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There are 5 key ways to make money in real estate:

  1. Cash Flow:
    • Definition: Cash flow is the income that remains after all operating expenses and mortgage payments have been made. Positive cash flow means the property generates more revenue than it costs to own and operate. This is the most important metric when buying and operating commercial property. To be considered an asset, a property must pay you to own it, otherwise it is a liability.
    • Example: If you collect $3,000 in monthly rent and your total monthly expenses (including mortgage, taxes, insurance, maintenance, etc.) are $2,500, you have a positive cash flow of $500 per month. This is a sustainable return that will allow you to continue to invest and grow your passive income. Some people buy a property that doesn’t have positive cash flow, intending to sell it for a higher amount in the future. This is not investing, it is speculating. This is akin to betting on an unknown future. Additionally, that bet will take money out of their pocket every month for as long as they hold the property. This is not sustainable and will require them to work harder or longer to earn additional cash to pay for this liability. Investment property needs to make money when you buy it, not just when you sell it.
  1. Appreciation:
    • Definition: Appreciation is the increase in the value of a property over time. This can be due to various factors including market demand and overall economic Appreciation is never guaranteed and the property needs to be profitable through positive cash flow even if the overall real estate market goes through a decline in value. However, in commercial property, there is sometimes an opportunity to accelerate appreciation. Since commercial property is often valued in terms of how much income it produces, increasing a property’s net operating income (NOI) will increase its value. This is sometimes referred to as “forced appreciation”.
    • Example: If you purchase a cash-flowing property for $1,000,000 based on the income it produces at the time of purchase, and you double the income through decreasing expenses and increasing rents, then the value should rise to $2,000,000 based on the increased NOI. The additional $1,000,000 in value can be realized by selling the property. However, the sale would be subject to capital gains tax and you would then have to go back out into the market to find a replacement property to get back the stream of income you already created. Often, a better strategy is to borrow against the increased equity and reinvest into more cash-flowing assets without a tax consequence. This is sometimes called an “equity transfer” and it has the potential to increase your returns while simultaneously diversifying your risk across additional properties.
  1. Tax Benefits:
    • Definition: Real estate investors can take advantage of various tax deductions and credits to reduce their taxable income. Some of these strategies are simple and some are extremely complex. Engaging a competent CPA who specializes in real estate is extremely important to optimize your tax situation and remain compliant with the IRS.
    • Example: Depreciation is a non-cash deduction that allows investors to deduct the cost of the property over its useful life. The standard depreciation schedule for improved property is currently set by the IRS at 27.5 years for residential property and 39 years for commercial property. However, the IRS will allow you to accelerate the depreciation by doing a cost segregation study to determine what type of property you own that should be depreciated over a shorter period of time. There are even opportunities for bonus depreciation where large amounts can be fully depreciated in the same year the property is placed in service. The Mortgage Interest Deduction also allows Investors to deduct some of the interest paid on loans used to acquire or improve rental property. Operating Expenses related to managing and maintaining the property, such as property management, legal fees, repairs, and utilities, can also be deducted. These, and several other tax strategies, can significantly improve your overall return on investment (ROI).
  1. Principal Reduction:
    • Definition: As tenants pay rent, a portion of that rent is applied to paying down the principal balance of the mortgage, thus increasing the investor’s equity in the property.
    • Example: A monthly mortgage payment of $5,000, where $3,000 of that payment goes towards interest and the remainder goes towards the principal, decreases the mortgage balance by $2,000 every month. This equates to $24,000 of increased equity per year for the investor. As previously explained, this increased equity can be realized at the time of sale or borrowed tax-free through a cash-out refinance.
  1. Inflation Hedging:
    • Definition: Real estate can serve as a hedge against inflation because property values and rental incomes typically rise with inflation, preserving or increasing the property’s value relative to the dollar. Unlike fixed-income investments, which can lose value in real terms during inflationary periods, real estate tends to increase, and rents can be adjusted to keep pace with inflation, maintaining or even enhancing the value of the investment.
    • Mechanism: Investment property typically has a valuation based on the income it produces. When there is an increase in the money supply relative to the available goods and services, everything becomes more expensive in terms of the dollars it takes to purchase them. Rental rates are not immune from this. So when inflation happens, rents typically increase as well, which in turn inflates the property values relative to the falling value of the dollar. This mechanism preserves property values relative to the falling value of the dollar. This mechanism preserves property values even in high inflationary cycles (please see inflation FAQ for more info).

 

How does inflation benefit real estate investors who responsibly take on debt? Debt, especially in the form of long-term, fixed-rate financing, can be a powerful tool for real estate investors.

Here’s how it works:

  1. Fixed-Rate Loans Gain Value Over Time: With a fixed-rate mortgage, your monthly payments stay the same, even if inflation rises. Over time, inflation reduces the real value of the debt, meaning you’re effectively repaying it with “cheaper dollars” in the future. This decreases the real burden of the loan while your asset continues to appreciate.
  2. Property Values and Rents Often Rise with Inflation: As inflation pushes up the cost of living, property values and rents tend to increase as well. This growth in value and income helps build equity and enhances cash flow, while the debt remains constant.
  3. Leverage and Wealth-Building: By using debt strategically, investors can leverage a smaller amount of their own capital to acquire more valuable assets. Inflation then works to increase the gap between the property’s worth and the remaining debt, helping investors build wealth over time.

In short, debt allows real estate investors to leverage their investments and take advantage of inflation to maximize returns. When structured properly, it can be a valuable ally in wealth creation.

Inflation devalues your income, it devalues your buying power, and it devalues your savings. However, it also devalues your debts. Inflation is not a mystery. The only mystery is why more people do not take advantage of this fact by positioning themselves on the winning side of the equation.

Real Estate vs. Stocks: A Comparison

When considering investments, both real estate and stocks offer unique advantages. Here’s a side-by-side look:

  1. Tangible vs. Intangible:
    – Real Estate: Physical assets you can see and manage.
    – Stocks: Intangible assets representing ownership in a company.
  2. Leverage:
    – Real Estate: Financing options amplify returns by facilitating the acquisition of larger assets with less upfront capital. 4:1 Leverage is not uncommon.
    – Stocks: Limited leverage through margin accounts, which can be risky if values change and there is a margin call.
  3. Income Stability:
    – Real Estate: Consistent cash flow through tax-advantaged rental income secured by long-term lease contracts.
    – Stocks: Dividends are subject to higher taxes and depend on company performance.
  4. Tax Benefits:
    – Real Estate: Offers deductions like mortgage interest, depreciation, and operational expenses. These tax advantages let you keep more of the profits you earn.
    – Stocks: Limited tax advantages, primarily focused on capital gains.
  5. Control:
    – Real Estate: Investors can directly influence property improvements, tenant selection, and pricing to maximize income and minimize expenses.
    – Stocks: Performance is influenced by external market factors and company decisions beyond investor control.
  6. Inflation Hedge:
    – Real Estate: Rents typically exceed inflation, preserving purchasing power and oftentimes resulting in rapid property appreciation and equity growth.
    – Stocks: Inflation can erode stock value. Some sectors may benefit disproportionately, but this can be difficult to predict.
  7. Market Volatility:
    – Real Estate: Generally more stable with relatively long market cycles.
    – Stocks: High volatility can lead to rapid changes in portfolio value with daily fluctuations.
  8. Wealth Building:
    – Real Estate: Increased equity through appreciation, monthly cash flow, loan repayment by tenant, and tax benefits.
    – Stocks: Long-term growth potential through capital gains but highly dependent on market trends.
  9. Diversification:
    – Real Estate: Adds stability to a portfolio and reduces reliance on volatile markets. It can further be diversified by asset class and geography.
    – Stocks: Offers access to different industries but often with higher correlation and risk exposure.
  10. Legacy Potential:
    – Real Estate: Tangible assets can be passed down to future generations with favorable tax consequences.
    – Stocks: Shares can also be inherited but lack the tangible legacy aspect.

While both options have their merits, adding direct real estate ownership to any portfolio should be considered for its stability, control, and tangible benefits. It’s an excellent choice for those seeking consistent income, long-term equity growth, tax benefits, and a hedge against inflation.

Are Public REITs the Same as Private Real Estate Syndications?

Not exactly. Publicly traded REITs behave more like stocks than real estate investments. This distinction is crucial for investors to understand. 

What Are the Hidden Costs of Public REITs?

When you invest in a public REIT, only about 85% of your money goes toward actual real estate. The remaining 15% is absorbed by Wall Street expenses, including executive salaries, compliance costs, and listing fees. 

In contrast, private real estate syndications typically allocate 95%+ of investor capital directly to property acquisition and management, with transparent fees tied to performance. 

How Do REITs Compare to Private Real Estate in Market Behavior?

Studies show that public REITs have a 0.68 correlation with the stock market, meaning they tend to rise and fall alongside stocks. Private real estate, however, has just a 0.14 correlation, meaning it operates largely independent of stock market fluctuations. 

This means that when the stock market declines, public REITs often decline with it, even if the underlying real estate assets remain strong. 

What About Liquidity? 

Public REITs offer liquidity, meaning you can sell your shares anytime, but that liquidity comes with higher volatility. Historically, stock market volatility has been around 15–20%, while private real estate has been closer to 5–8%. 

For long-term investors, the illiquidity of syndications can be an advantage, preventing emotion-driven sell-offs during downturns and encouraging a disciplined investment approach. 

Why Consider Private Real Estate Syndications?

If your goal is true real estate exposure, syndications offer several benefits over public REITs, including: 

– Lower fees 

– More stable, risk-adjusted returns 

– Less correlation with stock market swings 

 – Protection from emotional trading decisions 

While syndications require a higher minimum investment and have limited liquidity, these very features can contribute to more stable long-term returns—making them a valuable addition to a well-balanced portfolio. 

In real estate investing, an “Infinite return” refers to a situation where an investor recoups their initial capital investment, meaning they have no personal money left in the deal but still own the asset that continues to generate cash flow. At this point, the investor’s return on investment (ROI) becomes theoretically infinite because they are earning money without having any of their own capital still invested.

How It Works:

  1. Initial Investment – The investor puts money into a property (e.g., down payment, renovations).
  2. Value-Add & Appreciation – The property increases in value due to market appreciation, renovations, or better management.
  3. Cash-Out Refinance or Sale – The investor refinances the property, pulling out their original investment through a loan or sells the asset and reinvests in another deal.
  4. Residual Cash Flow – If they still own income-producing property, they continue collecting rental income while having none of their original money tied up in the deal.

Example:

  • An investor buys a rental property for $1,000,000 with $250,000 as a down payment.
  • After renovations, market appreciation, more efficient management, controlling expenses, increasing rent, and the bank debt being paid down by the tenant, the property is now worth $1,500,000.
  • The investor refinances and pulls out $250,000 in cash, tax-free, effectively recovering their original investment.
  • They still own the property and receive ongoing rental income.
  • Since their own money is no longer in the deal, any returns from the rental income or future appreciation are considered “”

This strategy is commonly used in BRRRR (Buy, Rehab, Rent, Refinance, Repeat) investing and other value-add approaches. It allows investors to recycle their capital and scale their portfolios without constantly needing fresh cash.

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