Capital Gazette: Realities of Real Estate: Building Wealth with Real Estate

Duncan Patterson, President at Patterson-Woods Commercial Properties/CORFAC International, weighs in on real estate being an "IDEAL" investment.

As seen on Capital Gazette:

Realities of Real Estate: Building wealth with real estate


By Bob and Donna McWilliams


When we thing about the world's wealthiest people, names like Gates and Buffett come to mind, and they, indeed, have amassed tremendous fortunes. Bill Gates is now worth almost $80 billion and Warren Buffett isn't far behind with just over $70 billion. But even with numbers like that, they're a long way from surpassing the empire built by the likes of an Andrew Carnegie. In today's dollars, Carnegie would be worth a staggering $310 billion. That's more than the GDP for most of the world's nations.


Back in Carnegie's day, it was a little easier to reach the status of what's known as the super-rich. After all, there wasn't any income tax and government regulations were all but non-existent. Nevertheless, his ability to build wealth was a remarkable achievement. So, what sage words of advice did Carnegie have when it came to the art of making money? He said, "Ninety percent of millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate". That was true back in the 1800's, and it's still true almost two centuries later.


Real estate has always been one of the safest and most reliable ways to build wealth. You won't get rich quick, but if you stick with it and play the game smart, buying and holding property can lead to a comfortable, carefree retirement. Here are some tips and things to watch for, whether you're looking to be the next Donald Trump, or just want to have a nest egg for your golden years.


First off, it's not like you need to go out and start buying shopping centers. Most successful real estate investors are those who have nothing more than a few rental properties. According to Duncan Patterson, President of Patterson, Woods and Associates LLC, a commercial real estate firm headquartered in Greenville, Delaware, real estate is an IDEAL investment.


I is for income. In today's market, where we have high rental rates and low mortgage rates, it is possible to buy a rental property, whether it be a condo, detached home or multi-family unit, and realize a positive cash flow right off the bat. And, since you can lock in a 30 year mortgage, your principle and interest payment won't increase on that property even though rental rates will continue to rise. As a result, the cash flow from a rental property will grow over time.


D is for depreciation. The beauty of real estate is that it's an investment where the IRS is actually going to help you out. Commercial real estate (like a shopping center or office building) can be depreciated over 39 years, and residential is even faster at 27.5 years, making the deduction a great way to offset your income. But be careful, when you sell a real estate investment, that depreciation will be recaptured and have an impact on what taxes you might owe as a result of the sale.


E is for equity. Like any investment, there will be ups and downs. However, even with the recent slide in prices, real estate is a great way to build equity since that equity can come from several sources. First, there's good old sweat equity, where you can do some fix-up to improve the value of your property. Second, your equity will grow as you pay down the mortgage; and third, equity will be generated as the property appreciates. Additionally, real estate equity is a great source of money for other purposes, since you can easily borrow against that equity.


A is for appreciation. After the real estate bubble burst, many were soured on the idea of real estate as an investment. Until 2006, most people thought that the value of their home would always grow and real estate was essentially immune to economic cycles. Well, we all found out that the trees don't grow straight to the sky. Even so, there are few other investments that can compete with real estate in terms of reliable growth over the long haul. Moreover, the price of a stock can actually go to zero and become totally worthless; whereas, real estate is a tangible asset that will always have value regardless of market fluctuations.


L is for leverage. One of the most effective ways to build wealth is through leverage, and real estate is an extremely effective method for utilizing the power of leverage. Most simply put, leverage is the ability to control a large amount of money, while risking a small amount of money. For example, when buying a $250,000 investment property, you might need about 10% down and there'll be some closing costs. All toll, that could add up to about $35,000. But, for $35,000, you now have the control of a $250,000 asset, one that will appreciate, provide income and give you a great tax write-off.


Although real estate can be an IDEAL investment, it is not without risk. If you don't know how to play the game, you can also get burned, especially when it comes to the tax implications of buying and selling real estate. If you do it right, such as the use of 1031 exchange to defer taxes you keep the IRS out of your pocket, but if you do it wrong, they'll be knocking on your door, wanting a big fat check. So, make sure you get professional guidance from a real estate agent, accountant and lawyers. They'll help keep you out of trouble. And finally, remember how Will Rogers summed up the value of real estate when he said, "Buy land. They aren't making any more of it".