Building Wealth in Real Estate

Real estate ownership builds more wealth consistently than any other asset class. Below are the most common and effective ways to build your own personal wealth through property investment.

Appreciation

The most common strategy being used to build personal wealth is through overall property appreciation. This is the same as holding, yet you live in the home and you renovate over time.

The national average appreciation rate year over year is anywhere between 3%-5% depending on where you live. This means, every year you own your home you build around 3%-5% equity.

Appreciation is also one of the best ways to combat inflation. You have probably seen how the federal government can print money like it's nothing. Meaning that the value of your dollar goes down every single day thanks to inflation, while the value of real estate gradually, but continuously goes up. I hate to say it, but savers are losers. When you put $1 in your savings account at the bank you roughly make .01% in interest while the inflation rate is -2% - you are losing money.

I cannot deny that there are ebbs and flows in the real estate market. However, if you were to invest that same $1 in an appreciating piece of real estate you would, at the very least, break even on your investment.

Cash Flow

Cash flow is the money you have left over from the rent you’ve collected after all expenses have been paid. Most real estate expenses include a mortgage, property taxes, insurance, maintenance, and property management. When you buy a property that pulls in more rent each month than the expenses you carry to own it, your cash flow is positive.

There are two forms of rental leases you can provide: Short term and long term.

Short Term Rental: this can be anything from a few nights up to 6 months or so. Think AirBNB, VRBO, Vacation Home, In-between home etc. Short term rentals can yield a higher monthly cash-flow than a longer term rental. This being said, there is a lot more uncertainty with bookings and expenses due to a higher volume of tenants in a shorter amount of time. There can be higher start up costs for a short term rental, typically because these are provided furnished to the tenants, but you are able to charge a premium for doing so.

Long Term Rental: this can be anything for 6+ months. Long term rentals are ideal for someone looking for stability and potentially less upkeep. The downsides of longer term rentals as an owner are potential evictions and lower cash flow/negative cash flow.

Regardless of the type of lease you provide in your rental property, you would still be building equity through the properties appreciation as long as the property stays in good condition. Cash-flow is just a huge plus.

BRRRR

The BRRRR (Buy, Renovate, Rent, Refinance, Repeat) Method is a real estate investment strategy that involves flipping distressed property, renting it out, and then cash-out refinancing it in order to fund further rental property investment.

If done correctly, the BRRRR Method can provide passive income and a revolving method for purchasing and owning rental property. The method works through the following steps:

Buy a property: The property you purchase should be a distressed property that needs some work to get up to code and ready to rent. Because of the home’s condition, it will likely be cheaper to purchase.

Renovate the property: Since the property is distressed, it may require extensive work. In this step, you’ll rehab the property to make structural, safety and aesthetic improvements and prepare it for renters.

Rent out the property: Determine the rental price and find people to rent the home.

Do a cash-out refinance on the property: With a cash-out refinance, you convert your equity into cash. You access your equity by taking out a bigger mortgage, borrowing more money than you currently owe. The cash can be used for anything, including purchasing another property.

Use funds from refinance to buy another property: In this final step, you’ll start the process all over again. Using the funds from your cash-out refinance, you’ll purchase another distressed property and rehab it, before renting it out and refinancing that property.

Understanding both the real estate market as well as how to invest in it can create such a lasting impact on you financially. With a couple of ways on how to build up that wealth, you will be able to go from zero to one hundred in no time.