- 6 Reasons Why Real Estate is the Ultimate Passive Income
Photo by Jason Dent on Unsplash
You’ve got a 9 to 5 job that generates a steady paycheck and that’s something to be happy about.
But deep down, deep deep down, you know you’ve always wanted some more money. More freedom. More flexibility. Financial independence. You look around on social media and everyone is talking about passive income streams. People are flocking to Medium to be the next Tim Denning. People are creating YouTube channels hoping for the next viral video to be theirs.
But it is getting tougher day by day. The competition is fierce. In 2020, there was a 106% increase in the growth of new writers on Medium. 400 hours of video are uploaded to YouTube every minute worldwide. There are 38 million active channels and 22K channels with more than 1 million subscribers on Youtube. More and more people are starting some businesses online.
But there is one passive income strategy that is always in demand — Real Estate. With well-chosen assets, everyone can enjoy predictable and passive cash flow, excellent returns, tax advantages, and diversification. The benefits of investing in real estate are numerous.
I have been investing in real estate for over a year now and have been researching even longer. Here are 6 reasons why you should dip your toes into the real estate market.
Property values are soaring in the US. It is at an all-time high. But that does not mean that purchasing real estate ties up a lot of cash.
Real estate is a bankable asset, so you can always leverage your investment — investing in an asset worth much more than you invested. This means that you can put down as little as 10% and use the bank’s money to grow your investment.
And when the property values increase, you can take out the extra cash to purchase even more properties. It is a win-win.
Real estate investment, if done with some due diligence, is a great source of passive cash flow, especially if you are in it for the long haul, and not a quick return.
Let us say you brought a real estate property for 200K and rent it out for 1800$ monthly. Here is how the cash flow would look like:
A revenue breakdown for a Real Estate investment. Image by author
There could be additional expenses like HOA, etc. And you may need to consider ~ 5% vacancy rate etc. But the overall premise remains the same. If you do your research before buying a property, you can easily generate passive cash flow.
In the above example, the ROI was 13% i.e for 40K initial investment, the return was 13% yearly
One of the biggest positives about real estate is its leverage to own an asset much more than you initially pay. That means in a few years' time, your tenants would have paid off a substantial portion of the mortgage, building more equity.
Taking the previous example, let us say you bought the property for 200K with 20% down. That is 40K of down, and 160K worth of the loan. In 10 years' time, with a positive cash flow, your tenants would have paid 36K of the mortgage (principal). That means, in addition to the cash flow, you built 36K of equity without doing much.
In the previous example, we saw how we built 36K equity in 10 years. But that was considering the market did not appreciate during that time. But that is never the case.
Based on this data, real estate in the United States increases an average of 5% annually. So, if you bought a property for 200K, the property value after 10 years would be 325K. That is a 125K appreciation on the property. I used this website to do the math. The appreciation rate depends from place to place, so it is your responsibility to research before buying a property.
If we look at the last 3 points, your total return of investment in the 10 year
= cash flow + equity buildup + appreciation
= 5,250*10 + 36K + 125K
All this from a 40K investment.
In addition, you can also force appreciation by remodeling the property. Whether you buy an undervalued property and fix it up to sell, or you renovate a rental property, you can increase the home’s value faster than natural appreciation occurs, giving you an even greater return on your investment.
If you make 1000$ a month of Medium, or in stocks, you have to pay 10— 25% (or whatever the amount is based on your total earnings and tax brackets) to taxes. The same is for most other revenue sources.
But, not for real estate. Owning real estate offers a number of benefits, but it’s hard to beat the tax advantages of real estate investing. Many people aren’t aware of the great tax benefits that come with it.
- You can deduct most of the expenses related to owning the property. Expenses such as property tax, insurance, mortgage interest, advertisements, etc. You can even deduct travel expenses to and fro your property
If you own a property that is being used for business or income-producing purposes (like a rental property) for a year or more, you can depreciate the cost of the property over time. That is more savings in taxes.
You also have the ability to defer the profits when you sell it by buying another property. This is called a 1031 exchange, where real estate investors can swap an investment property for like-kind property, thereby avoiding capital gains or depreciation recapture on the sale of the property
I am talking based on the rules in the USA. Please check the legal procedures in your country.
There will be a demand for real estate wherever you go, because primarily, people need a place to stay.
Additionally, there is a scarcity of housing units. Based on this forbes article, there is a shortage of 6.8 million housing units in the United States.The sheer number of new properties each year is a testament to the growing real estate market. Supply follows demand, and demand is continuing to rise.
Also, real estate is a hedge against inflation because of the positive relationship between GDP growth and the demand for real estate. As economies expand, the demand for real estate drives rents higher. Therefore, real estate tends to maintain the buying power of capital by passing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure in the form of capital appreciation.
- Date of publication:
- Thu, 11/25/2021 - 19:34
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