It is through TLTsolutions that I carry out my desire to help others build generational wealth. My own journey has given me the opportunity to create passive income, which allowed me to change careers without income interruption after nearly 30 years in the healthcare industry. Throughout my professional life, I have been presented with numerous opportunities to strategically buy and sell a multitude of residential properties and now hotels. Given my success in achieving financial freedom through investing in real estate, I feel it is my purpose to educate those in my community and share the knowledge that I have gained over the past 15 years. I believe everyone should include real estate in their investment portfolio.
There are five main reasons why I invest in real estate to grow my wealth:
Passive Income
Tangible Asset(s)
Favorable Tax Treatment
Leverage
Appreciation
Real estate is, without a doubt, one of the most effective ways to acquire passive income.That is, acquiring taxable money on a
regular basis with little to no effort. Of course, the level of involvement you want to take on when investing in a property is entirely a personal choice. The good news is, either way--you can still reel in revenue. I chose to manage my own properties and I leveraged automation tools, such as digital door locks and property management software to efficiently support my efforts. Moreover, the tangible asset aspect of real estate investments provides an unparalleled sense of security--I can physically see and touch my investments, and I know they will uphold a certain degree of value well into the future.
The cash flow I’ve received from rental properties over the years has been key to achieving my financial freedom. Even when I had a full-time job, I knew I would have my real estate income to support me during changes in employment as well as to bolster my retirement income.
A bonus, passive income from real estate investments has favorable tax treatment. When you invest in real estate, you get to write off depreciation, and when you do--you’re reducing your current taxable income, therefore paying less tax. Depreciation is not a true expense and although it is accounted for as such, no cash actually leaves your bank account. Depreciation creates a phantom loss in some cases that can reduce your taxable income in the short term –depending upon your income level.
The key benefit of investing in real estate to create wealth, especially when you are first starting out, is leverage. Due to the nature of real estate, you have the ability to borrow the majority of money needed to purchase the assets thereby increasing your return on investment. In simple terms for example, say you purchase a single-family home for $100,000 with a mortgage for 75% of the purchase price or $75,000. That means your down payment is $25,000. If 5 years later you sell that home for $125,000 then your return on investment is $25,000/$25,000 or 100%.
Comparatively, if you paid cash for that same house and did not receive a mortgage then your return on investment would only be 25% with $25,000/$100,000. A much lower return. Leveraging would ideally allow you to invest your $100,000 in (4) $100,000 homes verses (1). If you were to invest in 4 homes and achieve the same results - you would be doubling your money taking $100,000 and turning it into $200,000 as opposed to only $125,000 when you invested in all into one property. This does not include the cash flows that you would be receiving from each of the four homes as opposed to only one home when you invested your entire $100,000 in that home without a mortgage. This is the benefit of leveraging a mortgage to build your wealth.
Another way to maximize the benefits of leveraging real estate is through cash out refinancing whereby you benefit from the appreciation of an asset - appreciation can be forced or caused by inflation. Forced appreciation occurs when you create or improve the value of an asset by making improvements to the asset and/or changing its purpose.
An example of further benefiting from leverage
I combined the benefits of leverage and forced appreciation in 2013 to build wealth follows. When our nation was still working to rebuild after the economic downturn that affected millions of Americans, and many industries—especially real estate. That year my husband and I bought an abandoned townhouse in Maryland through a foreclosure auction for $183,700, and put in a little over $20,000 towards basic remodeling, such as paint, carpet, minor bathroom upgrades, new appliances and granite countertops in the kitchen to make the property desirable at the maximum marketable rent for the area. I rented the townhouse to a woman and her mother who were the only tenants for the 5 years that we owned it. Having the same tenant is an advantage, as it reduces the cost of turnover and thus increases your return on investment. After the rent was collected, the mortgage and all other expenses paid, we made a $1,000 a month--or $12,000 a year-- in net cash flow from the property.
Three years later, in June of 2016, the same townhouse was worth around $265,000, so we refinanced it and pulled out all the cash available through the refinance, which was $57K, nearly 100% of the $60K, that we initially invested which included the 20% down payment, closing costs, and renovations. Although, our net cash flow decreased to $870 per month due to the higher mortgage
payment after the refinance, we were able to take the cash from the refinance and buy another townhome in the same neighborhood which yielded us another $1,000 per month in net cash flow for a total of $1,870 per month-- a little over $22,000 per year. The best part about it was that by refinancing the 1st townhouse purchase we created a nearly infinite return on investment for that asset because we then only had a mere $3K invested in the property post refinance. Other leveraging strategies I used to maximize my return on investment included using an 18-month zero interest credit card in which I earned airline points, and charged all of the renovation costs for the townhouse to that card.
The goal for me has always been to keep my money moving and working for me instead of me working for all of my money. I sold the 1st townhouse at my targeted 5 year holding period in May of 2018. The timing was perfect as the tenant needed to move to accommodate her ailing mother who could no longer handle the stairs in the town home. After they moved out, I revitalized the place and put it on the market for $330,000. Within days, I had an attractive offer and sold the property netting $108,000 before taxes. The $108,000 was from appreciation and paying down principal. In addition to the net proceeds from selling the property, we received an estimated total of $56,000 in cash flow (before taxes) over the 5 year hold period. We nearly tripled our investment in those 5 years with a 2.7x multiple on invested capital (MOIC).
Refinancing and pulling out cash from productive assets is an effective strategy to grow your portfolio and thus your wealth. This is the best example of leverage and why I love investing in real estate – it is one of the simplest ways to grow your wealth.
It is important to note that in order to leverage successfully, you need good credit. When you have poor credit, you may not be able to qualify for a mortgage or you may have to pay higher interest rates for your mortgages, which could negatively impact your cash flow and your ability to achieve a beneficial cash out refinance. The higher your interest rate, the higher your expenses and thus the lower your net cash flow. In general, you will want to have a credit score at 640 or above, however, the better the credit score, the better the rates and preferred terms. I recommend managing your credit meticulously. I signed up for a program that allows me unlimited access to my credit score and respective notifications. I check my credit score regularly--it’s crucial in real estate if you are using the leverage strategy.
My transition from residential to commercial real estate
The leverage strategy can be highly effective, however, the key to success is to ensure that you educate yourself and apply the fundamentals of real estate, paying close attention to the market where you are investing. During the housing bubble, I didn’t buy any real estate for nearly five years--from roughly 2006 to 2010. The reason for this investing hiatus was that residential real estate where I lived became incredibly overpriced and when I would complete my investment analyses on potential homes, the opportunities were projected to have little to no cash flow, in fact many had negative cash flow. This accelerated my transition from residential to commercial real estate.
Typically, commercial real estate is more expensive (and intimidating), so I naturally thought it was going to be something that I would get into way down the line in my real estate career when I could exercise Monopoly moves. Yet when I saw prices were so
hyper-inflated, I had to do something different to stay on track with my real estate wealth building strategy. I needed to accelerate my goal to move to commercial real estate. I educated myself and learned how to evaluate commercial opportunities by turning to the CCIM Institute, a commercial real estate professional organization where I took every course offered.
It was through those courses I found out about syndication in real estate investment--where you bring people together to invest in commercial projects. I was enlightened by the fact that most commercial properties that I assumed are owned by rich individuals, were owned by groups of people or institutions, such as pension funds and insurance companies. Syndication, often referred to as crowdfunding today, is the strategy that my company, TLTsolutions, uses to educate and help others grow and sustain their wealth.
In closing, I believe that everyone should have real estate as a part of their investment portfolio and wealth strategy, the earlier you begin the better. I love investing in real estate as it was the key to creating my financial freedom and now I am using it to build wealth for my son and generations that will follow me.
As you think about starting or growing your real estate portfolio, the key takeaways are as follows.
Acquiring passive income through real estate investment is a truly empowering concept, and surely a mindset of being in control of your life. The point is to take an initial investment and grow it. Much like planting seeds.
Achieving financial freedom through real estate investment is a process that takes time. While it doesn’t happen overnight, the long-term effects are invaluable.
Include leverage as a part of your real estate wealth building strategy. Improve and cash out refinance is means to acquire more properties and thus more cash flow. The idea is to pull out your initial investment in a property as soon as possible, and keep the money moving by buying more properties. Keep the money cycle going!
Seek opportunities to increase the value of your real estate properties (forced appreciation) during the holding period or even before you buy the asset. This can be as simple as adding a bedroom or bathroom to changing its purpose – known as highest and best use.
Be mindful of your money. Take a graduated level of risk as you make money from an investment, in this case real estate. The money earned from a real estate investment could be considered free income that you might feel more comfortable taking on greater risks with--more than you would with your earned income from your primary profession.
If you are interested in learning how to achieve financial freedom, visit TLTsolutions.net schedule a Chat on the “Power of Passive Income”.
About TLTsolutions:
Providing unparalleled insight and access to alternative investments, TLTsolutions links people together to acquire residential and commercial real estate. Our mission is to empower people to create wealth, so we educate and open the door to real estate investing for aspiring investors like you. We build a chain that lifts you up and gets stronger as more people join together to build generational wealth.