How to Create Wealth by Investing in Real Estate

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Some of the wealthiest people around made a huge chunk of their wealth investing in real estate. They buy smart, manage professionally and hold for gains. With real estate, all you need is to target the right properties and execute the purchase well in order to consistently create ways to grow wealth while freeing your time. In short, buy smart, manage professionally and hold for gains.

Creating passive income should be a financial goal we should all have. Working forever isn’t ideal and real estate is a great investment choice for those striving to literally earn while they sleep. So, how is wealth created by investing in real estate?

Let’s explore the real estate wealth generators, drivers and the math behind investing in real estate.

Real Estate Wealth Generators

What makes real estate investing such a superior investment?

It can generate wealth in four main ways: cash flow, appreciation, loan paydown and tax benefits.

This is a win-win for every investor.

#1: Cashflow

The power of cash flow from real estate is the main reason why real estate is a superior investment choice. Cashflow is the amount that you put in your pocket each month after deducting expenses from rent.

With cash flow, as an investor, you are able to design your life, replace your income and scale your portfolio. Cash is king, cash drives wealth creation by injecting actual capital where it’s needed to generate even more wealth.

#2: Appreciation

The general trajectory of real estate value is upwards. If you hold a long position on a property, the odds are that it will be worth more than you paid for. Even though the price didn’t beat inflation, it is still unlikely to be worth any less. How many investments can you say that about? That’s what makes real estate investing such a superior investment option.

The reason why real estate value increases, is that there is only so much land. This makes it a scarce resource and the competition to live or work in certain locations drives up prices.

#3: Loan Paydown

If your property is leveraged, then as an investor you will benefit from paying down the principal on your loan. Leverage (otherwise known as a mortgage) is how you use other peoples money to get rich.

It can take you quite a long time to save up the capital needed to buy your first property, but its easier to save up enough for a down payment. Thus, taking on a mortgage becomes a wise decision and paying down the principal each month increased your net worth with each payment.

#4: Tax Benefits

Real estate in Kenya offers two main forms of tax benefits: capital gains and mortgage interest expenses. Capital gains tax in Kenya is only 5% on the net gain of any property sold. The net gain of a property is the proceeds upon sale, less acquisition and incidental costs.

The revenue authorities also allow us to expenses mortgage interest, such that interest payments on loans borrowed up to a certain limit are deductible.

Like this:

KSHKSH
Gross Rental Income
Property I – 1 Unit Apartment900,000
Property II – 6 Unit Block Apartments1,440,000
Total Rental Income2,340,000
Less: Expenses
Land Rent/Rates10,000
Insurance20,000
Agent Fees30,000
Repairs150,000
Loan Interest120,000
Electricity 75,000
Total Allowable Expenses405,000
Net Taxable Rent Income1,935,000

Learn more: Top 5 Ways To Begin Investing In Real Estate

Real Estate Drivers

What is the driving forces behind real estate wealth?

Inflation and appreciation.

For real estate investors, inflation consistently and reliably continues to create wealth – in rent increase and value appreciation.

A: Inflation

Inflation leads to an increase in the cost of living, ergo rent as well. Typically, rent increases by a certain percentage each year to offset the effects of inflation. Thus, it is common for landlords to increase rent with each renewed lease.

While inflation leads to higher cost of living, as a landlord your cost of owning a property won’t increase with inflation if your mortgage interest rate is fixed. Though taxes and insurance gradually increase, the cost of owning the property decreased over time. Couple this with inflation driving up the value of a property over time; the difference here remains equity – as, over time, you own a more valuable asset year after year thanks to inflation.

B: Appreciation

While inflation leads, market appreciation follows closely behind and sometimes, may even rise much faster than inflation. Location is everything in real estate, as certain cities and towns grow, so does the value of the real estate.

Buy low; sell high.

Learn more: Ways to Turn Single-Family Homes Into a Cash Cow

Real Estate Math

So how do you generate wealth through real estate investing? For beginners, you’ll need patience and alot of time to gradually increase your net worth.

Here is how:

Assume, you purchase a house for Ksh 4M and put a 20% down payment of Ksh 800,000. Then, you’ll have a Ksh 3.2M mortgage. And because you purchased the property with cash flow, let’s assume you are making Ksh 20,000 per month, which is Ksh 240,000 in rental income cash flow per year.

If you use this money to pay down your loan, then you’ll now own about 25% (or slightly less due to interest and other expenses) of your property, which is about Ksh 1M worth in equity. Therefore, your loan balance on the principal at the end of the year stands at Ksh 3M.

However, remember the drivers to real estate – appreciation and inflation. At the end of the year, the value of your property will slightly go up.

You new net worth will be the value of appreciation, plus the 5% in additional equity. Over time, this will continue to increase until you have a significantly higher net worth than before.

Learn more: Should You Invest in a Property with a Friend?

Beware of Risks

Like all investments, real estate has its own risks too. The key is to buy smart, manage professionally and under-leverage. Unlike other forms of investments choices, real estate is a long-term game that requires your time and attention to deliver those gains. Know the risks and mitigate them as much as possible.

Read our review and see how you can make money today investing in real estate through REITs.

Happy Building!


Image credits: Top by Andrew Wilus from Pexels

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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