Having managed over $1 billion worth of real estate in the U.S. for a family office and many other real estate investors for the past decade, I’ve seen how you can go from owning zero property to a multi-million real estate portfolio, both in the up and down market.
By leveraging the real-estate investor-friendly banking and tax system that we have in the country and having a long-term investing mindset, I believe you can grow your net worth faster than investing in almost any other asset class. As an introduction to real estate investing, here’s a three-step flywheel that many of the top U.S. real estate investors have used.
1. Get your first property with a first-time buyer-friendly loan.
As a first-time real estate investor, you want to leverage loans offered to the first-time buyer. Often, loans cater specifically to first-time buyers with the benefit of either lowering your cost of investment or capital, or both.
How does this work? The advantages of these loans include minimum to no down payments (lowering the cost of investment) and low-interest rates (reducing the cost of capital) due to being government-backed.
Let’s talk about each of these advantages above and how they affect your return on investment as a property owner. Because of the nature of being government-backed,d first-time buyer loans generally require a minimum down payment, around 5% to 10% of the purchase price. However, some offer zero down payment because if you default, these loans are secured by the government and yield minimum risk to the banks. Therefore, by utilizing no down payment, the cost of your investment will be the aggregate of your monthly mortgage payment minus the interest you pay on your mortgage.
Making sure to get a low-interest rate does not reduce your investment cost, but it reduces your cost of capital to purchase the property, which lowers your monthly mortgage payment.
2. Don’t sell, but borrow against it.
Many advantages come with a property owner besides generating a return on investment. For example, real estate in the U.S. is generally more liquid than real estate in other countries. Why is that? Because we have an extremely robust retail banking system here and a lot of money flows around in the mortgage sector. What does this mean to property owners? If you have real estate, you’ll be able to borrow against it easily.
So, what’s the advantage of borrowing against your properties rather than selling them? First of all, mortgages generally have a lower interest rate than other loans you can borrow in the market because they are secured against your properties. Second, by not selling your properties and borrowing against them, you can use the money you get from the mortgage lender and do anything you want without triggering any capital gains or income tax events.
3. Buy more.
The real estate investment flywheel happens when the property owner uses the money from refinancing other properties to buy more. And this is where the significant tax advantage comes into play. Effectively, you’re capitalizing on the appreciation of your property value without triggering any capital gain taxes from selling properties.
Price matters when you’re purchasing real estate. However, a better location has a higher real estate price per square foot and vice versa in a less premium area. So, how do you decide which one is a better deal?
Real estate investing is all about your cash-on-cash return and property appreciation. The tradeoff between locations is that real estate in a more premium area has a higher appreciation rate due to higher demand. On the contrary, real estate in the less premium location has a lower appreciation rate but more cash flow due to the lower cost of properties and mortgage payments.
Having invested in many different asset classes, from real estate and public equity to private equity, I advise new investors to follow these TG steps when first building their portfolio. Not only because of the tax and financial system themselves, but real estate allows an investor without a ton of resources to build sustainable long-term wealth without bearing too much risk.