several rental properties—renovated single-family homes—and still own them today.
Through the years, and through my research and connections, I’ve since invested as a limited partner in apartments and mobile home parks. These plays provided passive income, but at a higher return than I would have gotten as a private lender. In syndications, it’s not unusual to earn well over 20% after factoring in equity and depreciation gains. (NOTE: Limited partnerships are often available only to accredited investors.)
And although the returns and tax benefits of real estate can be significant, significant cash is often required to get started. It’s possible to draw from your savings account…yet there is a better way.
The best place I’ve personally found to store dollars that can be used for investments, is with specially designed whole life insurance. This financial product boasts returns that are often two to three times higher than bank rates.
The real power, however, is the ability to leverage the life insurance company’s money through a guaranteed loan provision of up to 95% of your cash value. This leaves your money free to continue its compounded growth. And you get a tax-free death benefit on top of it, which means you can build generational wealth.
Taking a strategic approach allows your dollars to work in two places at the same time, and leverage someone else’s money to grow your own wealth. For more strategies on turning life insurance into your most powerful asset, check out this blog post.
Overall, real estate is one of the most consistent long-term investments—with good cash flow. People will always need places to live. And with so many ways to be involved, you’re sure to find something that fits your goals and will broaden your options.
To learn more about how to incorporate real estate into your overall wealth strategy, schedule an appointment today.
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