My latest recommendations are: Austin,
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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. That's right, those 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
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.
And 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.
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, the rents keep ticking away 24 hours a
day, 7 days a week, whether I'm on the job or not. And
those loans keep amortizing. 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:
1. 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. My advice on cash flow is this: 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.
2. Appreciation
Appreciation is the increase in value of a property.
There are 2 kinds of appreciation. The first is from
economic conditions beyond your control, such as
inflation. But you wouldn't gain much from this type
of appreciation since the gain is offset by the higher
cost of living. The second kind of appreciation 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.
3. Leverage
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. What other
investments offer such a high degree of leverage?
4. Amortization
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.
5. Tax Advantages
Owning real estate with the goal of making profit
allows you to deduct interest payments and other
expenses come tax time. But, don't be fooled into
buying real estate for the tax advantages; buy real
estate because it makes economic sense to do so.
Owning your own
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
secret isn't money, it's time
Real estate, like a
business, is a great form of investing, but it takes a
lot of work and time on your part. Especially if, to
begin with, your resources are limited. But that's
okay because you're going to build your wealth one
brick at a 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. The worst thing
that you can do -- especially while planning -- is
surround yourself with negative people who will
trample all over your vision. 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
unlike the stock market, 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:
1. Get a good
support team
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. And by bringing them
repeat business, you can bargain for better prices.
You need to get the following players on your team:
Mentor --
Someone who's been in the business for some time
now and knows how to smooth out the rough spots,
or who can give you wise advice for sticky
situations. Maybe even a potential partner.
An attorney or
pre-paid legal service-- Ones that specialize
in real-estate deals are best.
Title or Escrow
Co -- 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 Escrow Co, find one who
specializes in real-estate investors and who
understands land contracts, landlords, and so on.
Contractors
-- Always needed for the more complicated
fixer-upper properties. Aim to establish a good
base of reliable contractors.
Mortgage Broker
-- Find one who is creative, savvy and experienced
in dealing with real-estate investors.
CPA (Certified
Public Accountant) -- Look for an aggressive
individual who preferably owns investment real
estate himself.
2. 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.
3. Stay informed
You can lose a lot of money thanks to 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.
4. Treat this 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.
Where do you start?
I personally recommend
that a novice real-estate investor begin with
single-family houses. Why? Because they have the two
biggest players in the market. Whereas apartments only
have investors playing in the market, single-family
homes have both investors and owner-occupants. For
this reason, financial institutions feel more
comfortable lending a higher percentage of value on
the property.
Single-Family Home
Investment Strategies
Following are two
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.
1. 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.
2. Buy Low-Sell High
Strategy (AKA, "Flipping"): 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. With experience, you
may want to seek greater profits by going after
properties in foreclosure or REOs (bank owned).
Finally, stop
procrastinating and "get in the game"
Don't expect to go
through real-estate investing without making any
mistakes. Like most businesses there is a learning
curve. You will only learn the real-estate game by
being active and understanding the buying process. To
be successful, you need to learn the market, how to
locate property, inspect property, negotiate your
deal, contract to buy, finance the purchase, and close
the transaction. You can't possible learn all this at
once; the only way you'll ever be ready to understand,
is by actually going through the motions.
The
"1031" tax-deferred exchange. One of your
best investment tools!
How would you like to
be able to defer paying capital gains taxes on your
investment properties and keep the money rolling into
new investments? You can do this through the 1031
exchange. A 1031 exchange, also known as a Starker
exchange or a tax-deferred exchange, allows you to
sell investment property and to defer capital gains
and depreciation recapture taxes. This assumes
reinvestment of 100% of the equity into
"like-kind" property (or a combination of
properties) of equal or greater value. Any property
held for investment purposes or for productive use in
a trade or business generally qualifies as "like
kind" property for 1031 exchange purposes.
1031 exchange rules require an investor to identify up
to three potential "replacement investment
properties within 45 days of the close of escrow on
their relinquished property. The acquisition of the
replacement investment property (or properties) must
be successfully completed within 180 days of close of
the relinquished property.
Benefits
of a tax-deferred exchange
A 1031 tax-deferred
exchange offers strong benefits that translate into
investment savings.
You can defer
Taxes
A 1031 exchange
enables you to defer capital gains and depreciation
recapture taxes. You can also harvest dormant equity
at predictable time intervals with a 1031 exchange
to maximize the inherent benefits of your real
estate investments.
You can
Potentially Increase Cash Flow
The tax dollars saved
may be maximized to increase cash flow and overall
net worth. The compounding effects of leveraging the
equity in investment properties over several holding
periods can potentially produce higher actual dollar
returns, new depreciation schedules to tax shelter
cash flow, and accelerate equity accumulation.
