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Real estate is an excellent way to build generational wealth, from the tax advantages it provides to property appreciation. It happens to be one of the assets that sees renewed interest when the stock market struggles, but real estate is not a short-term strategy. It also doesn’t cease being a viable wealth-building tool when the stock market does well.
Regardless of market conditions, real estate can help people build wealth. And while it is sometimes thought of as a way for the already-wealthy to pass generational wealth to their children, it isn’t an absolute necessity to start from a place of wealth. Even those who have relatively little can use real estate to build a legacy.
Here are tips from experts for building generational wealth through real estate.
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When inflation runs high, real estate can act as an inflation hedge. That’s important because cash loses purchasing power over time, and real estate can help lessen the impact of inflation.
According to Kathleen Peddicord and Lief Simon, founding publishers at Live and Invest Overseas, “Real estate is an inflation-hedged investment, so over time it should hold its value in real terms if not actually appreciate in real terms.”
In other words, real estate isn’t like cash; its value doesn’t decline from one year to the next. Of course, the condition of the house matters, as does the local market, but the value can increase with inflation or even appreciate.
One of the great things about real estate is it gives you a lot of options. A house can be many things, not just the place where you and your family live.
Giri Devanur, CEO at reAlpha, pointed out that a house can be used as a short-term rental or a long-term rental or it can be sold. Flipping homes and selling them at a profit is one strategy, although that is more short-term than generational.
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The equity that homes provide means they are assets that can be leveraged.
Nicole Rueth, SVP at The Rueth Team, compared using a home as a leveraged investment to buying stocks.
“If you invested $30,000 in the stock market at the bottom of its dip in March 2020, you could have seen a 95.5% rate of return based on the growth of the Dow Jones industrial average in 19 months. That’s fantastic. You could have doubled your money if you bought all the right stocks at the right time, profiting $28,500.”
However, Rueth points out that buying a home provides leverage, which allows you to see much greater returns in absolute terms when prices are rising.
“If you had taken that same $30,000 and bought a $525,000 house, even a year ago, then you would have seen a 20% gain on the $525,000, not the $30,000. The 20% gain on the $525,000 is over $100,000 — so you have built $105,000 in equity vs. $28,500.”
A home can be a stable source of income, which makes it a great way to build generational wealth. Consider real estate investing: Value isn’t likely to skyrocket, but real estate investments provide long-term sources of income.
“Real estate is an asset with historically low volatility because there will always be a need for housing,” Devanur said.
Keep in mind that low volatility also means you won’t see eye-popping returns either.
“Contrary to what you see in the media, real estate is typically NOT a ‘get rich quick’ asset,” said Dr. Guy Baker, director at Wealth Teams Alliance. “It is not going to appreciate 1000% overnight in most cases. It is steady as you go.”
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Sometimes you want a higher return. While real estate can provide a consistent source of income, as mentioned above, that income can sometimes be lower than you would like. One of the ways real estate investors are combating this is with short-term rentals.
“Real estate is a good asset class and the short-term rental market is a new and growing channel within real estate for investors,” said Daned Kirkham, senior director of real estate at Vacasa.
According to Devanur, short-term rentals are seeing 70% higher returns compared to longer-term investments. He said the combination of the low volatility of long-term real estate investments and the higher returns of short-term rentals is an excellent way to build generational wealth.
There is a common misconception that real estate is a tool for the wealthy — a way for those of means to get even richer. While real estate is certainly useful for those who are already wealthy, that doesn’t mean you must have a seven-figure net worth to take advantage of real estate as a wealth-building asset.
Consider the idea of house hacking, in which you buy a duplex and rent the other units to tenants. That can be a great starting strategy, said Shawn Elliott, president at Nest Seekers International.
“(Consider) starting small with even one two-family home where the investor can live in one half of the two-family and lease out the other,” Elliott said. “The leased-out portion can cover the mortgage and taxes and usually can pay off the mortgage in 15 years. And then (you) own the asset 100% and (can) then lease out both halves for a strong return on investment.”
As Elliott points out, the property you buy can be leveraged to move to multi-family properties; you can pull out money as your equity increases. In doing so, you can slowly build your real estate portfolio.
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