5 Things to Understand About How Real Estate Can Increase Your Net Worth to Enhance Your Lifestyle
We have deduced that there are 5 things with real estate that you can use to your advantage to increase your net worth so that you can enhance your lifestyle.
Real estate is my favorite vehicle for building wealth. Nothing else that I have invested in has provided the ability to have an asset on my balance sheet that produces cash flow for my income statement. No other investment has also been able to provide the freedom and security to cover my lifestyle.
The first way that real estate can increase your net worth is through inflation. Real estate investments are an asset on your personal financial statement. Chosen correctly, real estate has an advantage in that it can and does appreciate over time. One simple thing about real estate is that it is an inflation hedge. As inflation increases, the value of well-located, well-chosen assets typically increase because inflation will also increase the revenue stream derived from the asset. Cash flow should also increase due to inflation, which should help inflate property values.
The second way that real estate can increase your net worth is based on the location of the property. Knowing that inflation can assist with increasing the value of your real estate does not mean that you can be nonchalant in your approach to real estate investing. You have to pick your markets. Find markets that you understand. Research markets that you like. Understand the population growth in the area, understand the job growth in the area, and know the demographics in the markets that you are investing in. By doing this and by paying attention to location, you are building downside risk protection into your real estate investing. During a downturn, properties in the best locations are the last to get hurt and the first to recover.
The Property Itself
The third way that real estate can increase your net worth is based on the real estate you choose to invest in. Once you know your markets, you still have to pick the best real estate in those markets. Identify the areas in a market that you like best and evaluate properties in those areas. Know why people would become a tenant in that property in that location and why people may avoid becoming a tenant in that property in that location. Picking the best property you can in the best location in a market you like can be a huge differentiator to building your net worth over time and enabling you to better your lifestyle.
Cash Out Refinancing
The fourth way that real estate can increase your net worth is because of partial or full cash out refinances. As the value of your real estate increases from cash flow increases, you can go back to your lenders with loan proposal summaries requesting larger loans. As long as the cash flow can still be underwritten to the lender’s underwriting criteria, then lenders will often times provide larger loans that allow you to recoup some or all of your original equity over time. We have one property that we have refinanced multiple times over a 7-year period. Those refinances have allowed us to take out all of our equity multiple times over. We have then reinvested those funds into additional cash flowing properties. I highly recommend that you consider doing the same, as doing so can increase the number of assets that you have, which will increase your net worth and cash flow over time. Often times, we have been told by tax advisors that by reinvesting the cash out refinance proceeds, that there are little to no tax consequences. Check with your advisor to be sure, but if your advisor concurs, that could also increase your net worth over time.
Sale of the Property
The fifth way that real estate can increase your net worth is when you ultimately sell the property. When you sell property, you are often doing so for a profit, which can then be reinvested in larger, cash flowing properties.
Real estate is a vehicle to wealth if you are thoughtful in your approach to real estate investing. As an active real estate investment vehicle, real estate investing takes a lot of work especially in the initial phases after acquiring each property. As a passive real estate investor, investing takes thoughtfulness, it takes understanding your goals, and it takes resolve. It also means partnering with the right Sponsors who can aid you in growing both you cash flow and net worth.
Building both active and passive real estate wealth generally takes time, so you need patience. It took me about 8 years to go from no passive cash flow to over six figures a year in passive cash flow. I accomplished this by using my active income to generate passive cash flow through real estate investments. I continue to do that even now, but I am also using passive cash flow from my passive cash flow investments to continue making investments in more passive cash flow deals. Once you are up to a certain amount of investment dollars, the passive cash flow snowballs and enables you to make further investment.
Good luck on your journey and let’s continue growing our cash flow and net worth together.
Until next time, happy investing!