The 5 Reasons Why Real Estate is the Best Wealth-Builder for Members of the Military

Real Estate Investing in the United States is magic. Investors from other countries often disregard any additional resulting taxes and invest in our real estate market. It boggles their mind that our system is so profitable. If you or your parents were caught up in the 2008 crash, you are probably on edge about real estate and that is completely understandable. However, all it takes is arming yourself with knowledge of the system to be ready to capitalize on the next market crash instead of simply surviving or even drowning amidst all the hysteria.

There are FIVE specific aspects of real estate that show why it is a fantastic way to build wealth. Each aspect is reason enough to take the plunge, but when properly combined, the results cannot be overlooked.

Leverage.

This term is thrown around so often, it has almost become a buzz word. The problem with buzz words is that people rarely understand their true meaning. Leverage, according to Investopedia, is “the investment strategy of using borrowed money.” Here is how I like to think about it: it’s a way to invest MORE money. This money is not yours, in fact, you are paying interest on this money. However, at the end of the day, you are now putting more money into an investment then before. The best part is, the gain you make on that money is multiplied proportionally to the ratio with which you borrowed that money. For example, if you had 20 dollars and you made 5% interest on that money in a year, you will have 21 dollars. If you used those $20 to leverage (or borrow) another $80 at 3% annual rate, and you make a total of 5% from the entire $100, you will end up with about $22.60 after paying your lender. This may not seem like a lot because we are talking about a $1.00 in return vs $2.60, but in this example the return on investment is 160% greater! Now imagine if the difference between the interest you are charged vs the interest you make is even greater… And now imagine you are working with larger sums of money. The simple truth is, if you are making more interest from of a sum of money than the interest you pay for it, you are a smart investor. For the sake of making my point, I am over-simplifying this example and not taking into account inflation and other various factors.

Depreciation and Appreciation. – This is where things really start getting magical.

These are two very separate topics, but I like talking about them together. The economic trend, according to the U.S. Census is that homes are appreciating at an average of 5.4%. Although, some experts believe it is closer to 3.2%, that is not the point. All inflation and other factors aside, that is a halfway decent return on investment already. Especially when you consider all the bonds people are invested in for a mere 2% return.

Depreciation is exactly the opposite of appreciation but only from a tax perspective. This fact is what really makes a difference. In the eyes of the Internal Revenue Service (IRS), a real estate investment is a depreciating business asset when used as a rental property. In other words, the IRS considers Real Estate to slowly lose its value. Now, this would be true if a piece of property just rotted on the side of the road with no maintenance or general care. Let us assume that a certain real estate investment will receive the required maintenance and care. We know that it will not lose its value in the long run. In fact, if you are smart about how you buy, its value might appreciate several times more than the nation’s average.

But STILL, the IRS considers it to be losing its value! Why is this important? Because the value that it loses can be deducted from your taxable income. Boom! Depending on the kind of investment property you own, its value will diminish down to zero over 27.5 or 39 years. So, if you paid $275,000 for your rental property, you could potentially deduct $10,000 of income every year. If you combine that deduction with the mortgage interest that you will also be deducting, your taxable income from that property will most likely be ZERO. If this concept is still not making a big enough impact on you, just understand this: there is a way to invest in real estate and not pay taxes. This is NOT a loophole. In fact, the United States Government wants you to do exactly what I just described. But more on taxes later.

Cashflow.

This is the next big piece of this magical puzzle. Appreciation is something I try not to consider when analyzing a real estate investment. Instead, I focus on cashflow. The calculation is very simple: monthly income (rent) – monthly expenses (loan payment / utilities / management / taxes / other) = monthly cashflow. The reason why cashflow is the most important metric is because A) I want to know that the property can at least pay for itself. This renders less investor stress and makes it a more of a passive investment… and B) The goal is to create additional streams of income. If you are not making money after all expenses are payed, then you are shooting your lifestyle in the foot. Another good metric for knowing how well you are doing is Return On Investment, or ROI. If you want to understand how well your money is working for you, just add that cashflow up annually and divide that by your down payment to get your ROI. I shoot for an ROI of over 10% cashflow return, also known as “cash on cash return.”

Learn more reasons why real estate is the best wealth generator

Written by Markian Sich, U.S. Marine Corps

President of activedutypassiveincome.com