Making money in real estate isn’t for everyone. It takes grit, time, and most importantly, cash.
According to Brent Sutherland, a certified financial planner, real-estate investing is a decidedly “non-traditional” method for building wealth, but a powerful one nonetheless, he wrote in an article published on CoachCarson.com.
When he was 35, Sutherland bought his first single-family home to rent out for income. Now, less than five years later, he owns eight additional properties, plus part of a commercial real-estate project that involves four apartments, a garage, and 10 mobile homes.
After becoming a real-estate investor himself, Sutherland left traditional financial advising to coach clients on his own. The reason why, he says, is that the way advisers are paid, trained, and regulated generally inhibits them from recommending a non-licensed product like physical real estate to clients.
“How could I sit across the table from someone and talk to them about a financial roadmap and investment strategy that I was not following myself? I became professionally and morally conflicted. And that is why I ultimately branched out,” he writes.
Here’s why Sutherland believes real-estate investing is a valuable tool for building wealth:
1. Real estate diversifies your income
It’s a common habit among financially successful people to develop and maintain multiple income streams.
“While it is certainly important to be properly diversified with your investments, it is even more important to be diversified with your income,” Sutherland writes. “This is because the largest financial risk for most of you is the loss of your primary source of income, which is typically in the form of a day job.”
Setting up and managing a rental property can open up a stream of steady income that doesn’t require the time commitment of a full-time job.
“If you continue to expand your income streams, you eventually reach a point where you no longer need to rely on a day job (and someone else being in charge of your well-being). This is the point of financial freedom; the ultimate form of financial security!” Sutherland writes.
2. Real estate produces near-immediate results
When managed correctly, rental properties can produce income quickly and consistently, he says.
“You can achieve and feel the results almost immediately. Property improvements are visible and tangible. You can cash, spend, and invest rent payments. Today! Not 30 years in the future,” Sutherland writes.
“I’ve found that investing with near-immediate results usually generates energy and enthusiasm in a person that cannot be achieved through traditional means. Positive financial behaviors unearth themselves,” he writes.
3. Passive income can help you become financially independent sooner
According to experts, a person is considered financially independent when they have 25 times their annual expenses saved. With this amount, they would be able to withdraw 4% of their investments each year and live comfortably without ever running out of money, assuming they earn the average return.
With passive income from real-estate investments, Sutherland says you can halve the amount you need invested to become financially independent.
He explains: “If you need $40,000 a year to live, you could alternatively invest in assets that generate an 8% cash-on-cash return. This is a very reasonable assumption. And it means you would only need to save a total of $500,000 (instead of $1 million). Yet, your investments would still meet your annual household living needs.”
While returns, taxes, and inflation can, of course, affect your timeline, he says, cash-flowing real-estate is a clear asset.