2007 March | Real Estate Investing Blog – Part 2
Rental properties — small apartments and single-family homes that you rent out — are good investments because there is always a shortage of housing, and there are always people who can afford to rent but cannot afford to buy a home. Because of the high price of home ownership, and the fact that it is generally undertaken with borrowed funds, there will always be renters, those who are afraid of the financial obligation or unwilling to leverage themselves into ownership.
The main advantage real estate offers is leverage. Using a small amount of money — or even no money, in a few cases — you can buy real estate worth tens or hundreds of thousands of dollars. The second advantage is the price appreciation that occurs in real estate, whether it is through inflation, or fixing up, or just the fact that buyers and sellers are working in an imperfect market, usually with only a hazy knowledge as to the real value of property. This is even truer and absorb show in markets where the job growth is filling every single vacant rental property.
The house that you bought yesterday for $60,000 may be worth $65,000 to another person. Find that person, and you’ve made $5,000. Price is also boosted by the simple law of supply and demand. The supply of housing is growing slowly, and the population is mushrooming, through both the constant flow of immigrants looking for a place to live and our reliance in the old fashion way of enlarging our own families. As long as demand for housing continues to outrun supply prices will keep going up.
Other factors that affect the price of real estate are the general economic condition of the community, the condition of the surrounding neighborhood, the actual condition of the property, the financing terms, the time period involved, owner financing, down payment, and other factors.
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The number-one determinant of your success in real estate investing is your desire: your motivation as reflected in your goals and your plan. Many people think success in real estate investing hinges on your understanding of contracts, laws, and financial concepts. I don’t believe that. The most successful people I’ve met have a lot of desire.
As a matter of fact, many of the super successful investors actually don’t know everything about real estate investing. Many aren’t familiar with a lot of the concepts related to real estate such as wholesaling, lease optioning, limited liability companies, advanced analysis, or different types of contracts. They simply have a lot of desire; they go out and make things happen; they don’t worry about it — they just keep working their action plan. When I started in real estate investing, I didn’t know these things either. But I did enough activities to experience enough successes.
The most important part of your real estate investing career is desire and motivation — whether you’ve been in real estate for 10 years, just starting out, or you’ve spent the last 10 years just thinking about getting started.
Now it’s your turn. Write down what motivates you. Remember, there are no wrong answers.
- Why are you interested in real estate? – Is it to make more money, be your own boss, become financially independent, be able to take more vacations, get rid of your boss, create wealth for future generations of your family, build a retirement savings, make up for losses in the stock market?
- How much money do you want to make? – Now be realistic, if you’re just getting started. Maybe you want to make an extra 20000 and 30,000 or even just 5000 extra a month.
- What will you do with that money? – Pay off some debt, take a trip, purchase a toy, invest in the stock market, work part time, write down what difference that would make for you and your family.
- What will be your motivating factor? – A picture of a beautiful island off the Pacific ocean, a brand-new Ferarri parked out front of your three car garage mansion, or that 5 carat diamond Tiffany ring your wife has been dreaming about?now take whatever that motivating factor might be and put a picture of it on your desk and look at it every day, determining that motivation will remind you of why you’re getting into real estate.
Remember, your #1 determinant of success is your desire and your motivation. This visual reminder will encourage you weeks down the road. If you’re having a bad moment, don’t get frustrated. Just reread that card with your goal written on it and look at the picture of what you want. You’ll quickly be motivated again to keep on going. It will reignite that fire.
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Did you know that only 5% of North Americans are financially independent when they reach retirement age? The other 95% are dependent on friends or families to make ends meet. If you envision a comfortable lifestyle during retirement with the proceeds from your Social Security checks but don’t manage to save a good portion of your income before retirement, you’ll definitely need another plan if you expect your social security checks to maintain your lifestyle later in life. You’re going to have to either continue working well past retirement age or have an extreme leading meager lifestyle until your death.
So now that you know the bad news about the majority of Americans, I’m going to help put you in that small 5% category. Below are my top five reasons why to invest in real estate:
Real estate values have experienced a steady increase in value for the last several years. This appreciation is due to the overwhelming demand for real estate. Besides serving as a basic human need for shelter that everyone on the planet must satisfy, several other factors are working to increase the demand for real estate.
Leverage the use of borrowed funds to finance the purchase of an asset leverage basically allows you to use other people’s money to buy more properties. Real estate investors use leverage to increase their purchasing power and finance investments that they cannot pay for otherwise. Leverage also allows investors to earn a higher return on their equity. For example, leverage allows you to buy a $1 million property with only $200,000 down. How else could you buy a million dollar asset for 20% down? Try duplicating this type of purchase with your company’s 401(k) program or buying stocks in the stock market. You just don’t have the same type of leverage that you do with real estate.
3) Tax Savings
If you acquire the right properties at a good price and manage them while your rental properties generate a positive cash flow you’ll be qualified for substantial tax write-offs including depreciation. They might show a paper loss for tax purposes. Let’s say a property generates $1000 a month and positive before tax cash flow (cash flow before taxes = gross operating income – operating expenses, debt service, and capital additions) you would pocket $12,000 a year. Well, let’s assume the depreciation amounted of $15,000 for the same period. Not only would you show at $3000 paper loss, you’d actually avoid having to pay taxes on the $12,000 gain for that year.
Although some management and record-keeping are required, your time commitment can be minimal compared to that required by most other businesses. If you invested in a software company, consulting firm, coffee shop, or bakery, you would be married to the business and you would have to dedicate many long hours to its success. Real estate investing can be done (at least before you create an expansive empire) without too much interference with your current job.
Most of the heavy lifting of real estate investing is done in the beginning when doing research and property selection. Once the neighborhood has been selected a house or apartment building purchased, and all units rented, you simply need to field phone calls from the property management company. Unlike a regular 9-to-5 job, my properties continue to make money for me regardless of whether I’m physically there are not. I’m not saying that you should become an absentee landlord, or that you neglect your properties. However, you don’t need to spend 10 hours a day to properties watching the grass grow as is expected that most traditional day jobs.
5) Pride of Ownership
Last and not least, but in my opinion, one of the most important aspects of real estate investing is being able to know that you physically own a building and are responsible for people’s shelter. Just like Donald Trump — real estate means power, let it be your own personal residence or the 24 unit apartment building you just purchased. Unlike owning a stock, a property is a physical asset, and you can go to bed feeling good about owning something that most likely will appreciate in value and you can physically go stand in front of and look at and say this is yours.
Once you understand the major advantages of investing in real estate, it is easy to conclude that very few if any other investments can match it. It is the principal means of wealth accumulation for financially independent individuals. I challenge you to become part of that small 5% that are financially independent when they reach retirement age.
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This is the first post on my new blog where I’m going to talk about how I became a real estate millionaire in only four years. I’m no Stanford or Harvard graduate with an MBA nor am I a professional realtor or accredited real estate investor. I’m just an ordinary guy who had a desire to own lots of real estate and create multiple streams of income so I don’t have to work the rest of my life.
I grew up in the San Francisco Bay area and purchased my first property when I was 27 years old. Now San Francisco and the surrounding Silicon Valley is nowhere close to the cheap side for purchasing real estate. It was also a time when most people thought the market had already hit its peak and real estate prices were not going to go up much further. So when I started looking, the entry-level home price was around $400,000 to $450,000. Now I know you’re probably thinking “dang where’d you find a house at that low of a price”? Well, this was over five years ago and the housing market has since gone up.
At the time my current job was in San Mateo, California and the properties I was looking at in that price range pushed me all the way down to South San Jose. Now I’m not one for having to commute but I was dying to purchase my own house and the only way I could accomplish this was to do it in South San Jose.
After months of looking I finally found a house that had my name on it and I purchased it for $425,000 — back in 2002. Not only was this my first real estate investment — it just so happened to be my primary residence as well. From this point on I had an epiphany — all I could see were benefits in purchasing real estate.
Today I own several properties some in the United States and some internationally. The bottom line is they are all income producing cash flow positive assets that continue to build equity every single day. This blog is to help you understand how a normal Joe average with a basic college education can go from renting an apartment to owning several apartment buildings and vacation homes while he’s still under 35. I will also help explain the steps I took to get to where I am today in hopes you become just as (if not more) successful in real estate investing!
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