mortgage

Inflation – The Secret to Building Wealth in Real Estate

 

building wealth in real estate

“The major fortunes in America have been made in land.”- John D. Rockefeller

After more than 75 years John D. Rockefeller is still considered the richest man in history when you adjust for inflation.

According to the New York Times as of 2007, his net worth reached $192 Billion. Compare this with Bill Gates whose fortune is only $82 Billion. This shows how enormous the fortune of John D Rockefeller actually was. Only Commodore Vanderbilt and John Astor have even come close with $143 Billion and $116 Billion.

Rockefeller at one time controlled 90% of the nation’s oil and his fortune was approximately 1.5% of the nation’s economy. That is legacy wealth. Wealth that is hard to lose of destroy.

Even though all his wealth was made from oil, he still attributes major fortunes being made in land or real estate. That is a powerful statement.

What I am going to discuss here is one of the reasons why real estate is able to create legacy wealth. Wealth that can last for many generations if it is managed properly. Interestingly enough this is also one of the least understood benefits of owning real estate.

This post is the second part of a four part series about real estate. The last post, These Top 7 Powerful Tools Can Create Legacy Wealth from Real Estate, briefly touches on the importance of inflation to your real estate assets. I plan on going into much more depth this week.

The Advantages of Investing in Real Estate

Real estate is one of my favorite asset classes. Here is why.

In the prior post of this series I touched on a few of the reasons that real estate is such a favorable asset to invest in.

  1. You can easily use leverage to buy it,
  2. there is a limited amount of real estate
  3. Tax benefits
  4. It can create cash flow
  5. Appreciation potential
  6. It is inflation Proof
  7. You can reduce the debt in real terms over time.

Just one of these alone would be a good enough reason to invest in this asset class, but all 7 make it especially powerful. With exception of the tax benefits and the limited supply of real estate, all of the other benefits rely on inflation to enhance the performance of real estate over time. While I will discuss these in more detail, let’s first discuss what inflation is and how it works.

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These Top 7 Powerful Tools Can Create Legacy Wealth from Real Estate

real estate wealth

“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.”  – Marshall Field

Marshall Field was an American Entrepreneur who lived in the 1800’s. His quote was obviously made in an era before tech stocks, hedge funds and excess money printing by the Federal Reserve. However the principal of owning real estate to become wealthy still holds true.

Real Estate is arguably the best asset class if you want to build enormous wealth. While you may have heard of real estate investors such as Donald Trump, or Sam Zell, there are countless more who are relatively unknown and are just as wealthy. Many of these investors prefer to live in relative obscurity.

What I want to show you are the 7 powerful techniques that these real estate tycoons were able to use to build their enormous wealth. While most of these techniques apply to both real estate investors and homeowners, there are more benefits from owing real estate as an investor rather than a home owner.

The 7 reasons you should own real estate as an investment:

real estate leverage
 

Leverage

Real estate is one of the few assets where you can use enormous amounts of leverage to own the asset, and banks will happily lend it to you. Leverage is a way to amplify the returns you receive on that asset, in both directions. Leverage is both beneficial and dangerous, so make sure that leverage is working in your favor.

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Deflation – How a Mortgage Can Destroy Your Real Estate Wealth

real estate deflation

“Thus inflation is unjust and deflation is inexpedient. Of the two perhaps deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned.”   – John Maynard Keynes

This is the 3rd in a series of 4 posts about investing in real estate. The last post, Inflation – The Secret To Building Wealth in Real Estate, is about how inflation is essential to building wealth via your real estate investments. While most people subconsciously understand that real estate has all of the features listed in that post, they may not be sure why real estate has those features. The key is inflation.

This week I will be discussing the other side of the coin, and what happens when there isn’t inflation to make your real estate the wealth building tool that it has been for over 50 years.

This week I will be discussing deflation and how it would affect your real estate investments. Many notable economists have made deflation the economic boogieman. They have claimed that it is the worst possible outcome in an economy. When you hear someone talking about deflation, it is highly likely that Japan will also be mentioned in the same sentence.

Deflation is rare in the global economies of today. This is primarily because central banks around the world have engaged in a campaign to create a consistent inflationary environment for their own economies. This has worked for a few decades without hyper-inflation or persistent deflation in developed economies. Except for Japan.

Japan is one notable example of deflation which has taken hold in an economy and created a deflationary spiral. This is the essence of what economists fear. While this may sound scary, it isn’t, or doesn’t have to be. This week I will be discussing how deflation affects real estate, and why you should understand this if you want to protect your wealth.

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What You Don’t Know About Renting vs Buying a Home Can Cost You Money

 

renting vs buying a home

“If you rent a home, it is an expense. When you buy a home, it is an expense. If you buy a home and rent it out to a third party, it becomes an investment. A better way to put it is that when you are renting, you rent from a landlord. When you buy a home to live in, you are renting from yourself.”

This is the third and last post of this series. The first post, Should You Rent or Buy a Home?, examined what factors you should consider when renting vs buying a home. The second post, What is the True Cost of Owning a Home? , examined the true cost of owning a home. In this final post I will be examining whether it makes sense to rent or buy a home. Numbers don’t lie, so lets look at some real numbers.

There are many calculators available online to help you figure out whether to rent or own. Unfortunately very few include the true costs of owning a home in their calculations. If you read the prior post, you will have some understanding of what was left out and how to calculate it. The math in post this will be relatively straight forward and a bit more fun.

I will be showing you some examples of real properties that I have found in the past year to illustrate this secret that very few people know. Whether you are a real estate investor or looking to buy a home to live in, you will want to know this secret.

“you are paying someone else’s mortgage, so why don’t you pay your own?”

There is a myth out there that when you rent, “you are paying someone else’s mortgage, so why don’t you pay your own?” This is a farce. It doesn’t matter whose mortgage you are paying, what matters is your costs to live in that home.  No matter where you live, your cost to live in that home is an expense. If you rent, you pay rent to a land lord. If you own, you pay a mortgage, taxes, insurance, maintenance, etc. There are costs for both options. Unless you live in a tent you will be paying for a home either way.

The reason many people think that owning is better than renting is that they equate owing a home as an investment rather than an expense. Once they make the realization that it is…

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