The two primary vehicles for building wealth are stocks and real estate. While you can include either in your investment portfolio, real estate offers three advantages over other asset classes. Here are three of them:
Leverage is the first advantage: if you have $100,000 to invest, you can buy $100,000 worth of stock or $400,000 worth of real estate (with a 25% down payment).
For example, investing in a $400,000 investment property that appreciates 6% per year will give you an additional $24,000 in value per year, growing to $424,000 in the first year, which is better than $100,000 that appreciates 6% and grows by $6,000 per year, giving you a profit of $106,000 in the first year.
You spent the same amount of money, but by leveraging it in the form of debt or mortgage debt, you increased your potential gains from rising home prices. Real estate gives you leverage that other assets don't.
To learn more about this topic, read our article, “The Power of Leverage in Real Estate and How to Use It.”
The second is principal repayment. In the example above, you, the investor, borrowed $300,000 to purchase the property, but that's not your debt, it's your tenants paying it back each month.
One way to visualize this is that the $300,000 in debt doesn't go on your balance sheet, it goes on the borrower's balance sheet because the borrower is paying it back. All you have to do is come up with a down payment, and the borrower pays the rest over time.
Investing in markets with growing jobs and population (such as Dallas, TX and Indianapolis, IN) increases demand for housing, driving up rents and property values. Understanding market trends and property valuation methods is essential to optimizing your strategy and considering how to build generational wealth in real estate.
To illustrate the power of rising property values, consider the “10 -10” plan: buy 10 homes in a growing market and wait 10 years.
For example, in a market with strong population and job growth, a $250,000 home could be worth $350,000 within 10 years, increasing your net worth by $100,000. If you bought 10 such homes and waited 10 years, your net worth would increase by $1 million. Plus, while you wait, you'll have income from positive cash flow and tenant repayments.
To learn more about why calculating your net worth is important, check out this video by Kathy Fettke.