What is it about real estate that helps the rich to keep on getting richer?
Check out Forbes’ billionaires list and you’ll find the vast majority of members either made their money in real estate in some way or are now preserving and growing their wealth in real estate. That’s true of Warren Buffett, Richard Branson, and Larry Ellison. What is it about this asset class that helps them to keep on getting richer and richer, while others work so hard just to avoid drowning amongst the bills that cover the basics?
Billion Dollar Tax Benefits
We recently saw a lot of media noise about our current president and his almost $1B tax break. He certainly isn’t the only one. Owning your own real estate business and investing in property can provide massive tax benefits. Some of the biggest earners can use these advantages to make millions each year — and pay less in tax than the average worker making $60,000 a year.
Not only are there big tax breaks that help you keep more of your money, but 1031 exchanges and self-directed IRAs help investors make more money on that money tax deferred or tax-free.
The Power of Compounding
The wealthiest just put their capital into real estate and let it work. That builds returns on top of returns on top of returns. Did you know that investing just $5,000 can turn into millions if you give it time and let the power of compounding go to work for you? Try out the free compound interest calculator to see how it can work for you.
Income earned from real estate investing is considered passive income. That means your properties are working to make you money in your sleep. If you have 10 rentals, that means you actually have 10 households working their 40 to 100 hours a week to make you wealthier, even if you don’t get out of bed. Even better — this income is often taxed at a much lower rate than on earned income from a salaried or hourly job.
One of the best advantages of real estate is being a hard, tangible asset. It protects wealth. If you have stocks, those can be completely wiped out. The Lehman collapse is a prime example of average Americans losing their life savings in the market. With real estate, the foundation and land will always be there — and that’s where most of the value is. The key to getting wealthy often isn’t how lucky you get in generating big returns, but not losing what you make.
Real estate typically appreciates and grows in value ahead of inflation. Assets that don’t will constantly devalue. For example, cash. You can hide all the money you want in the bank, but often the fees will just eat it up. Put it under your mattress and it will probably just keep going down too. Look at how much a dollar was worth 20 years ago versus today.
Real estate not only appreciates in value, but throws off cash dividends too. The wealthy love this because it means they don’t have to dig into and spend their nest egg. They can live on the yields. If they don’t need the money, they just reinvest it and add it back to their pot.
Any other reasons you’d add to this list?
Let’s discuss below.