The quadfecta of building wealth in real estate investing

Real estate investment returnsIn 2015, we purchased this luxury 6-plex for $960K with indoor parking, central air, four 3 bedrooms/2 bathroom units and two 1 bedroom 1 bathroom units. Each year we’ve been close to cashflow neutral, earning absolutely no monies from positive cashflow. Many of my startup students ask in bewilderment, “Why bother?”

The reality is that many of my new startup students have walked away from investment opportunities simply because they don’t generate cashflow. Unfortunately, they have likely missed out on some pretty amazing opportunities. The reality is that positive cashflow isn’t the only way to build wealth in real estate investing; in fact it often isn’t even the typical way.

Real estate investing, when done right, creates wealth in four ways:

1 – real estate appreciation
2 – mortgage paydown
3 – taxation benefits
4 – positive cashflow

Looking at this property, less than 3 years later and it’s appraised at $1.1M+, that’s an appreciation of $140K+. Our monthly payments have reduced the balance by $72K+. Depreciating the value of the property by 4% per year has earned us $130K+ in tax basis reductions, and, as indicated above we’ve earned $0 in positive cashflow (yup… zero, zip, nada, zilch).

If sold today, we would receive back our original investment plus $212K in cash (less legal fees, realtor fees, etc. of course); our taxation on the capital gains would be reduced by the depreciation and we would come out further ahead than other investment vehicles (stocks, etc.).

Of course we aren’t selling it, in fact we plan to remain invested for another decade (or two); but I wanted to share this lesson, using a tangible example, so that my investment students could understand why sometimes they just can’t find an optimal investment opportunity when there are likely dozens right beneath their noses… they’re simply considering the wrong criteria!

It is vital to understand the entire formula in order to make an informed decision. Don’t use any single criteria to determine your investments.

Oh and one final note; those of you who’ve been procrastinating on taking action, just like I did when I first started, just remember, the best opportunity to start investing is always “now”. Had I started 9 years prior when I began taking courses, I’d have 125 properties today, not 24. That procrastination cost me a cool $12 million in returns; far more than the numbers listed above.

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