You always hear about people who made their fortunes investing in the stock market, and you also hear about other investors who lost their shirts playing the same game. But you hardly ever hear about real-estate investors who go bankrupt, and that’s because it doesn’t happen often.
Individuals who invested wisely in real estate many years ago are living a very comfortable lifestyle. Investing in real estate wisely can garner lots of money, so if you’re just getting started, or have considered investing in real estate, the information that follows is invaluable.
Take the Risk
No one hears about how much money one can make investing in real estate. That’s probably because it is a little well-kept secret. If everyone knew about it, everyone would be doing it, right?
Wrong. Much like starting your own business, investing in real estate requires entrepreneurial skills and a vision which is why not everyone is jumping on the real estate bandwagon.
Not everyone is willing to take the additional risk that real-estate investing entails. These are the same people or renters that will make you rich. The little secret is that there are hundreds of individuals who choose to procrastinate for every one individual who has a vision and chooses to take the risk with investing in real estate.
What Lies Ahead?
Would you like to have financial freedom? Of course you do, but these goals do not come without a price. Investing in real estate requires a lot of time; you need to deal with a vast array of tenants – good ones as well as bad. Just like a business, you also have to deal with operating and fixed expenses – such as heating and electrical bills, as well as renovation costs.
On the other hand, if you want to go out of town for a few days, you go. You don’t have to ask for vacation time. While you are out of town, your rents keep ticking away 24 hours a day, 7 days a week, whether you’re on the job or not. And those loans keep amortizing. The magic is happening just the same.
Aside from being your own boss, having the freedom to travel while earning profits, increasing your net worth, and having a place of your own to call home, there are greater benefits of investing in real estate:
- Cash Flow:
Cash is the difference between your income and your expenses on a piece of property. You can have a positive or negative cash flow. Obviously, you’ll feel a lot better if the cash flow is positive. Some people prefer to reduce debt as quickly as possible and sacrifice a little, and keep a negative or zero cash flow, but you should never use all of your positive cash flow with rapid debt reduction. You will be walking a thin line. By keeping a strong positive cash flow, you will have more options and space to maneuver.
Appreciation is the increase in value of a property. There are two kinds of appreciation. The first is from economic conditions beyond your control, such as inflation. You wouldn’t gain much from this type of appreciation since the gain is offset by the higher cost of living. The second kind is market appreciation. This kind of appreciation, you can control. When you improve a property (through renovation), you are, in effect, forcing its value higher. You can purchase a piece of property in need of repairs and bring it back up to neighborhood standards or slightly higher. This will give you a property that is much higher in value.
Leverage is the ability to borrow a percentage of the value of a piece of property. Real estate, in comparison to other investments, offers a very high degree of leverage. In some cases a couple buying a single-family home can obtain 95% financing. This allows individuals to purchase real estate with little, if any, of their own money.
With leverage, or the use of other people’s money, comes a repayment schedule. Your outstanding balance is being reduced with every payment you make. Part of each payment goes to interest (applied first), and part of your payment goes to principal. The principal reduction is called amortization – reducing debt. Hence, amortization can make you wealthy – slowly and steadily.
- Tax Advantages:
Owning real estate with the goal of making profit allows you to deduct interest payments and other expenses come tax time. Don’t be fooled into buying real estate for the tax advantages; buy real estate because it makes economic sense.
The Secret Isn’t Money…It’s Time!
Owning a real estate business is a great way to achieve your financial freedom, but to achieve these goals, an individual needs to understand the fundamentals of real estate investing. Probably the most important aspect of real estate investment is the notion of time. A seasoned investor knows that in the real estate game, there is no “quick buck.” Everything comes with time.
The first thing you need to spend time on is developing a vision. You need to be specific about what things you want for you and your family. Then you need to ensure that you act on your vision by motivating yourself. What do you want Real Estate to do for you? Spend some time thinking about it because money really isn’t enough.
The desire to make a million dollars won’t get you going. It is things such as new cars, vacations, improved health, improved housing, and upgrading your lifestyle that will motivate an individual to succeed. Once your vision is established, you’ll need a game plan to help you reach it effectively.
Have a Game Plan
Once you realize that investing in real estate is for the long haul, you can begin to develop your plan of action. Here is a list of the important things that you should consider:
- Hire COLLEGE TOWN LIVING:
Don’t wait until you have a deal in the works to find a supporting team. The idea is to get the competent professionals on your side. COLLEGE TOWN LIVING has expertise in your community and can help you find investment property that fits your needs. They can also help you get the following players on your team:
- Mortgage Broker – Find one who is creative, savvy and experienced in dealing with real estate investors.
- Title Company – Don’t deal with big-name companies; find one that specializes with real estate investors. Make sure they understand double closings and land contracts.
- Insurance Agent – Just like the title company, find one who specializes in real estate investors and who understands land contracts, landlords, etc.
- Contractor – Always deal with one who offers free estimates and knows how to “cut corners” in the right places.
- CPA (Certified Public Accountant) – Look for an aggressive individual who owns real estate himself.
- Be Persistent:
Very few deals are made on the first attempt. Most deals are actually booked by persistent individuals who follow up with a fifth and sixth attempt. If the deal is too good to pass up, have a follow-up system (schedule follow-ups and keep a running history of conversations). Eventually, you’ll come to an agreement and close the deal.
- Stay Informed:
You can lose a lot of money because of an investment mistake. Ignorance can cost you more than what it would cost to stay informed on new developments within the real estate market. Consider attending seminars every year. You can usually learn something that either increases your income or prevents you from landing in trouble.
- Treat as a Business:
Real estate investing is a business like any other. It takes a long time to develop customers, associates, partners, and so on. You need to be disciplined and professional, and with much effort – and of course some time – it will flourish into a profitable business.
Single-Family Home Investment Strategies
The following is a list of three strategies used by many investors who deal in the single-family home market. The idea is to take on one at a time and eventually combine several strategies with your investment plan, also known as stacking. Stacking entails using more than one method at a time, either in conjunction with, or in addition to, the other methods. You are maximizing your potential when you stack.
- “Buy and Hold” Strategy:
The starting point for most investors. The goal is to purchase the house with the sole intent of renting it. For this method to be successful, you must purchase under some set price and terms that allow for a healthy, positive cash flow. The rent has to be higher than the mortgage payment.
- “Buy Low/Sell High” Strategy:
Purchase a home located in a neighborhood with high sales activity. Make the necessary cosmetic and structural repairs and then sell the house for a higher price than what you paid. Keep in mind that the purchase price must be low enough to allow room to cover your repair costs, holding costs and resale costs…plus, leave room for a healthy profit.
- “Leasing” Strategy:
You can control property without actually owning it. Look for property you can lease under favorable terms, where you give the rights of use, enjoyment, and occupancy to a tenant who agrees to pay a price higher than your own lease (sublease). The longer the term of the favorable underlying lease, the more value your position holds.
A Final Tip!
Don’t expect to go through real estate investing without making any mistakes. COLLEGE TOWN LIVING is available to walk you through the entire real estate investment process.