Everyone has heard that real estate can be a great investment tool for building wealth and a secure financial future for you and your family. As business owners, one of the core issues we can find is that we’re just too busy building our main business to now begin researching, purchasing and managing a real estate portfolio. Luckily, there are excellent ways that you can get in the game, either actively or passively.
In this article, we’ll take a look at why investing in real estate can be a great tool for building wealth, whether to be an active or passive investor, and the benefits of passive real estate investment.
Why Investing in Real Estate Can be a Great Tool for Building Wealth
Real estate investments offer several benefits that investors looking to build wealth should consider:
1. Stable, Reliable Returns
When purchased correctly and operating properly, a real estate investment should cash flow from the rental income well over the monthly expenses that the property incurs. This will provide you with a new passive income stream (how passive depends on how you structure your investment) that will help to consistently build your wealth.
As they say, “they aren’t making any more land”. Most real estate will appreciate during the time you hold it. While your tenants are paying down the mortgage for you, your asset should slowly gain market value, building your equity as you hold the property.
3. Tax Benefits
There are several tax advantages with real estate investments. We can talk all day about this one, but the highlights are:
- You can depreciate the property over 27.5 years.
- Passive income deductions can allow you to reduce your effective tax rate by up to 20%.
- Self Employment/FICA tax – The Federal Insurance Contributions Act is a 15.3% tax split by the employer and employee. Depending on how you structure your business, it can offset your taxable amount.
- Capital gains at the sale will be lower on long-term investments. Most people do not hold for less than one year which would be considered short-term. Real estate usually works better as a long-term hold, unlike other investment vehicles.
4. 1031 Exchange
This IRS rule allows Investors to swap an asset for another “like-kind” asset (real estate for another higher-priced real estate asset in this case). By doing so, you are not taxed on the investment when you swap. The taxable amount is pushed to the new asset. You are responsible for the tax at the sale of the new asset unless you perform another 1031 exchange.
5. IRA and HSA Opportunities
Depending on your organization, you may be able to use your IRA and HSA funds to invest in cash-flowing real estate. This is a fantastic alternative to the stock market and a great way to diversify your portfolio.
Choosing to Be an Active or Passive Investor: Questions to Consider
Now, before you go searching real estate sites to find a few rental properties, apartment buildings, or other asset classes to purchase, consider whether you would want to be an active or passive investor. An active investor should consider the following questions:
Do You Want to be a Landlord?
Landlording can have its downfalls. When something breaks, it’s on the real estate investors to fix it. Tenants will never treat your investment property the way you treat your home, and you need to be prepared for that. You’re the property manager now. How much time are you ready to spare to handle this new venture? If you aren’t ready for the additional time needed, you might be setting yourself up for more stress. There are property management companies that you can work with, but they will also require oversight and management.
Do You Know Enough about Real Estate?
If you don’t yet have a solid knowledge base on this type of asset, take the time to educate yourself about the asset type you are interested in before making any substantial investments in the space. You need to do your due diligence before purchasing an asset in any real estate market to make sure you buy at the right purchase price.
Are You Prepared to Inject More Capital if Needed?
You are not just responsible for the down payment and any general monthly expenses, there are big-ticket items that may need updating? Just because an AC unit is new, doesn’t mean it won’t need to be replaced. Just after the warranty is up, of course.
If you already know that you don’t have the time, or if you answered “no” to the questions above, consider passive real estate investing.
Benefits of Passive Real Estate Investing
If Real Estate Investing is a space you feel is worthy of your investment strategy, but you don’t believe you’ll have the time needed to see the asset succeed, or you don’t want to deal with the needs of active management, investing passively may be a route you should research. There are several groups that work to identify, purchase, and manage cash-flowing assets that distribute reliable returns to their investors. There are a few major benefits to this approach:
- The assets purchased are typically large, multi-tenanted commercial spaces. If you own a single-family home and the tenants leave, you have zero income until you re-rent that property. If a tenant leaves a 300 unit multifamily commercial property, it’s barely felt on the bottom line.
- The operators typically have years of experience with a dedicated team. When investing passively you can invest with a team of people who have decades of experience doing deals in whichever asset class they focus on. Experienced operators know the ins and outs of the investing business and hold keeping their investors happy as their highest priority. When you find the right group, your investment will be well cared for.
- Most importantly, it’s a completely passive investment. You still experience the same benefits of being a property owner but without the hassle of purchasing and managing the asset.
If you know you won’t have the time due to how busy your day to day is currently, we recommend investing passively in commercial real estate deals. There is a ton of education online on this topic (this website included!). If you would like to connect with people in person, seek out your local REIA (Real Estate Investment Association). There are great REIA’s everywhere, and you’ll meet people who work in REIT’s (real estate investment trusts), real estate crowdfunding, private equity commercial real estate, real estate agents, people who work with real estate mutual funds and ETF’s; every type of real estate professional you’ll need to know to hit the ground running and find the right investment opportunity for you.