The power of compound interest is not hidden from any investor and has helped them grow economically over the years. Albert Einstein once said,” the most potent force in the world is compound interest.” It can work wonders for you if you know how to use it in your favour. Before investing in real estate, one should know what compounding is. It can be a game-changer for investors. In this article, we will discuss how compounding works in real estate.

What is compounding?

Compounding is a process of gaining interest on your interest, and it works equally for real estate as in banks. But the only difference is that in banks, the interest is credited to the existing principal amount, but compounding credits the interest on the previous interest, which is already paid. 

In the world of finance, it is popularly known as the “miracle of compounding”. Compounding helps your income grow exponentially over the years. The periodic profits from an investment are combined to help multiply returns. Real estate compounding is similar to using dividends from a stock to buy more stock. In real estate, you reinvest the gains from one property into other rental properties. A buy-and-hold investor may earn wealth by compounding over a long period.

How does compounding work in real estate investing?

Real estate is a long term, buy-and-hold investment as it takes time to return a profit to the investors. Compounding in real estate does not happen overnight, but it’s worth all the wait and time.

From compounding, landlords get benefits as there is an increase in property value. For example, if house prices increase 6% every year for 10 years, landlords receive a significant rise in their net worth.

The profits might fluctuate from one period to another because of the unexpected repair costs or longer vacancies. But, on the other hand, nothing is obvious, so house prices can also go down in case of a crisis. 

According to the Federal Reserve report, during the Global Financial Crisis of 2007-2009, the sales of houses decreased by 20%. Then, it raised by 94% over the next 12 years. In 2022, realtor.com predicts a 2.9% rise in housing prices, while the National Association of Realtors predicts housing prices will climb 5.7% in 2022.

Things to keep in mind while compounding in real estate.

• Compounding doesn’t happen immediately and takes time.
• The gains and profits from one property are used in buying additional rental properties.
• Primarily, the investor might need to spend from his pocket for the repairs and other expenses when the property does not generate any capital.
• The increase in property value leads to cumulative cash flow.
• Any investor who starts compounding early may generate good wealth over time.

Tips for compounding in real estate

Compounding in real estate requires a lot of patience and discipline. Here are some tips that every real estate investor should know before compounding. You can also check out the best community in Dubai for real estate.

Do your research

Knowledge is the door that can help you move mountains. The more knowledge you have, the better you can invest. Do as much research as possible before investing in any property. Learn about the different ways to invest in real estate. Make sure you understand the market.

Force yourself to save

Live below your means and invest the money saved in real estate. Saving bit by bit can make a reasonable sum. It’s alright to start with tiny rental houses and inexpensive properties. Then, as you gain profit, you can invest it in buying a more extensive property.

Make sure you understand the risk

The investment comes with its risks. Investors should know how to manage and deal with the risks. They should be ready to buy and sell any property to generate income and face the problems. 

Turn your home into a rental

If you own a house and, for some reason, you have to move out of the city. Instead of selling your house, you can turn it into a rental property, a better wealth-generating option. By keeping tenants, you might see strong returns over the years.

Start as early as possible

Compounding real estate does not happen overnight and takes time. The sooner you invest, the sooner you start generating wealth. Any investor who invests at an early stage generates good income over the years.

Watch YouTube Investment videos

If you don’t know much about the market and the risks it holds, youtube videos can be your lifesaver. They provide all the tips and information on starting investing and getting rich. Learning never goes in vain.

Use the BRRRR method

BRRRR stands for buy, rehab, rent, refinance and repeat. Investors use it to build passive income. First, an investor purchases a property that they proceed to rehabilitate. The property is then rented out, the income generated is used in paying the mortgage, earning profits, and building up equity over time. Once a reasonable sum is earned, the owner can invest it in buying a new one.

Reinvest the profits

Reinvest the capital earned. Take profits as dividends that have to be reinvested. By doing so, an investor can build a real estate empire.

Don’t sell if you have positive cash flow

If you have a positive cash flow, that means more money is coming in than going out. Therefore, don’t sell such property. Once you have recurring income, you can become financially independent and get more opportunities to invest with good management. 

Be patient and disciplined

Once you find a strategy that works for you, stick to it. Compounding is a time-consuming process, and you need to be patient to get fruitful results.

Don’t sell if you have positive cash flow

If you have a positive cash flow, that means more money is coming in than going out. Therefore, don’t sell such property. Once you have recurring income, you can become financially independent and get more opportunities to invest with good management. 

Conclusion

Compounding in real estate is incredible. It can help you build an empire and even make you pay for it if you understand. By combining cash flow with property appreciation, an investor can generate good wealth over the long term. And if you are looking for some properties, you can check out the apartments for sale in Jumeirah Village Triangle.