10 April, 2020

Four ways real estate helps you build wealth

If you have a pulse and have been on the internet in the last few years, you must have come across some quotes, or motivational speaker explaining how there is so much money to be made in real estate.

The details, however, tend to be very sparse on how exactly real estate generates money and builds wealth.

In this article, I’ll be taking you through the four major ways real estate builds wealth.

Appreciation

For most people, this is what they mean when they say “buy land”.

The general expectation in most places is that the value of land continues to rise with time due to factors like development & the inherent scarcity of land. A very good example today is Abuja Nigeria. Before it was designated the capital, most of the land belonged to the Gbagi tribe of the Northcentral part of the country and cost next to nothing to acquire because there was not really much going on.

Since the area was expropriated to be developed into the modern capital of Nigeria, the value of land both in and around the city has appreciated more than 1000% and it keeps growing.

There is also something known as forced appreciation which is the concept of increasing value by improving the property. Rendevaour the owners of Appolonia and Alaro Cities run this model across Africa and have seen immense success with it.

Carefully selecting locations with potential for growth and buying & holding land while it appreciates over the years is a tested and proven strategy for making money in real estate.

Cashflow

This applies mostly to rental properties and refers to the income from renting or selling of a property after expenses. This fluctuates for rental properties because expenses for managing the property are different every month, however with a good management strategy for the property, you can make a very decent return every year.

A strategy that’s been growing in popularity is the short let model popularised by Airbnb. Individuals can list their empty properties on popular platforms for short periods of time. Some entrepreneurs have reported higher earnings with this model and many landlords are opting to use their properties for short lets exclusively. Its yet to be seen how sustainable this model is in the long term, but there’s no question that its currently a popular means of creating an extra source of income with real estate.

Tax benefits

Depending on where you are, there are some tax benefits for owners of commercial properties

From depreciating the value of the property every year to writing off the cost for maintenance.

Its sometimes called a phantom benefit because you don’t actually receive physical cash, just a reduction in the amount of taxes you would have paid, which is more money in your pocket.

Consult a qualified tax consultant on what taxes and benefits apply to you as a property owner.

Loan paydown

More often than not, to acquire a rental property, you will need a mortgage which is simply a loan to acquire a property. Most mortgages are spread over a long period of time, each time you make a payment, you are acquiring more equity in the property and the equity of the mortgage provider reduces. More equity means that you own more and more of the property which you can sell or leverage into a loan or capital for another business or property.

This list is by no means exhaustive and there are many more ways that real estate helps to build wealth, however, these are the basics and when experts talk about building wealth via real estate, this is what they usually mean.

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