Real estate is a trendy investment today. Prices are low, interest rates are low and opportunity is everywhere. But why is it right for you? Do you know the right investing niche for you?
While I like to capture all five principles, not all investments will do this. If you pay cash you lose the leverage aspect. Are you an active or passive investor? Do you want to be active and involved in the day to day grind? Or do you like getting paid each month for the diligence you did up front, such as the buy and hold or buy and rent investor?
Knowing your niche is as important to real estate investing as it is to any business. First a quick review of the five wealth-building principles so you can figure out which ones fit your plan.
• Income: From cash flow
• Deductions: Income from tax benefits
• Equity: Tenants paying down your mortgage
• Appreciation: 50-year national average is 6% per year
• Leverage: Income generated by using other people’s money
Active investors doing wholesaling and flipping can indeed capture four of the wealth building principles while the passive investor can obtain all five wealth building principles.
The big difference comes in the holding time. If you buy and quickly sell you lose the long term benefit of each of these wealth building principles. Passive investors enjoy these benefits over the long term and they simply continue to compound. So review the principles and get the right fit for you.
• Income: Both passive investors and active investors can earn income from flipping, wholesaling or buy, rent and hold.
• Deductions: Passive (rent and hold) investors can deduct interest payments, depreciation as well as all cost associated with the business. Active investors (flippers and wholesalers) can deduct their cost of improvements and holding costs only.
• Appreciation: Passive buy and hold investors love this one as they can capture this for the duration of ownership. This is often considered the best wealth building principle and one that has made many millionaires. Active investors capture some appreciation through the value-play of converting the property to its highest and best use.
• Equity: Equity build up is when tenants pay down your mortgage so this one is only for the buy and hold investor
• Leverage: Both active investors and passive investors can utilize leverage. Active investors doing wholesaling and flipping can indeed capture four of the wealth building principles while the passive investor can obtain all five wealth building principles.
Seasoned investors who have mastered their skills have learned to navigate back and forth as the market dictates which strategy will work effectively in the current market within a defined location. These active investor strategies can be used to create quick chunks of cash to allow for more passive investments.
Each investment category has benefits. Finding the niche that works for you that accomplishes your short and long term goals is the key. You should always master your niche before attempting another.