Up until just a few years ago, you couldn't leave your house without tripping over a real estate investing “expert”.
This was when the market was high, interest rates were low, and banks were handing out mortgages like candy on Halloween. Everyone and his brother had a story about how they bought a house one day and sold it a week later for a five figure profit. Of course, these stories led even more people to try their hand at real estate investing, more bad loans and contributed to the housing and lending crisis our country finds itself in today.
Don't get me wrong – a lot of people made a lot of money in those days, and a lot of those stories about rapid flipping were true. But, you don't hear about that type of investing anymore because the circumstances have changed – house values are declining, banks have stopped lending and people aren't buying. And the guys who built their financial independence on that type of ‘investing' are finding that they weren't really financially independent at all – instead, they were dependent on the market. (Now, they're likely dependent on unemployment to pay their bills.) That's because most of that flipping relied on rapid appreciation of housing in a particular area.
Everyone wanted to be the first to discover the area that would be the next Yuppie haven, the next hot neighborhood. People would buy houses with no cash flow or negative cash flow, and rationalize it by saying that the neighborhood was up and coming, and in two or three months (or later, two or three years) the property would appraise – and sell — at twice the closing price.
Some people got lucky doing that. But, that's all it was, luck. And you won't become financially independent through luck. One of the many smart things Thomas Jefferson said was this: “I'm a great believer in luck and I find the harder I work, the more I have of it.” Here's my point: success isn't based on hoping and waiting and wishing. Real estate isn't luck, it's not possibility. It isn't supposed to be a crap shoot.
Instead, you can learn how to harness the power of appreciation and make it work for you. You can be in control – not Wall Street. And you can make a lot of money doing it!
I call it ‘forced appreciation'. Here's how it works: go to a neighborhood that is already desirable and stable (not one that you hope will become desirable and stable). Find the most run down, beat up property in it – what I called a distressed property. Often in these situations, you'll find that the seller is distressed, too – maybe they're getting too old to keep the place up, they're having financial troubles, or it's the kids dealing with an estate after their parents have passed on. Whatever the case, a distressed property and a distressed seller are a good combination for a real estate investor.
Now, let me be clear – you want the place to be a run down and beat up, but the roof can't be caving in. You want it to be cosmetically distressed, not condemned. You want a place where you can raise the value by $20,000 or $30,000 just by spending $1,000 on some paint and landscaping – not a place that will require extensive renovations.
This way you're forcing the home to appreciate in a short period of time, just by spending a little money and adding some elbow grease. With some minor cosmetic work, you'll raise the property to the value of the other houses around it. You make your profit and you're in control, not Wall Street.
Now, this is not the way I advise people to get started. First, you want your multiple-unit properties that are generating dependable, positive cash flow. But once you build that foundation, you can add to it using the principles of forced appreciation. And you can use this method for multiple unit properties that you're going to hold onto, too – just buy a cosmetically distressed duplex, triplex or multi-unit building, spruce it up a little, and you can charge higher rent and generate even more cash flow.
This is all about financial independence – and independence is about being in control. Based on the craziness we've seen from Wall Street over the last few years, I think we can all agree that they're the last people we want in control of our futures. You can't sit back and wait for appreciation to come, you've got to get out there and make it happen.
Try using this forced appreciation technique, and I bet you'll find that your luck will change.