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Want to Build Wealth Faster than Any Other Strategy? Use these Four Tools.

Updated: Feb 6

Susan ​wrote recently​ about three main paths to achieving early financial freedom (extreme frugality & saving, growing a profitable business, and real estate investing). When I look at my path to hitting financial freedom in my 30s, real estate investing was the most instrumental to my success. There are four tools specifically that real estate offered me, and without all four, I would not have built the same net wealth in that time.

The four wealth-building elements of real estate: cash flow, appreciation, tax benefits, and leverage & loan pay-down

Cash flow, Appreciation, Tax Benefits, and Leverage & Loan Pay-Down are essential tools in building accelerated wealth. Most investing strategies incorporate at least one of these. Real estate investing is the only one to incorporate all four.

Cashflow 💰

Before I became an opportunistic landlady in 2013, I was using Craigslist to find out what properties in my neighborhood were renting for. I was blown away that the market rents more than covered my mortgage and escrow. I did some embarrassingly rough calculations of my projected rent minus estimated expenses in order to land on the difference, which was a lovely-looking positive cash flow number. This magical number is what made me decide to rent my first home. I took the cash flow concept to every deal thereafter and unless the number was positive, my answer was No.

Appreciation 📈

When you buy a share in a fund one day for $1.00 and next month, that share is worth $1.50, that share has increased in value. You're the proud owner of an asset that has appreciated. Appreciation is the increase in an asset's value. Real estate properties appreciate naturally (with the historic national average at 3.9% annually), and if you add value to a property by renovating it or adding amenities to it, you're forcing the appreciation even higher.

It was like finding $35,000 in my pocket.

The longer I had my rentals, the more they would appreciate (on average). So, not only were they providing cash flow, their current value was increasing. I purchased my first home with a loan that had an interest rate of 5.5%. The purchase price on that home was $215K. I put $40K down on that home, so on day 1 of homeownership, that home gave me $40K in assets. After three years, interest rates dropped and I decided to refinance. With my initial $40K down payment, and the amount of mortgage payments I had made that went to the principle of the loan (in total: $8K), I owned $48K worth of my home. BUT, something had happened in those three years. Appreciation! I hadn't done anything to improve the value of my home, but it was worth $250K. That means instead of owning the $48K amount that I had paid so far for my home, I actually owned $83K. It was like finding $35,000 in my pocket.

Tax Benefits 🏦

The first time I felt the tax benefits from owning real estate was soon after I made the purchase of my first home. I knew that owning a home meant I would be paying more per month for my housing than I had while renting, but I was OK with this tradeoff considering all the homeownership benefits I realized. Among the benefits I had NOT realized, however, was the first tax advantage of real estate: the 1098, or the mortgage interest deduction. When I was doing my taxes that year and saw that I was able to deduct the total amount I had paid in interest on my home loan that year, I was ecstatic. This indeed was a benefit I hadn't considered. Little did I know, it was among the smallest of the tax benefits that real estate investing provides.

As I began buying properties as investments, my taxes became more complicated, but to my pleasant surprise, my tax bill did not necessarily go up. I was able to take standard depreciation losses, and deduct my business expenses from my income. After bonus depreciation was placed in service, I paid for an engineered cost segregation study, which was not cheap, but provided for hundreds and thousand of dollars in paper losses on my taxes across my rental portfolio.

When I began investing, I assumed I would be a buy-and-hold investor through and through because I didn't like the idea of having to time the market or put a lot of work into rehabbing a property. But after establishing a rental business for several years, I was suddenly faced with choices about whether to stay in certain markets, and whether to keep certain types of buildings in my portfolio. COVID also played a part in forcing our hand, so we decided to sell. Thanks to appreciation, the assets we sold held a lot more value than they had when I had purchased them. But, thanks to the 1031 exchange, I didn't have to pay capital gains tax on that basis. Because I sold investment properties and used those proceeds to buy more investments (in this case, other properties), my gains were deferred.

Leverage and Loan Pay-Down 📉

None of the deals I invested in would have been possible if not for leverage. Leverage is when you use debt to acquire assets. For me, this started with conventional financing. And then, my real estate business started to take off when I leveraged the equity I had on my primary home to finance new real estate deals. What this means is that the home I was living in had appreciated, or increased in value, in the four years since I had bought it. In those four years, I had also made several mortgage payments, paying down the loan on this home. This meant that the bank's ownership of my home was decreasing while mine was increasing. I was able to apply for a line of credit that was equal to the amount of my portion of ownership of my home's current value. At the same time, since I had been buying rental properties for four years, the equity I had in those homes was growing. This is because while I was renting those properties out for cash flow, I was simultaneously paying their mortgages, and therefore paying down those loans (slowly).

There are powerful tools at play in this equation. As time passes on an investment property and it appreciates while the owner is paying down its mortgage, equity (amount of ownership outside of debts) builds quickly.

Cash flow and tax benefits allowed me to acquire deals that were slowly contributing to my wealth, rather than chipping it away. Leverage and appreciation allowed me to acquire more assets in a shorter amount of time and rapidly build equity in those assets. My equity growth is what propelled by net wealth so that by the time I was 35, I had over $6M in equity. This number boosted me even further because I was able to qualify for private equity deals reserved for accredited investors, and I had access to more equity that I could leverage in order to invest in more assets.

There are many fantastic strategies within real estate investing and some do not incorporate all four of these elements. When all four are put to work, it's a recipe for financial freedom.

If you're curious about getting started in Real Estate Investing, check out our starter course here.

🎥 Curious to see some of Caitlin's properties? Watch her short video!

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