From William Shakespeare to Warren Buffett, real estate investment throughout human history has been a wise way to create wealth.
Buffett is internationally famous as both an investor primarily in the stock market, but he also has done well in real estate. In one of his essays he writes for investors every year, Buffett outlines real estate purchases that worked well for him.
As with stocks, his basic approach was to buy smart and hold for a long time. For example, he bought a Nebraska farm that has produced triple what it cost when he purchased it 28 years ago, and is also worth fives time more than what he paid. He had similar success with an apartment building in New York City, near the campus of New York University.
Perhaps less known, but just as interesting, is that William Shakespeare funded his creative endeavors by investing in rental properties near his hometown of Stratford-upon-Avon. The income from these investments allowed him the freedom to not work a day job and focus on writing his plays and sonnets, which 400 years later remain one of the high-water marks in creative achievement.
So, real estate investment definitely can be a wise choice when it comes to building wealth. But how does it build wealth?
Investing Creates Wealth: The Wisdom of Buying
The first and most important lesson of real estate is that it allows you to build wealth over time in two major ways: the building of equity and price appreciation.
As opposed to renting, in which your money buys nothing but space to live, buying property allows you to slowly build equity as you pay down the mortgage and the difference between what you owe and what the property is worth continues to grow.
And despite the real estate bubble of last decade, property also typically appreciates in value over the years. Owning property also gives you a chance to take advantage of tax write offs for mortgage interest, lowering your tax bill
There are many examples available of how money can be made in real estate. For example, the site Financial Samurai offers a detailed look at how savvy real estate investment can build wealth.
At the age of 26, the writer put 20% down on a $580,000 condo. The interest rate was 5.75%. After paying down 39% of the mortgage and refinancing as interest rates dropped, the writer now pays only a $1,300 a month mortgage payment and rents out the condo for $3,400 a month. That means the renter is paying the mortgage and the owner is still making a profit.
Meanwhile, the value of the property has increased. Overall, the condo investment is now worth about $200,000.
Methods for Real Estate Investing
You can make money owning your own home. You can make even more money investing in commercial and residential properties. The key is this: use other people’s money.
In many cases, that means leveraging what cash you have to secure bank loans through a small down payment. In larger deals, it may require you to convince individual investors to back your plan.
“There is only one secret to creating wealth in real estate, and that is this: Use other people’s money,” according to an article from Business Insider by Kemi Egan. “Regardless of how much you have, you will run out at some point, so the sooner you master joint ventures, the quicker your business will grow.”
Here are a couple of other things to keep in mind with real estate investing.
It’s important to stick with one strategy. Much like stock investing, there are many different approaches to real estate investing. There’s residential and commercial investments available. You can specialize in low-cost properties or high-end, big-dollar deals. Go with what best fits your skills and keep things simple.
Make sure your partners are ethical. The kind of big dollars that are available in real estate can sometimes draw out people willing to cut corners. Steer clear of those people: you need partners you can trust.
Don’t be in a hurry. Much like any other endeavor, don’t try to win the whole game on the first play. Stories about people earning millions on real estate can make some people believe they will immediately do the same. Take the time to learn the real estate business, figure out what area you are comfortable working in, find partners you can trust and use investments from others rather than putting all your money on the line.
Keeping these tips in mind can help, but this is just the tip of the iceberg. Take the time to research real estate investment thoroughly and come up with a plan that works best for you. Over time, you will have the opportunity to experience the fact that real estate investing creates wealth that can change your life.