By Clarence Walker, Newsblaze Business Writer
Part-1 Of an Occasional Series On Smarter Ways To Invest In Real Estate
Billionaire Developer and U.S. Presidential Candidate Donald Trump once said, “Real estate is always good as far as I’m concerned.”
How good is real estate for those with just a little money?
Real estate investment on a large scale is not limited to “big money players.”
Anyone Can Do Real Estate Investing
Successful real estate investments can be achieved by typical, 9-5 hardworking people or those with 401K plans and pensions, and, of course, people with lots of cash on hand eager to make a quantum leap into real estate to rake in profits.
Investing always carries risk. Unlike stocks and bonds, which are intangible, a person can see and touch real estate.
Learn What It Takes
But earning money in real estate takes patience, hard work, and knowing how to spot a good investment deal. Nor is it a “get rich quick” business despite all the hype advertised on TV and on the internet, promising instant real estate riches.
“Real estate investment is get rich slow, not get rich quick,” according to Scott McGillivray, in an online article published by Forbes. McGillivray is a real estate mogul and the popular TV host of the TV show called Income Property.
Hard work and knowing how to develop effective investment strategies is worth more than a valuable property for sale. Taking a real estate investment class to learn the nuts-and-bolts of the game is not a bad idea unless you have a very experienced mentor willing to show you the ropes.
“What I tell people,” McGillivray says, “is I’m the type of person willing to work hard to make a little more and being able to control my own financial future.”
Investing in a property or multiple properties can vary from a small apartment complex, single-family home, townhouse rental, and up to a luxury hi-rise building surrounded by the beautiful skylines of Houston Texas or New York.
Single family home real estate is an excellent market because everyone needs somewhere to live. It can be extremely profitable, and famed billionaire Warren Buffett, one of the world’s best financial wizards, realizes the potential.
Buffett recently made this inspiring statement on CNBC Squawk Box. “If I had a way of buying a couple hundred thousand single-family homes … I would load up on them.”
Surely most investors don’t need 200 thousand homes to make a big profit in property investment?
If you are eager to dive into real estate investing, there are questions you must answer:
Do you really know the best kinds of investment properties to invest in?
Do you have any experience?
One Property Investment Strategy
So what are the best ways for an inexperienced investor to squeeze into this competitive game responsible for making some people comfortably wealthy, while others become millionaires, and some become billionaire like Donald Trump.
Here is a property investment strategy:
Cost of house: $40,000
Cost for repairs: $10,000
House value after repairs: $80,000
Okay, let’s do the math. Total investment is $50,000, which equates to a 30 percent discount on the total value of the property. To clarify numbers, the $50,000 investment has an automatic $30,000 built in equity on this property.
Do you get the picture?
The focus of this article is to inform and educate potential investors in deciding how to locate, analyze and invest in investment properties to eventually over time create a stream of income through real estate investing – one property at a time.
Real Estate Investment Benefits
So let’s first start with the benefits of becoming a real estate investor:
Average people are unaware that by owning investment properties there is a considerable tax benefit, a monetary benefit you won’t immediately see nor deposit the money in your account or in your pocket. The benefits will go towards deductions to reduce your income taxes.
“Because many of the expenses are deductible, only a portion of rental income you receive will be taxed,” says Bankrate’s Greg Mcbride. Mcbride further said .” .. any money spent on mortgage interest, insurance, repairs, and association dues are all tax deductible,” during an interview with Newsblaze.
Assume an investor purchases distressed property, a foreclosure or a short sale, estate sale etc, and then restores the property; the difference between After Repair Value (ARV) including the price an investor paid for repairs in this technique is called “sweat equity.”
For example, you are an investor who purchased a residence for $120,000 dollars and spent $35,000 on repairs, and this rehabbed home was then worth approximately $240,000 dollars. Therefore you accumulated between $45,000 and $50,000 worth of “sweat equity.”
Continuing cash flow is the money derived from rental property.
If you bring in more money from property rented to tenants than the amount spent on expenses such as mortgage, taxes, insurance and repairs – you wind up building a nice, monthly cash flow.
Overall, expenses are inevitable in the real estate game.
“Positive cash flow is key,” McBride stated in an email message to NewsBlaze. “You’ll need to price the rent to account for the unexpected expenses and repairs that pop up. It is planning for these contingencies to help you stay cash flow positive,” McBride explained during the interview.
Appreciation of Assets
Real estate appreciates over the long term of approximately 4%-5% percent per year, and this is only 2% above inflation rate. Important to also know is if investors buy real estate considerably cheap during recession years between 2008-2011, the appreciation rate is likely to exceed these rates than if the property was purchased in a boom.
Further, as property appreciates, it compounds the returns you earn. For instance, a $100,000 home can become a $105,000 home after the first year, and at the end of the second year it rises to $110,250.00 – as the 5% percent appreciation is compounded off the larger value accumulated after the first year.
Principal Pay Down
Let’s assume an investor or average working person has a mortgage on a property, some of the monthly mortgage payments paid from rental tenants – these funds actually go toward the loan principal, according to real estate experts. Over succeeding years, when the principal is paid off, the equity builds up in the property. Or they can take another ingenious route by refinancing the property and that way they can collect the accumulated equity upon closing.
“This is like tenants stashing money into a separate savings account for you each month but only you can’t access the money until the property is sold,” Bankrate Analyst McBride concluded.
Do you want to play like the big boys? And you got money like “big money” Sonny, consider investing in a real estate investment trust.
Real Estate Investment Trusts
Real Estate Investment Trusts (REIT) are companies that own, and in most cases, operate income-producing properties for those who invest in the REIT company. REITs own a variety of commercial real estate, ranging from High-scale offices, apartment buildings, warehouses, hospitals, shopping centers, hotels and even timber land. When an investor invests in REITs, the investor does not have to actually own a property that needs to be maintained. REIT commercial properties usually pay high dividends to shareholders(like you the investor). REIT income is generated by rental income from their properties, and REITs’ are more liquid investments than owning real estate in the traditional way because a REIT trades like stock.
There are numerous ways to make money in real estate but as a property investor, you don’t have to grab each one available because a good rule of thumb is to focus on one or two types of properties and learn the ropes to become a pro in selected areas of real estate investing before branching out to new territorial ventures like investing in: single family homes, apartment complexes, commercial buildings, small multi-family properties(4-5 units).
So now you have a an idea on how to plunge into real estate investing and the benefits it offers if you become a successful investor.
Real Estate Investor: Caution
Real estate investors must acknowledge the reality that property market price fluctuates and can affect your investment. The value of the investment in real estate is connected to various factors, including the conditions of the real estate market, the economy, and availability of properties.
For more information on real estate investing, download the Ultimate Guide To Real Estate Investing
To avoid mistakes in real estate investing, read this (PDF) report.
Newsblaze Reporter Clarence Walker is a news media writer specializing in writing about business, real estate, finance, general news, and consumer protection. As a business consultant and real estate investor, Mr. Walker can be reached at: [email protected]