The Foolproof Way To Make Money As A Real Estate Investor
Real estate is one of the best ways to create wealth in our capitalistic society. It is a finite resource that will always be in demand. The house I grew up in when I was a child? It’s still there 30 years later. It’s probably going to still be there 100 years from now, long after Google and Facebook and perhaps even the internet itself will be radically different or even non existent. Real estate is relatively permanent and because of this, the opportunities to invest in real estate should not be overlooked. The problem is, only a small percentage of individuals are doing it correctly, or even at all. Let me first start off by telling you that the home that you live in and pay a mortgage on is NOT an asset, and is actually a bad investment. Let me say that again: your house that you currently are living in is NOT an asset nor should it be considered a good investment. I realize that this must sound crazy coming from someone who is a REALTOR®, but this concept is not one that I invented, rather one that has been realized by many wealthy people probably since the advent of private property and land ownership.
Allow me to explain. An asset, as explained to me long ago by “Rich Dad, Poor Dad” author Robert Kiyosaki, is something that puts money into your pockets. Conversely, a liability is something that takes money out of your pockets. Your current mortgage payment is a liability if you are a homeowner. Your current rent payment is a liability if you are renting your residence. Even if you own your home free and clear of any mortgage, it is still a liability because you have to pay property taxes, make occasional repairs and maintain the property. Most people are playing a loser’s game when it comes to real estate and don’t even know it.
Now I understand that we all need a place to live. I live in a home that I own and pay a mortgage on, a liability. However, I offset this liability with assets such as rental properties that I own in California and other states that put money into my pockets every month, assets. As long as I can increase my assets, I can afford bigger liabilities and luxuries like a nicer house or a nicer car, etc. This is what wealthy investors have figured out long ago: when you buy a property that you generate cashflow on every month (the rent you are charging is greater than the mortgage, taxes and other expenses that you are paying on the property) you are having your real estate work for you, this is an asset. Furthermore, you are only concerned with the cashflow of the property, not the price appreciation (although that does indeed occur). I am going to explain, in very simple terms, how anyone can do this and even take it a step further than I am currently doing, by having your monthly mortgage paid for by someone else every single month.
Multi-family properties are assets. Duplexes, triplexes, and fourplexes, are properties that are subdivided in 2,3,and 4 separate livable units. There are, of course, larger multi-family properties, but 4 units is the maximum number allowed by lenders that can still be considered “residential” and not “commercial” properties. One sure-fire way to start playing the real estate game the right way is to do the following, and I am starting with the least expensive option (duplexes) as an example:
-find a duplex in your neighborhood that is for sale.
-figure out what your monthly mortgage, property taxes, and other fees will be
-figure out how much you can rent one of the duplex units for (chances are, in 2015, a LOT)
-if the rent from the single unit can cover most of the mortgage continue reading, if not, keep looking until you find one that does (I am a REALTOR® and I can help you with this)
-go to your bank and tell them that you are purchasing a primary residence and you want to put down 5% (if it’s your first property you may be able to get away with a 3% down payment, if it’s your fourth or fifth property you might need between 10–20%)
-live in one of the units and rent the other to someone who is not a relative (family members are tough to collect rent from LOL!)
-you will be the property manager in charge of finding a good tenant, collecting rent, making repairs, charging late fees if needed, etc.
-in 6 months you can find another duplex to purchase by following this model and live there, or continue living in your current duplex, or, if you must, you can buy a personal residence (a liability) and now because you have 2 units that you can rent out you might even be able to pay for some of your personal residence.
It really is that simple. Real estate investing is not reserved for the smartest people in the world, ANYONE can do this. As a matter of fact, I know some pretty stupid people who got pretty stupid rich by following this roadmap. Notice how in this formula we are not accounting for price appreciation. As long as you can have a positive cashflow every month, you could care less whether the price of the property goes up or down, however, it is important to understand that property values do fluctuate over the years as do the rents that you will be able to charge. There are also many tax advantages for following this formula that I will not get into, but just know that depreciation is another way to create long term wealth through real estate for investors.
When following this fool-proof formula, there are 3 possible “exit plans” that you will need to consider.
-holding on to the property indefinitely
-refinancing the property and taking equity out
-selling the property
Let us briefly take a look at these 3 options, although entire books have been written for each one of these topics.
What I prefer doing is holding on to my properties indefinitely. Over the very long term (30 years or more) real estate prices have shown to appreciate significantly even when factoring in inflation. As long as the majority of your properties are cashflowing,why would you ever want to sell them? You can never have enough assets much like you can never have enough money, so to me this is a no-brainer. Furthermore, you can reinvest some of your cash surpluses into even more multi-family properties and continue to build your real estate empire! However, I understand that circumstances may arise in which you may need to pull out some of the equity that you have been building in real estate over the years. Maybe a medical emergency has occurred, or you started a business and need some start up capital, or perhaps you want to buy a Rolls Royce. Whatever the case may be, you’re likely going to be able to take some equity out of your property by either refinancing it or selling it. As I will not get into when to do this or how to do this in this particular blog post, just know that you can do it and REALTORS® such as myself would be more than happy to help you do this.
If you continue to follow this roadmap and play the real estate game the way that the wealthy do it, you will eventually be able to purchase your properties with all cash. Keep cash reserves on hand for situations like we experienced in 2009 and 2010 where real estate prices hit rock bottom and cash investors where able to negotiate even lower purchase prices because sellers where desperate to get out of the game. It is during these financial market panics that you can generate even more wealth and acquire even more cash flowing assets for yourself. We may not encounter another situation like we did in 2010 for quite some time, but just keep this in the back of your mind, and if some of your properties have appreciated significantly, it may be wise to sell them and take some “money off the table”.
A metric that real estate investors like to use to assess the performance of their properties is capitalization rates (cap rates). A cap rate can essentially tell you what kind of a return you are getting on your investments by dividing the net income that each property generates and then dividing it by the price of the investment itself. A decent cap rate is between 8–10% if you are using all cash, and between 12–20% or more if you are using financing. Note that as your asset increases in value over time, your cap rate goes down and your opportunity cost of keeping that investment is higher because you could sell the property at this point for a larger return. I will discuss cap rates in future blog posts and videos, but for now just know that it is a metric you will use to assess whether you should buy, hold or sell a particular property.
If you’re thinking about buying or selling a home and would like a free report on your property, please contact me at (949) 415–6256 or by email at firstname.lastname@example.org. My experience in creating high-quality CMAs is part of a high level of service that gets homes sold for the highest possible price and in the shortest possible time. I also work with buyers and investors so you can also sign up below!