Real Estate Investing Strategy For Passive Income

Real Estate Investing Strategy For Passive Income

Why Get Into Real Estate Investing?

Through real estate investing, many individuals just like you have been able to increase their net worth substantially, obtain the things they always wanted to have, reached their financial goals faster than they thought possible, and preserved their wealth for their retirement and/or their families. And many have done so without much money to start with, or without any money to start with at all.

The fact is, real estate investing isa powerful tool for building and preserving wealth no matter where you live and no matter who you are. And unlike some investment opportunities, real estate investing has “staying power.”

Demand for real estate in most areas is constant although there are economic factors that influence the market and its demands. The good news is that when the economy is in a slump, there are tremendous opportunities for good real estate deals because the number of buyers decreases along with tougher economic times.

Now is just such a time and that makes investing in real estate more lucrative than ever. The key to building wealth through real estate is having the knowledge to understand the market swings and pressures and then being able to capitalize on the opportunities as you find them. There will always be a never-ending supply of buyers looking for everything from their first home to their retirement home—and you will be the investor who has exactly what these buyers need.

Before we go into greater detail in this manual about profiting with real estate, locating and negotiating deals, evaluating properties, and making the most out of some of real estate’s best opportunities, let’s take a brief look at the real estate investment market in general to see why it provides so many avenues for building wealth.

THE MAJOR BENEFITS OF REAL ESTATE

The benefits of investing in real estate are many, from creating situations where your profit potential is up to you, to building a lifestyle some people only dream of. With real estate, you can:

• Own your own business

Work part-time or full-time, be your own boss, and time things according to your schedule and goals.

• Take advantage of appreciation

Real estate typically appreciates around four to five percent annually.

This appreciation rate generally takes place as part of natural market growth, essentially, without you doing anything. To illustrate, consider homeowners who purchased their homes 20 years ago and now find themselves with $150,000 in equity in their homes, something they never thought about at the time they purchased the home. Beyond that, you can create situations where you “force” appreciation, such as through renovations or cosmetic improvements to a home (we call this rehabbing properties). This is where the work you put into a property makes it instantly more valuable than the price you paid for it.

• Generate positive cash flow you can use – Some investors will purchase property in order to rent it out and create positive monthly cash flow.

Property can sometimes be rented for more than the total expenses (principal and interest, taxes and insurance), so you can make money from the rental, while someone else is building equity in your property. Another way to buy and hold property is to lease it to someone else with an option for them to purchase it in the future. This technique creates excellent positive monthly cash flow since these tenants are willing to pay more than the average renter will pay.

• Create a hedge against inflation – Even in times of inflation, opportunities abound with real estate. That’s because inflation tends to force higher real estate prices and because the underlying asset (your property) can be counted on to be there through inflation (while some other investments may not survive economic downturns).

• Make money with low risk and low start up costs – The market for potential customers is huge and you can start your business in real estate investing with little or even no capital of your own. There are always private investors in the marketplace who have the money to invest but do not know how (or don’t care to do the work) to do the deals themselves.

• Profit from equity buildup – You build equity at the same time as the property is naturally increasing in value due to market conditions and demand. And you can tap that equity in a property to finance additional investments.

• Enjoy multiple channels for profit – There are many ways to invest in real estate and there is something for everyone, from the casual or first-time investor to the more experienced or full-time investor. Once you understand the variety of opportunities available, you can choose the deals that help you reach your individual goals faster.

Recognizing the Caveats of Real-Estate Investing

Despite all its potential, real-estate investing isn’t lucrative at all times and for all people — here’s a quick outline of the biggest caveats that accompany investing in real estate:

✓ Few home runs: Your likely returns from real estate won’t approach the home runs that the most accomplished entrepreneurs achieve in the business world.

✓ Upfront operating profit challenges: Unless you make a large down payment, your monthly operating profit may be small or nonexistent in the early years of rental property ownership. During soft periods in the local economy, rents may rise more slowly than your expenses or even fall. That’s why you must ensure that you can weather financially tough times. In the worst cases, we’ve seen rental property owners lose both their investment property and their homes. Please see the section “Fitting Real Estate into Your Financial Plans” later in this chapter.

✓ Ups and downs: You’re not going to earn an 8 to 10 percent return every year. Although you have the potential for significant profits, owning real estate isn’t like owning a printing press at the U.S. Treasury. Like stocks and other types of ownership investments, real estate goes through down as well as up periods. Most people who make money investing in real estate do so because they invest and hold property over many years.

✓ Relatively high transaction costs: If you buy a property and then want out a year or two later, you may find that even though it has appreciated in value, much (if not all) of your profit has been wiped away by the high transaction costs. Typically, the costs of buying and selling — which include real estate agent commissions, loan fees, title insurance, and other closing costs — amount to about 15 percent of the purchase price of a property. So, although you may be elated if your property appreciates 15 percent in value in short order, you may not be so thrilled to realize that if you sell the property, you may not have any greater return than if you had stashed your money in a lowly bank account.

✓ Tax implications: Last, but not least, when you make a profit on your real estate investment, the federal and state governments are waiting with open hands for their share. Throughout this book, we highlight ways to improve your after-tax returns. As we stress more than once, the profit you have left after Uncle Sam takes his bite (not your pretax income) is all that really matters.

These drawbacks shouldn’t keep you from exploring real estate investing as an option; rather, they simply reinforce the need to really know what you’re getting into with this type of investing and whether it’s a good match for you. The rest of this chapter takes you deeper into an assessment of real estate as an investment as well as introspection about your goals, interests, and abilities.