When I tell people I'm a real estate investor these days, they think I'm nuts. Based on what they've read and heard, they assume that all of real estate is in the toilet – and that my investments, and my life, are right there with it. “Isn't it risky right now? Aren't you worried?” they'll ask.
The short answer is, “No, I'm not the least bit worried.” That's because smart real estate investing is one of the safest things you can do right now. (Relying on someone else for your paycheck, health insurance and retirement savings seems a lot riskier to me.) The reality is, this is one of the best markets I've seen in 30 years of real estate investing – if you know what you're doing.
Now, I'm not about to give a free real estate investing seminar to every person I meet at a cocktail party. But I'm sure you've had some of the same conversations, too. You may even have a few of those seeds of doubt yourself. I can't blame you. You probably know some people who tried investing in the past and lost their shirts when the market tanked. Everyone around you is probably telling you you're crazy for even thinking about investing in real estate right now. But I'm here to tell you – those people who lost their shirts didn't follow my formula. And you're crazy if you don't think about investing now.
The people who lost their shirts in the “bubble” gambled on quick turnarounds on single family properties in hot neighborhoods. They never had positive cash flow – it was all a bet on market appreciation. When the market cooled – and then froze over – they were sunk. If I were doing that kind of investing, I'd be worried and scared, too. But that's not what I do. And that's why I was able to become financially independent before I turned 30, and haven't looked back since. You can do the same if you follow my lead.
Here's what I do: buy multiple unit buildings in low to moderate income neighborhoods that will generate positive cash flow from day one. It's not rocket science – just figure out the monthly expenses for the property (the financing payment, the taxes and fees, the utilities and maintenance) and subtract it from the total rent you'll collect each month. If your rental income is more than your expenses, you've got positive cash flow. If you lose one tenant, you've still got two or three or four others paying you. (Think about it – with a single family house or single unit rental, once you've lost your tenant you've lost 100% of your cash flow.)
Best Time For Real Estate Investors To Buy
That's something you can do in any market. But this market is particularly good for three very specific reasons.
Reason #1: There are more distressed sellers and distressed properties now. What does that mean? Basically, a distressed seller is desperate to get rid of a property, for any number of reasons. Let's face it, a lot of people are struggling right now. Targeting distressed sellers isn't predatory – you're actually helping them out. It just so happens you're going to help yourself at the same time.
A distressed property needs a little work to make it marketable. Noting major, just some cosmetic things like paint and landscaping to bring it up to par. Often, distressed sellers and distressed properties go together – even better for you.
Distressed sellers and distressed properties both contribute to lower asking prices and greater availability of creative financing options. Which brings me to my second point.
Reason #2: Alternative financing is more available than ever. Many people think you can't invest in real estate today because it is so difficult to get a loan. It's true that banks are tight with lending right now. But there's no reason why the seller couldn't be the bank.
It's called seller financing. And just like it sounds the owner acts like the bank and provides the financing to you, the buyer. In many cases, it can be done for no money down.
This is great for the beginning investor because your odds of getting a bank loan are even smaller than those of an experienced investor like me. Plus, the bureaucracy of bank lending eats up a lot of your time and energy – things that you're better off putting in to finding more positive cash flow properties.
Reason #3: The residential rental market is going strong. Ask your local real estate board about vacancy rates in your area – chances are, rates have held steady around 5% in low to moderate income neighborhoods for years. That's where you want to buy, because a low vacancy rate means positive cash flow for you.
Rents aren't subject to market fluctuations. Most landlords have not lowered their rents over the last year because of the economy. Once leases are signed and your units are full, those rents aren't going anywhere but up. And in this economy, the demand for affordable rentals is going to continue to climb.
So don't miss out on your chance for financial independence because uninformed people tell you it's too risky. Let them talk. Let the skeptics think you're nuts. That's a risk I'm willing to take – it makes the reward all the more sweet.