How Do You Build Wealth Through Real Estate?
Question : I have been renting since I graduated college (4 years), but, I don’t understand why I should own real estate?
Owning real estate is one of best means to build wealth mechanisms available to average US citizen!
However, learning how to build wealth through real estate is not something that is taught in the average US school system.
Here are the ways in which wealth can be built, especially since you are just out of college, and looking to understand the benefits :
Principal Paydown :
When a mortgage is obtained, monthly payments will be made to pay back the bank. When your payment is made, a portion of that payment goes to paying down the principal on the mortgage itself. I like to think of this as a “forced savings account” to build wealth. In essence, as a borrower, you pay back the bank and as you pay back the bank you build equity in your home (and your net worth). This equity translates to wealth. The more payments you make over time, the more each payment gets contributed to principal in what is called an amortorization table.
Checkout the mortgage calculator, below, to better understand this example :
Tax Benefits :
While President Trump’s income tax reform of 2018 certainly changed some tax benefits to owning a home in the US, the ability to itemize (write off) property taxes and mortgage interest still exists if you exceed your annual standard deduction.
For each homeowner, on an annual basis, this benefit can change. On average, a tax savings of roughly 3% can be contributed to cash you keep in your pocket or can be utilized for wealth-building.
Follow this link for finding how the tax benefits of homeownership can translate to money in your pocket :
Appreciation in Value of Property
The third way we benefit for owning real estate is by holding in a real estate market in which the value of the property will accelerate over time. In most US markets, we can use a figure of 2-3% as the figure in which a residential home will appreciate in value on an annual basis.
However, it is important to remember that REAL ESTATE IS LOCAL and the average appreciate value will vary depending on what market you live in within the US. See below for what Vero Forecast considers it’s Top 10 and Bottom 10 real estate markets, based upon appreciation, for the 1st quarter of 2019 :
Inflation of Real Estate Pricing
Outside of real estate price appreciation based upon any individual market, national inflation also can be contributed as a benefit to wealth-building of real estate ownership over a long period of time. For instance, $1.00 spent in the year 1977 would be worth roughly $4.23 in 2019. In terms of real estate, a $100,000 home in 1977 would be worth $423,000 just using inflation as wealth-building factor.
Not to mention, if you lock in a mortgage rate for 15 or 30 years, you use the value of inflation in making your payment lower than it would be considered in today’s dollars.
To have some fun with understanding inflation on the US dollar, check out this inflation calculator :
Now…there is a FIFTH wealth-building factor to consider, but, can only be used as a landlord (homeowner collecting rents). Do you know what it is?
If so, leave a comment in the box below with your answer!