Investing in real estate can be a powerful vehicle to build your wealth, diversify your investments, and generate passive income. The best part is that you don't have to do it full-time, nor do you have to have a ton of cash to get started. If you're a bit flexible in your living situation, you can even house hack to kick off your investment career while living rent free.
If you're like most Americans, you don't have much left for savings after all your monthly bills and paying down your debt. If you do save a little each month, it goes into your retirement account or earns a measly 0.1% annual return sitting in a savings account at your local bank. For perspective, if you start saving $100 per month, in 10 years your savings account will have gained $60. Not a great way to build wealth!
But, if you can pair your minimal savings with decent credit, you could start investing in real estate and building wealth much more rapidly through leverage. With just $10,000 you can start your career as a real estate investor. While you'll likely need to borrow money quite a bit to buy an investment property and you'll pay interest on that loan, each payment also pays down your principal — meaning you're building equity while also enjoying monthly cash flow. On top of monthly income from the property, after 15 to 30 years, you'll have another paid off house — not to mention the likely appreciation of the asset.
Traditionally, most people have invested in the stock market to save for retirement — with an average return around 10% annually. While stocks can be a great long-term investment strategy, it's always a good idea to diversify your portfolio.
Each investment type is risky and no investment is a sure thing. In fact, some may argue that real estate has a similar annual return but is more secure than stocks, as the real estate market tend to be relatively steady over time — with little volatility. Although highly unusual, the stock market can experience a crash overnight.
While you can invest in the stock market in other ways, the most common is through a retirement plan like a 401(K) or IRA. The drawback to investing this way is that you can only access 401(K) funds after you have turned 55 — age 59 ½ for an IRA —and only if you're retired. If you have dreams of retiring early or getting to that money earlier for some reason, you'll face stiff penalties. If you're looking to save for some major travel or your dream home prior to retirement, real estate may be a great vehicle to supplement your retirement plan.
Another reason to diversify it that while anything invested as cash — like stocks or retirement accounts — inflation decreases its value over time by about 2% each year. Since the dollar will buy less in 10 years than it will now, it's important to make sure your investment makes up for inflation and then some so you're actually growing your wealth. If your money sits in a checking account, you'll actually lose your buying power year after year.
Real estate, however, hedges against inflation — it reacts proportionately to inflation. As inflation increases, so does the cost of inflation — meaning your rental income and property value both increase.
Generate Passive Income
One of the immediate benefits of real estate investing is the steady cash flow in the form of rental income. While this is entirely as a result of your due diligence in purchasing a solid property in the right location with good renters, it could mean a significant profit each month. Plus, your tenants will be paying your mortgage and all expenses.
Because the government deems owning rental property as passive income, it is not usually subject to self-employment tax — a whopping 15.3% on top of your normal income tax. This is why many choose real estate over another entrepreneurial venture. Plus, you'll enjoy tax breaks for property depreciation, and any expenses like maintenance and repairs, insurance, or property tax.
Real estate investing is an amazing way to build wealth, and a top-rated, low commission agent can help you get started.