Getting Started Right in Real Estate Investing
|"Investing in Single Family Houses has the potential of generating a six-figure income when done right! But, there are certain things you have to do. It's unrealistic to think riches will fall into your lap just because your business card says "Real Estate Investor". Ain't no free lunch, baby! It still takes work."|
I don't know where you are in you investment career. Maybe you're just starting out. Maybe you're a seasoned pro. Regardless, the information we're about to discuss will help you make more money... if... you will take the time to absorb it.
We're going to talk about "Getting Started Right in Real Estate Investing". If you're just starting out... this information is invaluable. This is the kind of stuff you won't find the late night infomercial Gurus talking about. Do they understand it? Maybe yes - maybe no. Whatever the reason... it's not being discussed.
If you're a seasoned pro... I've got something special to say to you. Did you know there are more people interested in Real Estate investing today, than at any other time in history?
I don't have the exact numbers in yet, but all indications are that they'll be staggering. It appears as if the Baby Boomers are at a point in their lives where they want more. More money... more time... more lifestyle perks... more of everything. And, they see Real Estate as the vehicle that will allow them to obtain these benefits (wonder why?).
The point is... you can either think in circles... or you can think in squares. Meaning this: The Old School always feared competition. Competition was bad. Competition messed up the market. Competition spoiled things for everybody. The Old School thinks in squares. The pie is only so big.
Contrast that to the thinking of the New School (for lack of better terms). The New School welcomes newcomers into the market. Expanding the market is good. This allows strategic relationships to be established. This opens up new profit centers for those who embrace the competition. After all, they need knowledge... guidance... and a source of profitable transactions. In short, the New School thinks in circles. The pie keeps getting bigger and bigger.
Which tack you take is up to you. But, I can say this: The Old School is a dying breed. They have failed to adapt. And by failing to adapt... are becoming extinct. Maybe it's time for us all to start changing our thinking. Maybe we should be thinking in circles... ever expanding circles..
It All Starts With A Vision
When I first got started investing in Real Estate, I really didn't have a clear vision. Financial freedom was what I wanted. But, I ended up with so much more. It wasn't my intention to become a "workaholic". But, in some ways, that's just what I've become.
You see... I really love what I do. Parts of it are still work. But, most of it's fun. I've tried to find a way to lay the work part off on somebody else. Sometimes it works... sometimes it doesn't. Then again, there are days when it all seems like work.
Here's the trade off: I don't have to wear a coat and tie all day and run around doing somebody else's bidding. You see, to me that's big. Really big. My dress code consists of shorts and a knit shirt 10 months out of the year. That's how I'm dressed right now. When it gets too cold to wear shorts... I put on a pair of jeans. Everywhere I go, people tell me they wish they could dress like me. My response is always the same... you can!
If I want to go out of town for a few days... I go. I don't have to ask permission. By the same token, I also realize I'll be missing out on potential profits. But, my rents keep ticking away 24 hours a day, 7 days a week, whether I'm on the job or not. And, those loans keep amortizing. You can't hear `em... but the magic is happening just the same.
Basically, I'm unemployed... and ... un-employable. I honestly don't think I could work for anybody else. You might as well shoot me now... if you ever expect me to punch a clock. The really funny thing is ...
It's Not The Money
It's The Time
I've come to the realization that if I lived to be 100 years old, there still wouldn't be enough time to do what I want to do. To accomplish what I want like to accomplish. Time is a precious commodity. Real Estate doesn't buy me more time... nothing can... it just allows me more control over my time.
O.K... So it starts with a vision. If you don't have a vision of what you want Real Estate to do for you... then you need to spend some time thinking about it. This is always a good use of time. You see, money really isn't enough. The desire to make a million dollars, in and of itself, won't get you going. It's things such as upgrading your life style... new cars... vacations... charitable causes... improved housing... time with your family... improved health... and happiness. These are the things that will provide you with the motivation to succeed. You need to be specific about what things you want for you and your family. Make these part of your vision and you will be a success as a Real Estate Investor.
One more thing: Don't allow anyone to trample on your vision. It's your personal property and nobody has any rights to mess with it. Sadly...very few people have a vision at all. But, there's never a shortage of critics. This doesn't mean there isn't always room for improvement. There is. Just don't allow the other lobsters to pull you back into the tank.
Give Me The Bennies... Baby!
What are some of the benefits of Real Estate ownership? Well... there're plenty.
Why Single Family Houses?
- Cash Flow: Cash flow can be simply defined as the difference between your income and your expenses on a piece of property. This can be positive or negative. Obviously... it feels a lot better when it's positive. Depending on your goals, negative cash flow may play a part in your investment program. If you want to get to free and clear on the fast track... you'll be making some sacrifices in cash flow.
My advice on cash flow is this: Never choke-off all of your positive cash flow with rapid debt reduction. Your walking a tight rope. One slip and the ground accelerates rapidly upward. A healthy positive cash flow will allow you more leeway... more room to maneuver... more options. Besides, debt is only one component of expenses. Taxes, insurance, maintenance and management never go away.
Happiness is a... Positive Cash Flow!
- Appreciation: Appreciation is the increase in value of a property. There are two kinds of Appreciation. The first is from economic conditions beyond your control, such as inflation. Since we can't control these factors it would be foolish to buy, hoping inflation will bail us out of a questionable deal, or provide us with a profit. Don't misunderstand, this stuff can make you rich, but, it can be dangerous to think it's anything more than icing on the cake.
The second kind of Appreciation is Forced Appreciation. This kind of Appreciation you can control. When you can improve a property, you are in effect forcing it's value higher. With Forced Appreciation, it becomes possible to purchase a piece of property in need of repair at it's "As Is" market value... bring it back up to neighborhood standards or slightly higher... and end up with a much more valuable property. The key factor here is - you control this process.
- Leverage: Leverage is the ability to borrow a percentage of the value of a piece of property. Real Estate, in comparison to other investments, offers a very high degree of Leverage. It is not uncommon for investors to buy a single family house and obtain 100% financing. It's done every day. This allows an individual to purchase Real Estate with little, if any, of their own money. What other investments offer such a high degree of Leverage?
With Leverage, however, comes risk. Be very careful when using a high degree of Leverage. Especially, when you are incurring personal liability. Don't ever allow yourself to be tricked into thinking borrowed money is profit. It's a liability... plain and simple.
- Amortization: With leverage, or the use of other people's money, comes a repayment schedule. Unless you're only paying the interest on a loan (interest only payments)... your outstanding balance is being reduced with every payment you make. Part of each payment goes to interest (applied first) and part of your payment goes to principal. The principal reduction is called Amortization. In fact, the word Amortization roughly means "to kill the debt".
Obviously, as your debt is being killed or reduced... your equity is being increased (being given life?). The reason you should get jazzed about Amortization is because you can determine before you purchase how rapidly it will work for you. And it will work for you... even while you sleep. Suffice it to say... Amortization can make you wealthy. Slow and steady.
- Tax Advantages: There a several sections of the Internal Revenue Code (IRC) you can use to your advantage as you assemble and disassemble your Real Estate empire. They are worth knowing and utilizing. But, don't be fooled into buying Real Estate for the Tax Advantages. Buy Real Estate only when it makes economic sense to buy.
In my opinion... the 1986 Tax Act (which devalued more Real Estate with the single stroke of the pen... and caused more economic chaos than any governmental act in recent history) was the best thing to ever happen to Real Estate Entrepreneurs.
As soon as the ink dried, it no longer made sense to buy or value Real Estate based on Tax Benefits. Real Estate once again became an economic commodity. Real Estate could only be valued and traded based on it's economic benefits. Everything artificial had been stripped away. This forces us to buy based strictly on the economics, doesn't it? The way you should always buy.
- Other Real Benefits: The benefits described above are the standard benefits of owning investment Real Estate. There are other benefits... considered by some to be intangible... you should seriously consider. Here's a quick rundown. There are many, many ways to make money with Real Estate. Learning just one can provide you with a renewable source of income. Real Estate can provide you with a source of cash... cash flow... help you build an estate... provide you and your family with an exceptional lifestyle... provide you with shelter... help you become independent... boost your confidence... provide a springboard for bigger and better things... and on and on.
Once you master the basics of making money... these skills can be taken with you anywhere. They're portable. Allowing you to relocate and re-establish yourself in short order. You can even generate profits while on vacation. If you could make money while vacationing... do you think you would travel more? And last, but not least, time is on your side. Real Estate will work for you even on those days you don't work. And over time... your skills will improve. This is an evolutionary process. As you mature and evolve... so will your profits.
This is a great business. What could be more worthwhile than taking up Real Estate as either a full-time business or just a hobby? The benefits are there. Now, let's look at some of the ways we can take our desire and convert it into action. But first...
Of all the different types of Real Estate investments, Single Family Houses are hands-down the best for the average cat. (That's you and me.) Here's why: Single Family houses have two markets. One for owner-occupants and another for investors. You can't say that for apartments. So, the resale market isn't just double-edged... it's very large. As a result of this large market, the financial institutions understand and feel comfortable lending a high percentage of value (leverage) on houses. Financing of houses is big business.
Add to this the fact that houses are plentiful (they're literally everywhere). They fill our basics need of shelter. And, last but not least, they're safe. You can make a mistake with a house and it won't take you down (and we all make mistakes). You can survive and learn from a bad deal. That's powerful!
Mo' Money... Mo' Money... Mo' Money
Here are 5 strategies for generating Cash, Cash Flow and Equity with Single Family Houses. A well rounded investment plan should include all of these. But, don't become overwhelmed. Take them one at a time... mastering them as you go. Just remember... each method is strong enough to be a business in and of itself.
You can become successful with any one of these strategies... but... you can accelerate your program dramatically, and maximize your profits, by stacking these techniques. Read this paragraph again if you really want to rise to the top!
- Buy and Hold Strategy: Probably the starting point for most of us. And, quite unfortunately, the only strategy for some. Here, you purchase a house with the sole intent of keeping it for rental. For this method to be successful, you must purchase under some set of price and terms that allow for a healthy, positive cash flow. The numbers have to work.
The benefits of this method are cash flow and equity build-up through appreciation and amortization of the debt. This is a great long-term wealth-building technique. The down-side is maintenance and management. These are skills that must be learned to be successful.
- Buy Low-Sell High Strategy: This is a high powered cash generating strategy. Here, you purchase a house located in a neighborhood with sales activity. Generally speaking, these houses will be in need of cosmetic and/or structural repair. Your purchase price must be low enough to allow you room to cover your repair costs, holding costs and resale costs... plus leave room for a healthy profit.
The benefit of this method is Cash Generation. This is a great way to increase your income dramatically with just 2 or 3 deals a year. There is also some benefit knowing you are putting people to work, bringing a property back up to neighborhood standards and helping a family purchase a nice home. On the down-side... this method takes a great deal of time and capital. These projects can take up to 180 days or more, tying up your capital in the process.
- Buy Low-Sell Low Strategy: Often times referred to as "Flipping" or "Wholesaling". This is a very easy way to generate cash fast! The key is to not become greedy. Here, you purchase, or contract to purchase, a property at a price below which another investor would be willing to purchase. Your can either a) purchase and resell; b) assign your position in the purchase contract; or c) close your purchase and sale simultaneously... for a cash profit.
The benefit of this method is quick Cash Generation. The per transaction potential is not as great as the Buy Low-Sell High Strategy... but... these deals can be done in a matter of days (sometimes hours) and require little, if any, of your own cash. This is good stuff. So good, in fact, I really don't see a down-side.
- Leasing Strategy: Sometimes we fail to see the forest for the trees. This cash flow method, hopefully, will help you overcome that. Rights of use, enjoyment and occupancy are controlled by a lease. Here, you are looking for property you can lease under favorable terms... allowing you to sub-lease the premises for a higher price. You become sandwiched in the middle of the two leases in a position of profit. The longer the term of the favorable underlying lease, the more valuable your position. This is a form of control without ownership. Did I mention... your position can also be sold for cash. Whoa!
The main benefit of this method is cash flow, but it can also be used to generate cash. Look on leasing as a low-cost financing tool for controlling property without actual ownership. This can be an extremely powerful tool for you because it doesn't require much up-front cash. The down-side is you're only controlling the cash flow. While your lease may become more valuable with time, any appreciation in the property will accrue to the title holder.
- Options: Options, to me, are unquestionably the highest leveraged, lowest risk investment tool available. They take up where leases leave off. They control not only appreciation, but so much more. An Option is the unilateral right to buy (or sell) and is a low cost way to control property without the headaches associated with maintenance, management, income or expenses. Here, you look for a way to unilaterally control ownership while you wait for your profit to mature. This can be a very high powered Cash Generating tool.
The main benefit of this method is control with limited risk. That spells cash profits. Options can also be an outstanding way to build wealth (equity). The down-side with Options is they still require you to manage them in order to maximize your profits and protect your position.
"Stacking" is a term you may not be familiar with. It means using more than one method at a time, either in conjunction with, or in addition to, the other methods. You are maximizing your potential when you stack. Lease/Options are a prime example. Stacking an Option on top of a Lease controls both Cash Flow and Appreciation. Both are powerful tools in their own right... but used together, they're incredible. You should strive to utilize as many of these profitable methods simultaneously as possible. Stacking will allow you full benefit of the profit potential Real Estate has to offer. Isn't that what you really want? Sure it is.
Coming Down The Home Stretch
There is one other thing I want to mention: Understanding the Buying Process. Here it is in a nutshell. To be successful, you need to learn your market, locate property, inspect property, negotiate your deal, contract to buy, finance your purchase and close the transaction. You can't do this in front of the T.V. You can't get it done with procrastination. You have to get off your big butt and go to work.
This business is an evolutionary business. You're already way ahead of the game... but... some of this, you won't fully understand until you're ready to understand it. The only way you'll ever be ready to understand, is by actually going through the motions. I promise... your deals will get better as you go. You'll learn to see opportunities you didn't see before. You'll make some mistakes. We all do. It's a vital element in the human learning process. Fail forward. If you wait until everything is just right... you'll always be waiting.
It's time to take action. It's the missing link only you can provide. Study the Buying Process. Challenge yourself to go completely through the process in the next 21 days. Arrange to have lunch with a successful Investor you like and trust. Somebody that shares your same values. Do some business with them. Ask them to help you. If they can do it... so can you!
Real Estate Success,
|Scott Britton, author and publisher of the "University of Real Estate Letter" is an active, full time Investor who has been successfully buying, selling and investing in Single Family Houses and Mortgages since 1979. Beginners and seasoned pros alike have profited from his down to earth, common sense investment advice. Scott is known for his clear thinking and problem solving abilities. His strategies for generating cash while building wealth, can help anyone accelerate their investment program while improving their lifestyle. Scott, along with his wife Cindy and their three children, live and work out of their high-tech, low-cost home office in historic Jackson, Mississippi, where he practices what he preaches on a daily basis. |
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