The IDEAL Investment: Why Real Estate Still Reigns

In my last blog post, I talked about how The Flow Authority got started and how I’m building wealth through real estate. Today, I’d like to take a deeper dive into why I believe real estate is the BEST investment vehicle out there.

It all comes down to an acronym, “IDEAL”, which stands for Income, Depreciation, Equity, Appreciation, and Leverage. These are the 5 key benefits of real estate investing – the only investment vehicle that will give you all 5! Let’s dive in.

Income

Most people have some notion of what income means. When it comes to real estate, when we talk about income, we’re really talking about cash flow, AKA, the money left over from rent after all expenses are paid.

You may have heard the phrase “cash is king”. Well, I believe that to be completely false data. Cash is DEAD. Cash FLOW is king! Cash by itself is terrible. Its value erodes away to inflation year after year after year. You should be looking to put every dollar you have to work. Cash flow, however, continues to come in month after month, and in the case of real estate, continues to increase year after year with inflation, as you increase rents (by the way, it would alarm you how many novice investors I run into that haven’t raised rents in years – don’t let that be you).

The return you make on your cash flow is called the cash-on-cash return (COC). When comparing real estate to stocks, COC is analogous to the dividend rate of a stock. Except that with real estate, it tends to be much higher (for my properties, I target 8% minimum COC, vs. the average dividend rate of the S&P 500 of less than 2%).

Depreciation

Think a 401(k) gives you nice tax benefits? Think again. With real estate, we get what’s called depreciation. This is where the IRS allows you (actually, forces you) to depreciate the value of your building over time. The good news is that this provides a nice tax write-off for you at the end of each year, which goes against any income you made from rent. Often, you will see a loss on paper for the year with the combination of depreciation plus all the other deductions you get to take (interest, taxes, insurance, maintenance, property management, utilities, etc.). There are also things you can do to accelerate the depreciation through a cost segregation study. This is how my friends Tabitha and Nate were able to put an extra $56,000 in their pocket their first year owning a motel.

The one disadvantage to depreciation is that it decreases your cost basis in the property, so if you sell the property, you may end up having to pay taxes on the amount that you depreciated. I say “may”, because there is an amazing tool called a 1031 tax-deferred exchange where the IRS allows you to sell one property and use the proceeds to purchase the next property, without paying any taxes on the gains! The gains are simply deferred to the next one.

So, you might ask, if I continue to defer until I die, who pays the tax man? Well… the good news is that, in the way things are currently written, your heirs would receive a step-up in basis, meaning that those gains would be wiped out and your heirs could sell without paying taxes on your deferred gains.

Pretty cool, right?

Equity

Equity is simply the value of the property less any debt owed. Each time a tenant pays their rent – the most important bill of the month (because we all need a roof over our heads) – you make a mortgage payment, and the principal balance on your mortgage goes down. In other words, the debt that you owe goes down, and your equity goes up. This is a pretty simple concept to grasp, but many people forget about it.

Remember, you only need to put down about 25% to purchase a property. The rest of the purchase comes from the bank, and the tenants (not you) are paying the bank back. They are essentially buying the property for you. More on that later.

Appreciation

Appreciation is the increase in the value of your investment over time. There are many types of appreciation. The most common is market appreciation, where the value naturally goes up over time (similar to stocks) as inflation rises and the value of the dollar goes down. Another type that you DON’T see in stocks is forced appreciation. This is where you purchase a property at a discount, put some money into it (say, $30k), and see the value go up (say, $60k). This is what makes fix and flips and the BRRRR method extremely powerful strategies.

Leverage

The last of the IDEAL benefits is leverage. This is simply using other people’s money (OPM) to buy real estate. The most common examples of this would be leveraging a loan from the bank (the bank’s money) to buy the real estate and then leveraging the tenant’s rent payments to pay back the bank. This is an incredibly powerful thing that you can’t do with stocks. And here’s the beautiful part about leverage: when your property goes up in value (appreciation) and you pay down some of your loan (equity), you can take out another loan to pull out some cash and go buy another property. As you purchase more and more properties, this benefit compounds allowing you to scale.

Recap

So the next time someone tries to persuade you to invest in some new shiny stock or cryptocurrency, run through the 5 IDEAL benefits and see which ones that investment vehicle provides. Real estate has stood the test of time. You have an incredible amount of data to back it up that you don’t have with newer strategies. Some would say it’s worth including in a diverse portfolio mix. I would say it’s worth putting every cent you have into it (just my opinion).

If you have any questions, please feel free to reach out or book a call to discuss. And remember, it’s your life, your canyon, your legacy. You are in control. Let’s flow!

Disclaimer: The Flow Authority makes no promise or guarantee of any results, money, success, or lifestyle from learning real estate investing strategies. The information provided in this blog is for educational and informational purposes only and should not be considered financial, legal, or professional advice. The views expressed in this blog are those of the author and do not necessarily reflect the official policies or positions of any organization, government agency, or financial institution. Any personal experiences shared are for illustrative purposes only and may not apply to every person’s situation. This information is general, not personal. Seek specific advice from a licensed professional for legal, financial, and business decisions. There are no typical results in real estate investing; every person, property, and transaction is unique. The information shared in this blog is believed to be truthful, accurate, legal, moral, and ethical, and is subject to change.