Real estate can help you build wealth

The median household income for most Americans sits right around $57,000 per year, which may be livable in some markets, but is hardly enough to accumulate any sort of substantial wealth.

That’s where real estate can come in.

If anyone understands the ins and outs of real estate investing, it’s Nicole Rueth, Denver Metro Association of Realtors Market Trends Committee member and producing branch manager of Fairway Independent Mortgage Corporation. Rueth owns 23 investment properties throughout Colorado, and is an expert at helping her clients use real estate as an income source for long-term retirement, as well as short-term goals such as paying off debt or paying for their children’s college.

“The truth is, most Americans will have a difficult time creating wealth any other way,” said Rueth. “Many have salaries and will end up with a modest retirement, but regretfully, that’s just not enough in today’s market. Using real estate investment really is an incredible opportunity that is open to everyone for building long-term wealth.”

Real estate provides an opportunity for investors to gain appreciation on a large asset, while only putting a small percentage down. Not to mention, real estate investments have the added benefit of using someone else’s money to pay down your debt through rental income. This powerful combination of appreciation over time and the reduction of the principle loan sets investors up perfectly for accelerated wealth building.

So, how does one use real estate to increase wealth? I sat down with Rueth to discuss the matter and get her top tips for those looking to get started with their first investments. Here’s what I learned.

With the amount of equity in residential real estate today, coupled with job growth and a strong economy, housing prices are expected to level out, not depreciate, and that’s a huge distinction.

When the market levels or even corrects, many people become fearful and sell, and that is where they lose money. However, with interest rates at historical lows with expectancy to rise, the cost to get in is more affordable today than it will ever be in the future, even in a leveling market.

“You have to stop fearing small dips,” said Rueth. “If homes continue to appreciate at the national historical average of 3.6 percent, and you’ve only put a small amount down, then 3.6 percent year-over-year over time could be monumental for a family.”

Investors should also consider the buy-down of the principle. For example, if you buy a home for $400,000, and put 20 percent down, even if it doesn’t appreciate at all and remains at $400,000, as long as you don’t have to sell that property, it doesn’t lose any money. That said, if in 15 years you used rental income to pay down that mortgage, even with no appreciation, you still have a home worth $400,000 and you only put $80,000 down.

By comparison, if you look at the stock market, the only way to gain wealth is through appreciation, and if you lose money, it’s twice as hard to get it back. With real estate, you have something that will more than likely increase in total value, but you will also be gaining leverage on that asset over time through rental income.

In the local market, we’re finally seeing a much-welcomed increase in homes for sale. It’s important to note, however, that while the number of homes we have today is more than double what we had at the beginning of 2018, it’s still half of the historical average.

“The increased inventory and slowdown of appreciation paired with today’s low interest rates make this the best time to purchase an investment property,” shared Rueth. “This is the time to have the best cash flow on your investment, which is a critical element of investing.”

Furthermore, Rueth adds that home prices are correcting and it isn’t necessarily because of the shift in more housing inventory.

“Price reductions aren’t happening because we have too much inventory, it’s because we have buyer fatigue and fear of unaffordability,” she said. “But you can use the homebuyer fatigue and these price reductions to your favor in negotiations.”

While becoming an expert at real estate investments is no simple feat, below are a few key takeaways for budding investors to help get them closer to their wealth goals.

• Start by converting your primary home: Primary homes have lower down payments and interest rates, better loan terms, and they can be converted into an investment property after just one year. If you’re able to move, you can buy the primary home, live in it for a year, convert it into a rental, then repeat the process.

• Surround yourself with a team you trust: Purchasing any home is a big investment, so it’s important to feel confident in the people supporting you during the transaction, such as your Realtor, lender and financial planner or CPA. Many investors buy a handful of rental properties, so they’re engaging with the same people over and over again, making it even more important to work with people who have your best interest at heart.

• Have a plan: You don’t ever want to jump into any sort of investing without a plan. Rueth shared that she advises her clients to define their goals before purchasing anything, because their goals will determine which types of properties will get them there, and which ones won’t. For example, factors like financing options, type of home, number of units, and area of town all impact the rate of return, so it is important to start with the end goal in mind.