How Real Estate “Creates” Wealth

It is not uncommon for people to talk about how real estate creates wealth. Typically this is a reflection of their understanding of how a property appreciates over time while simultaneously paying down underlying debt. While this technically “builds” wealth it does not “create” it. Can real estate actually create “new” wealth, which was not included in the property value prior to your ownership? Absolutely!

While there are many techniques than can produce new wealth, here is a simple example of one that is easy to recognize. Recently an investor I know purchased a small home on a corner lot. The lot was large enough that the investor was able to subdivide it, thereby producing a new building lot. Since a home will sell based on comparable sales in the area which focus on the size of the home, number of bedrooms, bathrooms and amenities, the home lost no value on the open market. After the simple two-lot subdivision, the owner owned a home with the same value on a now smaller lot. However, she also owned a new building lot with a value, for this example, of approximately $60,000. That $60,000 is “new” wealth. It is value that was “created” because of the investor’s recognition of the opportunity and effort and ability to change the elements involved.

I am watching a transaction right now where an investor is doing the same type of thing with a small commercial strip center on a lot large enough to split. Since the commercial space has a value based on its ability to produce income, the separation of the lot will in no way reduce its value. After the lot is divided off, the new owner will own the strip center with the same investment value he paid (based on its revenue production) and a separate commercial building lot. The value of the new lot is “created” wealth. Good for him.

The examples above are only one way of creating wealth with real estate. There are many others. If you are serious about this business it would be wise for you to learn everything you can about the numerous techniques available. For ultimate long term success, you will probably structure your business to do th5ree things; create, build and preserve wealth. But those are topics for another time. I hope this has given you a new idea or two. Why not go out this weekend and see if you can create a little wealth for yourself. I’ll bet you’ll be looking at property with large lots a little differently from now on. Good luck.