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5 Ways Real Estate Makes Your Money Work For You

 

The rich don’t work for money. They make their money work for them. – Robert Kiyosaki

Growing up, I’d always heard people talking about making your money work for you, rather than working for your money. Sounded easy enough in theory, but how was I supposed to actually make that happen, I thought.

When I looked around at my parents, my teachers, almost everyone I knew, they were all working full-time jobs to earn a paycheck. Many were fearful of layoffs and other conditions that might lead to them losing their jobs, as that would mean loss of income, change in lifestyle, and a boatload of stress.

When I asked around, it seemed that the diligent ones would save some of their earnings, and the ones “in the know” would even put money into mutual funds or stocks. But that’s all I could see from my limited vantage point.

It wasn’t very apparent to me how this whole make-your-money-work-for-you thing was supposed to work.

That’s why it was so eye-opening for me to discover all the ways that your money goes to work for you when you put it into real estate. Real estate really introduced me to passive income and a doable way to build wealth for my family. I realized for the first time that my money was working for me, and in more ways than one. I was floored.

How I Got My Start in Real Estate

Take a walk with me down memory lane for a moment, will you?

In 2007, I was still in my early 20s, barely aware that the financial world was melting down around me. I was young and naive and idealistic, and the catastrophic events in the news were barely making it onto my radar.

At the time, my husband and I were living in Washington, DC. I was teaching fourth grade with Teach For America, and he was working as a web developer at the Kennedy Center. My mind was focused on lesson plans, field trips, and times tables. Real estate investing was nowhere near my line of sight.

But, then again, we needed a place to live, so…there was that.

We’d saved up a small sum of money and began looking at properties with our real estate agent. We really had no idea what we were looking for. We looked at everything from condos to multifamily fix and flips.

Then, our agent gently floated the idea of buying a duplex. In DC, rowhomes with a basement in-law units are pretty common, and he reasoned that eventually, if we played our cards right, we might get it to be “cash flow positive.”

I had never heard that term before, but I knew that I liked cash flow. And, well, positive seemed like a good thing, so we started to hone in on duplexes.

The duplex we ended up buying was a foreclosure with beautiful exposed brick walls, waist-high weeds in the backyard, and a kitchen that had a washer/dryer in it, rather than a refrigerator. Oh, and there used to be a brothel in the basement.

It was love at first sight.

Being first-time homeowners, we were giddy with excitement as we rolled up our sleeves to scrub and paint and renovate. Once we rented out that basement in-law suite and the monthly rent checks started coming in, I had a lightbulb moment.

Both my husband and I were still working our full-time jobs. We had not added any jobs to the mix, and yet, we started to see this additional stream of income every month, via those rental checks.

 

It was like playing real-life Monopoly.

Fast Forward to Present Day

From that first property on, we went on to acquire several more multifamily properties, in a number of different markets, and we discovered the full power of putting our money to work for us in real estate.

We would work to save up some money, then put that money into real estate so it could start to go to work for us. With each additional real estate investment, we were creating a new money machine.

You know that saying about money not growing on trees? Well, it’s true.

Money doesn’t grow on trees. Money grows on real estate.

5 Ways Real Estate Makes Your Money Work for You

As we’ve learned over the years, every dollar that we invest in real estate goes to work for us, and in more ways than one. It’s like having a bunch of little minions out there.

There are five core ways each dollar works for you when you invest it in real estate:

  • Cash flow
  • Leverage
  • Equity
  • Appreciation
  • Tax benefits

Cleverly enough, this spells out the acronym CLEAT, but…that’s neither here nor there, and I couldn’t think of a relevant soccer analogy, so, we’ll let that one slide. Anyway.

How real estate makes your money work for youHow real estate makes your money work for you

#1 – Cash Flow

This is perhaps the biggest benefit of investing in real estate. Unlike other types of investments, real estate generates passive cash flow.

When you invest in a real estate asset, you’re buying the asset to rent it out to tenants, who then pay you for the opportunity to live in, or otherwise use, your property. Once you pay all your expenses, the rest of that rent check is yours to keep, aka, your cash flow.

 

This is what they call mailbox money.

So, for example, let’s say you put down $25,000 to buy a single family rental for $100,000. Your mortgage is $500 per month. You rent it out for $1,000 per month.

On the first of the month, your tenant sends you a rent check for $1,000 (cha-ching!). You use $500 to pay the mortgage, $350 for expenses and reserves. The remaining $150 is your passive cash flow. See? Mailbox money.

#2 – Leverage

Let’s take a closer look at that purchase for a second. In this example, you bought a $100,000 rental home, but you’re not paying $100,000 in cash. Instead, you’re paying $25,000 for the down payment, and your lender, aka, the bank, brings the other $75,000 to the table.

However, and here’s the kicker. The cash flow you make is based on the full $100,000 asset, not the $25,000 portion.

In other words, even though the bank put most of the money into the deal, the $1,000 rent check you collect from your tenant goes directly to you, not the bank. The bank doesn’t take their 75% cut out of those rent checks. Sure, you still have to pay your mortgage and interest, but you don’t have to split your cash flow or profits with the bank.

This is the power of leverage. You partner with the lender to create your money machine, and you get all the upside. Not a bad deal. Just try and get a bank to loan you 75% to buy stocks. Seems ridiculous, right?

#3 – Equity

Keep in mind, that as you’re getting those monthly rental checks, you’re able to use those to pay your mortgage, and thereby increase your equity. That means that you don’t have to pay your mortgage from your own income. The rental property generates income to pay for itself.

That’s like if you bought a TV that generated money to pay for its own cable. (Let me know when you get that one to work, will you?)

Given that your equity in the property increases with each mortgage payment you make, your tenants are essentially building that equity for you. #hugyourtenants

Further, once you build up significant equity in your property, you can consider strategies like taking out a home equity line of credit (HELOC), which essentially allows you to borrow against your own asset. You can then put some of those HELOC funds into another cash-flowing asset, and now your money is not only working for you but is starting to clone itself. #mindblown

#4 – Appreciation

When investing in real estate, your money also goes to work for you in the form of appreciation. As you have likely heard, real estate values tend to go up over time, sometimes (and in some markets) faster than others. There are certainly exceptions to this, and every market is in a different stage of the cycle, so keep that in mind.

But, let’s take, for example, one of our duplexes in Washington, DC, which we purchased for $580,000.

During the years that we held that property, the value appreciated to $750,000, which is the approximate price we eventually sold it for. If you take $750,000 and subtract out $580,000, you get $170,000, which was our profit via appreciation. (And, keep in mind, that’s not counting the additional equity that we had built through paying down our loan.)

Note: While appreciation is a nice-to-have, it’s not a guarantee, which is why we always buy for cash flow, first and foremost. Appreciation is the cherry on top.

#5 – Tax Benefits

I probably could have written this entire article on the tax benefits alone, but suffice it to say that this is a HUGE way that your money goes to work for you in real estate. The tax code is written to reward certain types of endeavors, of which real estate is one (because, it seems that people like to live indoors, so the government has realized that it needs investors’ help to provide that housing).

When you invest in real estate, you get the benefits of depreciation and mortgage interest deductions, as well as a whole host of write-offs for a number of other related expenses. #hugyourcpa

In fact, we’ve often shown losses on paper, while we were actually making money through cash flow. The losses played a big part in helping to offset some of our other income, and that’s a major reason that many investors continue to invest in real estate.

How real estate makes your money work for youHow real estate makes your money work for you
Make Your Money Work for You
So, there you have it. Five ways that you can put your money to work for you through investing in real estate. With each dollar you invest in real estate, you’re taking advantage of cash flow, leverage, equity, appreciation, and tax benefits.

This is true regardless of whether you’re investing in a single family rental or whether you’re a passive investor in a large syndication, or any number of variations in between.

If I could go back and talk to my younger self, I’d let her know that those people who talk about making their money work for them – they’re right on the money. Literally.

INVEST