Ever played Monopoly? Most likely you have. Anyone who’s ever played knows that the winning strategy requires involves owning profitable real estate. One simply needs to buy those most frequented properties, build them up, then sit back and wait. Soon enough, the “dog” always lands on a Hotel. Unfortunately, real life isn’t played and won with two dice and fake money. Rather, it’s a game of complexity and chaos. It can, however, be won through a multitude of strategies. Lucky for us, like Monopoly, owning profitable real estate is one possible pathway to victory. To help you win, this article will provide a summary of the 4 strategies you can use to make money in real estate.
The first strategy is cash flow. Simply put, you can make money by buying a house, a condo, a piece of land, or an apartment and renting it out to a high quality renter. The renter pays you rent, from which you pay expenses. Whatever is left over is yours to play with. To learn more, read Brandon Turner’s book on rental property investing.
The second strategy is appreciation. Appreciation refers to the natural increase of the price of real estate. History shows that real estate is pretty much a perpetually increasing asset. It may decrease for a short time, but it will always increase over the long-run. So, to make money via appreciation, you first buy a house at one price, wait, then sell for a profit. Canadian writer Douglas Gray has written extensively on the subject.
The third strategy is tax savings. Though highly complex, owning a house can be a great way to save on the amount you pay in taxes. When you buy a house, you have the opportunity to deduct an amount of depreciation from your home each year. This amount translates into your paying less taxes. In short, less taxes paid equals more money in your pocket. Additionally, if you have a mortgage, you are frequently allowed to deduct the amount of interest you’ve paid. Again, more money in your pocket.
Lastly, mortgage principal pay down. If you use a mortgage to buy your home, each monthly payment increases the amount of house you own. This means with each payment, you’re growing your ownership equity. For example, if you bought your home with 20% down, then you can be said to own 20% of your house. With each payment, you increase the ownership incrementally.
What’s exciting about each of these strategies is that they rarely occur by themselves. Instead, for example, a rental property owner can experience the combined advantage of all 4 strategies. Similarly, a person who owns their own home benefits from tax savings, mortgage principal pay down, and appreciation.
The bottom line is this: each of us can win the game of life when we employ certain strategies to manage the chaos and complexity. Buying profitable real estate is one such strategy. Yes, it requires hard work, and yes it’s a much slower process than winning at Monopoly. But, just as monocled rich man in Monopoly might say, it’s a strategy that’s bound to win time and time again.
(article appears in the January 2018 issue of The Stew)