We recognize that there is a great feeling when owning a cash flowing property. But can we let you in on a secret? Short term ownership is not the way to build wealth through real estate. We like to think that cash flowing properties builds income, but things like home equity can build long term wealth for investors. Click here for a detailed video that explains the difference between the two!
Building Real Estate wealth is what gives us not only stability, but it gives us security in knowing that if everything else fails, we will always have a backup plan. Building wealth is not the same as income and it can take years and years to see your return on investment, but it’s infinitely better than an extra $200 a month.
There are so many ways to generate wealth through real estate, helping you live life on your terms. But… there are also necessary skills that should be developed before you set off on your journey to build real estate wealth.
Here are 5 of the most common ways investors like yourself are building real estate wealth and what skills they need to succeed in living life on their terms.
Conventionally, most people think of flipping houses as a temporary ownership to sell right after. Many investors make flipping a house into a somewhat long term venture by making their primary residence that investment property during the renovations.
By doing this, investors can hold on to the house for much longer than they would have otherwise been able to and give the market time to help the property appreciate in value. Additionally, making an investment property a temporary primary residence helps exempt the investor from capital gains tax.
Being able to flip houses to hold them to appreciate can be a dangerous investment if the investor is not experienced enough. It is important to have a good understanding of the market, your timing in the market, how much appreciation you are expecting based on trends, budget, and timeline.
Without considering these main important factors, flipping can be a traumatically messy investment. Done well, it can be a really satisfying and worthy achievement.
Flipping houses works well as mainly a short term option to used forced appreciation to your benefit. Renting out a property, however, is a great way of generating equity over a longer period of time as you pay off your mortgage. This is a great, less risky longer-term investment that is much more beneficial in terms of tax that comes after returns.
Can’t decide which one is best for you? There is a magical middle ground though. It’s known as a lease option agreement, or rent to own. Although there are many names to describe this type of wealth building real estate investment, it basically entails that the tenant is allowed to have a simultaneous option but no obligation to, in the future purchase the property they are residing in from the investor.
The price of this property is usually pre-determined at slightly higher than the current market rental price as it is a beneficial offer to the tenant for long term purchase. This acts somewhat as installment payments and will go towards the final purchase price. Additionally, by adding a lease option to your tenant's contacts, it allows investors to force appreciation on a property that might not currently be seeing growth that massive while also generating a larger cash flow. Many landlords implement a sizable down payment towards the tenant's purchase of the property to prevent the risk of the tenant backing out.
A rent to own/lease contract is a great alternative to traditional renting as there is a better, and faster return on investment, and holds a lot less risk than flipping a property.
Who are these amazing tenants where can you find them? Generally, tenants that are interested in rent to own are individuals that are in a tight position financially but wish to own a home in the near future.
Not only does this option help the tenant, but the investor will benefit greatly from this long term investment, as finding a buyer is planned out long before!
This is the most common way investors are generating wealth through real estate. Long term rentals include single-family apartments or homes, multi-unit residential buildings, as well as commercial real estate.
Long term rentals hold the least risk compared to the others while also helping the investor generate home equity while paying off the mortgages through the tenants rental payments. Sometimes these properties can generate cash flow to help cover the expenses that come with having a tenant, or it can be a good idea to save it for a rainy day.
One of the big benefits from owning a long term rental property is that while generating real estate wealth by building home equity, it also is beneficial from a tax perspective. Typically, investors get to amortize the cost of the real estate property they own to expense it each year for tax purposes.
This is also beneficial from a tax perspective when compared to income generated from flipping homes. Because this happens over a longer term, there is minimal tax impact because there is no quick tax payment on the full amount of the property in one year. With these tax benefits, there is a great opportunity in this type of real estate investment to ensure you are building the most amount of wealth long term as possible.
Along with these great advantages, there are bound to be some disadvantages. The biggest one being vacancy. If it is difficult to find a tenant for your property, it is still necessary to make all the necessary monthly payments. Many new investors don’t realize that there can be difficult periods in their home ownership where they may need to cover the monthly costs. Before an investor gets involved in getting a rental property, it is important to keep in mind if they can afford the monthly costs if no tenant comes through.
Additionally, sometimes it’s not even the issue that you can’t find a tenant. Sometimes you can’t even get your tenant to pay their rent. No big deal, you can just evict them, right? Wrong! Sometimes it can take months to go through an eviction process. This time can cost you time and your own money, for the monthly payments of the property as well as the administrative fees that go along with having to evict a tenant.
Another disadvantage that comes up with rental properties is vandalism. Most people who are involved in long term real estate investing hear about or experience horror stories about tenants. These costs can cost up to thousands of dollars and can impact on the investor's ability to build wealth as these damages can cause major setbacks! This is why it is important to save the cash flow you receive for those rainy days!
Investing in land requires a lot of patience as the land takes time to appreciate, Additionally, there is no monthly rent to help pay off the land to invest in land, an investor will generally buy an underdeveloped plot of land in a relatively empty area away from the business of cities or even suburban areas. This is done strategically, as the investor will have to know what area will be up and coming and what areas won’t be.
To most investors, purchasing a house involves the purchasing of the land that comes with it. However, buying a house generally requires much more upkeep in addition to demands and requests of the tenant.
Investing in land is definitely a long term way to build wealth in real estate. Most investors keep a plot of land for 30 to 40 years before they sell it to make a good amount of profit from it.
In addition to the length of time needed for the land to appreciate in value, it’s also important to mention that this is not always a guaranteed investment. It is possible to keep a property for years without it appreciating too much. This is why it’s important to do a good amount of research beforehand, to know what people would want before they even know it!
Since their creation in 1960, REIT (real estate investment trusts) have been a popular alternative to traditional real estate investing. The best way to think of a REIT investment is a pool of assets in real estate that is traded freely in the stock market.
There are many benefits to this type of investment.
Along with all these benefits, there are some disadvantages to consider. For example, having a good understanding of the current housing market is important, as you don’t want to be active in real estate investment during a housing market crash. Additionally, fees for participating in this type of investment tend to be relatively high and must be taken into account when budgeting for your investment.
Building real estate wealth is long term. Home equity and appreciation of properties is something that happens over a long period of real estate investing, but what is great about wealth is that it provides investors with a sense of security through owning real estate assets.
As the population in southern Ontario increases, it will be harder to find great properties in great areas that are affordable for investors. This is why we recommend getting started as soon as possible in your journey, to ensure your success in building long term wealth!
In an article we wrote at the beginning of 2019, we discussed certain towns that have been experiencing massive population growth and real estate opportunities. We have noticed the population increases in the GTHA and were curious about how this will affect where people are moving.
After careful and long term research, we have noticed that as the small pockets in this area fill up, people are moving to the other side of the greenbelt. With GO expansions, we are noticing people are willing to commute from further distances willingly. This is a great opportunity to get involved in a market that is about to explode and get involved in this gold mine that no one is realizing is right in front of them!