A quick overview
The world of real estate investing is both exciting and intimidating for those who have yet to step foot into it. To take the mystery out of it, investors should start by learning as much as they can. We’ll take a look at the four pillars of real estate investing, to outline the benefits of this strategy and its wealth generating capacity.
Table of Contents
Real estate investing has long been known for its wealth generating capability. It has been a strong investing strategy for more millionaires than any other investing avenue. For some, real estate may seem like an intimidating industry to invest in. However, once investors have learnt about the industry, they can use this knowledge to reap the rewards.
To help investors understand real estate, Ariel Diaz has broken real estate investing down into 4 pillars, in his book “The Four Pillars of Real Estate”. He shares his decades of real estate investing knowledge and explains the fundamental ways that real estate can be used to generate wealth. We’ll outline 4 pillars of real estate investing, to help you begin your real estate journey from a place of knowledge.
What Are The 4 Pillars of Real Estate?
The 4 pillars of real estate are 4 aspects of real estate investing that contribute towards wealth generation. These pillars work together as puzzle pieces, to create one big well-oiled machine that can generate profit. The 4 pillars of real estate include: cash flow, appreciation, amortization and leverage, and tax benefits.
Pillar 1: Amortization and leverage
Acquiring debt is not usually something to encourage, however in the case of real estate investing, debt can in fact be a vehicle to building wealth.
Amortization is an important concept to understand when investing in real estate. Simply put, it is the process of spreading out the cost of a major purchase, such as a property, over time. This can be done in a number of ways, but the most common method is to make monthly payments on a loan, ie: debt.
As the loan is paid off, the amount of interest owed decreases first and then gradually the principal amount follows suit. This results in lower monthly payments over time, which can be helpful for cash flow purposes. It’s important to note that not all loans are amortized, so it’s something to keep in mind when considering financing options. When used correctly, amortization can be a valuable tool for real estate investors.
By adding a loan or mortgage to the deal, real estate investors can use leverage to turn inflation into a higher rate of return on a property. Using a loan means that investors also risk less of their own cash, and leverage allows them to enhance the property’s rate of return and the result of any appreciation the property may have had.
Pillar 2: Appreciation
you probably know, real estate appreciates in value over time. This is an integral part of the success of real estate investing because investors can either buy and hold property while it appreciates, or the value can be increased through a number of strategies. Either way, at the end of it all, the property can be sold for more than it was bought, and investors will make a profit.
Buying and holding real estate is usually done by renting the property out, to pay for the mortgage while it’s owned by the investor. The property will increase in value over time, depending on the economic climate and the length of the holding period. So, a higher rent can be charged over time, and eventually the property can be sold for much more than it was bought.
Actively increasing a property’s value can be done by fixing and flipping houses, for example. This is the process of buying a property, doing repairs and renovations to increase its’ value and then selling it again for a profit. Either way, property appreciates in value and savvy real estate investors can make a large profit off this.
Pillar 3: Cash Flow
Cash flow refers to the income and expenses of a property. Owning an investment property comes with various operating expenses, such as utilities and the mortgage payment, that need to be covered by the income that the property is generating through rent. So, cash flow is an important part of real estate investing.
Over time, the amount made through income generation of a rental property adds up and begins to create a profit. If this profit is managed correctly and a positive cash flow is maintained, investors stand to begin generating good returns on their real estate investment. If you add in extra investment properties and their income generating potential from a positive cash flow, investors stand to make good money.
Pillar 4: Tax benefits
One of the biggest tax benefits of real estate investing is the ability to deduct depreciation. Depreciation is a non-cash expense that essentially allows investors to claim a deduction for the wear and tear on a property. This can lead to significant tax savings, especially for investors who own multiple properties and are on the hook for property taxes.
Another major tax benefit of real estate investing is the ability to deduct mortgage interest. This is a huge benefit, as it can significantly reduce taxable income. For example, if you have a $1,000,000 mortgage at 4% interest, you can deduct $40,000 per year in interest payments. This can easily make up for any other expenses associated with owning rental property.
Lastly, real estate investors can also take advantage of capital gains tax rates when they sell their properties. Capital gains taxes are much lower than ordinary income tax rates, so this can be a significant saving when you sell an investment property.
4 Pillars of Real Estate - Book Summary
In Ariel Diaz’s book “The Four Pillars of Real Estate”, he outlines the above-mentioned pillars, in order to help investors make sense of how to make a profit from investing in real estate. It’s not as complicated as it may seem and learning about these pillars can help investors truly understand real estate and how it can be a wealth generating vehicle.
In essence, Diaz elaborates on and simplifies the benefits of investing in real estate and brings awareness to the strategy to demystify it and make it accessible. At the outset, Diaz states that none of the information is new, but that the key is to learn the fundamentals first, and then be able to put them into practice effectively.
Additional Tips For Achieving Real Estate Success
Although there’s no blueprint for real estate investing success, there are some key elements that many successful investors follow. One of the most important is to develop a niche and become an expert in that area. This could mean focusing on a particular type of property, such as office buildings or apartments, or it could mean becoming familiar with a specific geographical market.
Another important strategy is to build a network of reliable partners, such as experienced lenders and contractors. These relationships can provide essential support during the ups and downs of the real estate market.
Finally, it’s important to have realistic expectations and a long-term vision for your investments. By doing this, you can increase your chances of achieving success in the exciting world of real estate investing.