Real Estate Wealth Creation
Real estate is the best hedge against inflation because property value generally rise at the same rate as the annual inflation percentage.
- To make money in commercial real estate you:
- Leverage the spread (difference) between the Cap Rate and the Bank Rate
- Leverage annual inflation percentage (appreciation)
- Capitalization Rate is the True Rate of Return of an investment after all expenses and reserves. CAP = net operating income (after all expenses). It is a snapshot of the finances for the first year of ownership.
- If you make a 20% down payment you own 20% and the bank owns 80% of the investment but the buyer gets control of the property to buy, sell or trade it. The bank assumes most of the risk of the loan but has almost no control over the property.
- The bank is your best partner because they only want you to re-pay the fixed loan rate (percentage). But you get to keep the spread between the CAP Rate of Return and the bank’s loan percentage on your shares and their shares, too.
- Property Appreciation: inflation raises an average of 3% annually and this amount is tax-free.
- The benefit of owing property is like having 3 buckets of money:
- Income from Operations – taxable
- Principal Reduction – taxable on revenue produced above the interest rate level of the loan
- Property Appreciation (inflation) – non-taxable
- When added together they build wealth and equity in the property.
- You don’t have to sell your property to get your equity out. Refinance the loan and take the cash equity to reinvest in larger and more profitable property. This is called the pyramid investing strategy.