The concept of private property is as old as civilized society itself. Slightly younger, although not by very much, is the concept of accumulating wealth through the acquisition of land. The idea of augmenting and ensuring a personal fortune by increasing one’s landholdings has proven perennially fruitful and consistently effective. It is a time-tested strategy for making money. But why is that so? And how does it work? Through the eyes of a non-landholding outsider, it may seem like an untraceable mystery. But the answers to these questions are really quite easy to grasp, albeit somewhat multi-faceted.
The Chief Financial Officer at Michael John’s Developers L.L.C, Michael Sico, aims to demystify the elements at work enabling individuals to make money in real estate.
Real Estate Generates Wealth Through Appreciation
To begin with, the most traditional way that real estate generates wealth is through the appreciation of property value. This occurs when a plot of land becomes more desirable to other parties, increasing the price that they are willing to pay for it. Reasons for this can include improvements made to the land, such as the building of dwellings or infrastructure, or demand for land exceeding supply in a given area. Depreciation of property value is also possible, and can be caused by a measurable increase in crime surrounding the land, or an overall economic recession. Over a short period of time, the value of a given property can surge and fall from year to year. However, when evaluated over a longer timeline, property values almost invariably trend upward. Therefore, generally speaking, the longer a piece of land is held for, the more value it accrues for its owner.
Unfortunately, there is only one way to cash in on the economic force of nature that is property value appreciation, and that is to sell the property in question. “In many cases, though, the more farsighted and strategic course of action is to hold on to the land for as long as possible, even until death, ultimately bequeathing it to younger family members in order to foster generational wealth and seed a legacy fortune.” states Sico. However, such a decision depends largely on the priorities, intentions, and the momentary needs of the person who owns the property.
Real Estate Generates Wealth Through Income
Of course, while a property is busy appreciating in value, there is no reason why it cannot generate other forms of income. Historically, one of the most popular ways to do this is by renting it out. There are two major methods of approach in doing this; renting residential living space out to individuals, or leasing commercial space to retail businesses and industrial firms. At one point in the past, such a decision was left to the discretion of the landowner whose possession of title and deed was viewed as the ultimate authority on what activities were permitted to take place on the land. But in modern times, municipal zoning commissions are charged with determining which lands can be used for what, and owners must abide by their rulings. As such, the main way a real estate investor can influence what classification of tenant rents space on their land is by purchasing land already zoned for the desired activity. Even under such constraints, renting out property can generate an absolute abundance of income, and is one of the primary ways to make money in real estate.
Real Estate Generates Wealth Through Natural Resources
“Finally, real estate generates wealth through the exploitation of natural resources inherent to the land itself” claims Sico. “This is done in any number of ways. On a small scale, it can be done by something as simple and un-intrusive as the cultivation of a family farm. If a homesteader purchases a plot of arable land, the fertile soil indigenous to the property can be used to grow fields of grain, orchards of fruit-bearing trees, or any otherwise valuable crops suited to the terrain. These products can then be sold on the open market to generate income.”
On a larger scale, if a corporate concern purchases a vast swathe of desert land recommended by an oil surveyor, it can fill the land with pumps and derricks to extract whatever deposits happen to lie underneath and lay pipelines to transport the oil to processing stations. In such a case, many fortunes for many people can be made. Of course, these are extreme examples on both ends of the development spectrum; there are many business models in between. It should also be noted that property owners can auction off the rights to certain aspects of their land—such as mineral rights, or rights of passage—to private bidders, and generate income that way, as well.
The Bottom Line
It is an indisputable fact that all wealth is derived from the land in one form or another and always has been. Throughout history, individuals with a keen sense of enterprise who also possess the financial wherewithal to acquire real estate have traditionally become very wealthy. The examples are too numerous to cite, but the elements at work in each case are constant. By harnessing the economic force of nature that is appreciation, landowners make money by doing little more than knowing when the best time is to buy and sell properties. By renting space out to retail and industrial businesses on commercial properties, or individuals and families on residential properties, landowners generate long-term and consistent incomes. In addition to all that, owning real estate is massively incentivized under current U.S. federal tax laws, as well as the tax laws of certain states, thus compounding its profitability. The conclusion is inescapable: acquiring a portfolio of well-chosen properties is the surest path to personal wealth there is.
