Are you interested in building your portfolio by investing in real estate? Buying multiple different properties is still one of the best ways to create wealth. For example, in times of economic turbulence, you can hold onto your property and sell it when the market is thriving again.
In this guide, we will focus on how to create wealth by investing in commercial and residential real estate. You will be able to start using capital to buy properties with confidence by defining your goals and understanding the different types of assets available to get the best return on your investment.
Decide on Your Definition of Wealth
Define Your Goals
One of the most important steps in your real estate investment journey is to establish what your definition of wealth is. You should be asking yourself these key questions:
- Do you want complete financial freedom?
- Do you want to save for retirement?
- Do you want to set aside funds for your children's college education?
- Do you want to build a vacation fund?
- Do you want to quit your day job and focus on investing in real estate full-time?
Once you define your goals and reasons for buying an investment property, you will have a clearer idea of how to proceed in the future. Most investors come up with a business plan before they choose to invest.
Active vs Passive
Another important factor to determine is if you want to take an active or passive role in real estate investing. The key difference between these two investment strategies is how much work is required to maintain the asset.
An active role requires you to be more of a hands-on investor. Some investment properties, such as fix and flip homes, require the owner to have a hand in fixing up the property to resell it at a higher price.
If you plan to rent out your property, then you will be stepping into a management investment role. This means you will be required to handle maintenance calls, payments, and other details that your tenants might require.
A passive investing role is more hands-off. This means you will not be a landlord directly. Instead you will hire a property manager or an office administrator to handle the day-to-day operations.
Passive investing also means the income you receive from your properties will typically come as rental income from tenants.
Decide What Type of Real Estate Investing to Tackle
Short-Term Vacation Rentals
With the world slowly opening back up again after the COVID-19 pandemic, people will be desperate to go on vacation. With the current economic standings, short-term rentals are poised to make a great comeback from 2021 to 2022. According to experts, the short-term vacation rental industry is expected to grow by USD 62.97 billion from 2020 to 2024.
Short-term vacation rentals can give you the opportunity to earn extra income on properties you own while you are not using them. One great benefit is tenants only stay for a short time, so you can increase the rental prices more often to accommodate fluctuations in the market price. During the off-season, you might want to decrease the price per night. However, during the high season, you can increase the rates.
One benefit of short-term rentals is you can collect passive rental income while you still maintain your career job. This can help you build wealth while you hold onto the property as it appreciates.
An often overlooked benefit of short-term rental investing is you can use the property for yourself and your family whenever you want.
Residential Real Estate
Many successful real estate investors get started by purchasing a single or multi-family home. They will often rent out this additional home, renovate it, or hold onto it until it appreciates in value.
One way residential real estate can build wealth is by being much cheaper and easier to get into than other investment types. It requires less money upfront and the opportunities are everywhere. You can often find great deals on single-family homes that are under foreclosure. You can also more easily take out a mortgage for a single-family home as opposed to commercial real estate opportunities.
One of the amazing benefits of single-family houses is that you will often have long-term tenants who will treat the property as if it is their own home. This will reduce wear and tear while the property increases in value.
You can also build capital if you pay for a single-family home in cash. That means all of the rental income you collect will go into your pocket as passive income.
One important thing to note is that real estate investments will also greatly reduce your tax bill. You can deduct the property taxes and mortgage interest, which can save investors a lot of money.
Commercial Real Estate
Commercial real estate is one of the most lucrative property types. While the barriers to entry are a bit more difficult, it is worth it if you want to build wealth in real estate. Commercial real estate includes office buildings, retail spaces, and industrial warehouses.
Commercial real estate is easier to maintain than residential properties because the tenants are not living on the premises full-time. Office workers will come in for eight hours a day, then go back to their homes. This will greatly reduce the wear and tear and expenses that an investor will have to pay.
Another wealth-building technique for commercial real estate is that tenants sign a building lease for 3 to 10 years, which means you will not have to find a new tenant for quite some time. Once a commercial lease is signed, you can focus on your other property investments.
Some commercial leases require the landlord to pay for maintenance expenses. However, some commercial building leases will designate the tenant to be responsible for some repairs.
Industrial buildings also offer a great way to create wealth by investing in real estate. For example, data centers are the fastest-growing commercial investments. All of the information we store online requires industrial space to store servers and other equipment. The data center construction market is expected to grow by 4.8% in the coming years.
House flipping is considered an active investment type. So, before you purchase a property, keep in mind that you will have to do a lot of work to sell the house for a profit.
While house-flipping might require more effort from the investor, it can be an immensely lucrative investment opportunity to help you build wealth.
One thing about house-flipping is it can be extremely rewarding for investors. If you find a distressed or foreclosed property for an amazing deal, you can fix it up and sell it for three times the purchase price.
How Do You Create Wealth in Real Estate?
Build Your Portfolio
The quickest way to create wealth by investing is to build your portfolio. If you purchase an investment property, you should use the money from that investment to buy or renovate another property. The more diverse your real estate portfolio is, the more profit you will be able to make.
If you have the funds to purchase multiple different property types, you can increase your returns immensely. We recommend getting started in one real estate sector with low barriers to entry, such as residential real estate, then making your way up to commercial investments.
Take Advantage of Real Estate Tax Breaks
Some of the common tactics in real estate investing can help property owners build wealth using their investments. Many of the most important wealth-building techniques include tax breaks and other financial loopholes.
You should take advantage of real estate tax breaks such as deductions, which include mortgage interest, property taxes, depreciation, and operating expenses.
Another real estate tax benefit is the ability to complete a 1031 Exchange on like properties. This IRS code allows you to swap one investment asset for another with limited or no tax at the time of exchange. This will eliminate the capital gains tax as the gains are not yet realized. Instead they will be deferred.
You might also be able to deduct any renovations you do to the property. If you complete any renovations that will make the property more energy-efficient, you may be eligible for additional tax breaks.
If you make a big purchase, such as a replacement AC, you can deduct the whole cost of the repair, unit, or installation from your tax bill.
Is Real Estate The Key to Wealth?
Are you ready to start building your wealth with real estate? In this guide, we have provided you with the different property types and ways to create wealth investing in real estate. While many people may be nervous about investments in this day and age, real estate has always been a sound and profitable investment. It offers you many opportunities for short and long-term profit.
If you're ready to make the jump into real estate investing and start building your wealth, contact us for more information on how you can earn money with property investments.