How To Earn Your Salary 6 Ways In One Investment Deal
When a person earns a salary, they usually have only one way of earning it, like going to their 9-5 job to earn a paycheck, whilst estate investment deals pay up to 6 different ways to real estate investors.
To eventually earn a salary usually requires attending post-secondary school for 4+ years to earn a degree and often collecting student debt. As a result of this many students are left spending a huge chunk of their lives paying off that debt, out of their salary paycheck. Most of these people are highly intelligent individuals taking the traditional route to lead a successful adult life as indicated by societal expectations. But now times have changed and this route usually doesn't pay as much as other routes. Today we live in a world where a C student who makes bad decisions on the right investment such as RIE (real estate investment) can make more money than an A student with multiple degrees and a steady salary who makes the right decisions in their chosen career trajectory, such as working a corporate position.
If you don’t believe me, check out this real-life example.
Let’s say a C student who has no business acumen and barely finished high school, purchases a commercial condo. This student has no experience, guidance or network. He wants to turn it from commercial to residential by adding a kitchen sink, and thinks he will sell it for a higher amount. However, when he applied to the city for rezoning they made him gut the entire apartment, fix plumbing, and refinish the entire condo unexpectedly. He had to update the soundproofing, duct systems, and just about everything else in the condo on a whim. This process took 2 years because he was inexperienced, however, after those years of spending a lot of time and money, he sold the condo and was still able to turn a profit. There is pretty much no other industry out there where a person can make mistakes on every level as this student did, and still end up making money in the end.
Now you might be wondering, how is that even possible?
When you invest in real estate, you have 6 different ways it pays you, as compared to only one standard way like with a traditional salaried or hourly job. Those 6 streams of income are outlined below.
Cash flow - When you buy and rent out your real estate, you create monthly cash flow, which is money every month you make from collecting rent. This is passive income because once everyone is set, you don't need to do much work and the cash flow keeps coming each month, so long as tenants continue to pay their rent.
Instant Equity - All successful real estate investors make money as soon as they buy the property because it's usually off-market, and underpriced. As a result, as soon as they purchase the property they gain instant equity on it. Experienced investors want to make money on day 1 and to get a good amount of equity on your buy you usually have to either have connections to a good realtor to negotiate the price down for you or buy the property privately off-market. Equity on day 1 of a deal usually happens on mismarketed opportunities that don't have enough exposure, or do have exposure but to the wrong types of buyers so they do not sell for what they potentially could. For example, a 5-plex residential building is being put up on MLS, under "Residential" instead of a "Commercial" type of property. This gives a lot of exposure to people who are not investors and are looking for their own family home and would not be interested in purchasing a 5 plex. At the same time, investors do not see this deal because they are looking for a "commercial" type of property.
Leverage - Real estate is the only industry where the bank will give you 3-5 times more money than you will put in yourself. This means whatever investment you put in, your returns are much higher on your investment in real estate than any other business or deal. This is because you're investing the bank's money and not your own, in real estate, a $100,000 investment will buy you $1000,000 in the property. However, in stocks, $100,000 will get you $100,000 in stocks flat out. Banks will not even lend on their own stocks due to risk factors but will lend on real estate. If the bank is willing to put their own money into real estate instead of their own stocks, so should you!
Appreciation - An experienced real estate investor understands that not all real estate properties appreciate in value at the same rate or at the same time. Real Estate appreciates at different levels and rates depending on the market, submarket, city blocks, countries, economies etc. Investors stay on the lookout for undervalued city blocks or sub-markets that are appreciating in value, and what controls the appreciation? That would be the supply and demand of people and property in the area. However, physical conditions can manipulate the demand by forcing it through renovations and alterations to the property including bathroom and kitchen upgrades which carry high-value increases when updated. One of the best strategies to force appreciation is through BRRR - purchasing a runner-down property and renovating it. If you’re interested in learning more about BRRR, you can read our blog detailing it here.
Economy - This is a big factor of appreciation as when the economy is booming in an area, people start moving into town to seize the opportunity. When the economy is going down, they move out of the area to look for better opportunities elsewhere. Interest rates also affect appreciation as when interest rates are high, it can make things less affordable, making it hard to actualize appreciation on the property.
Depreciation - Skilled Real estate investors can make money by using depreciation techniques that amortize the property over the life of the building of approx 25 years. This is done by an accountant creating paper losses and sheltering revenues from taxes. There are costs and benefits to using this technique and speaking with your accountant. Why depreciate? $1 today is worth more than $1 in 10 years. Taking your money out of your real estate as fast as possible and moving, makes that same money more valuable. Effectively making your money work harder for you in the long run.
Principal pay down - Many inexperienced investors are scared to see high mortgage rates because the only thing they see is the liability and debt. However, an experienced investor wants to see a higher mortgage because it means higher equity being built every year. The more mortgage debt you have, the more equity you make each month. Especially if you rent the property out, someone else is paying down your mortgage and you make a passive income each month. You can also take out equity tax-free through a debt refinance by buying a new property, and because this will be considered a loan and not income, you don't get taxed on loans.
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Credit to Money, People, Deal by Stefan Aarnio for source information.