The three basic needs of people are food, water and shelter. Everyone deserves to have a place to live they can call home. Whether they own or rent, people want safety in shelter. Real estate is an incredible vehicle to build your wealth and provide a basic need for an individual or a family. Real estate investing is not a get-rich-quick phenomenon and it takes a general understanding of how people have obtained their wealth through various investment strategies.
Here are some keys to understanding how people built their wealth in real estate. First, they treat it as a business and not get emotionally involved in a piece of property. Yes, everyone gets emotionally involved in their personal residence, but never feel this way while investing in it. Investors focus on the numbers and the deal first, then choose whether or not it will fit their criteria for their personal portfolio.
Second, real estate produces income if purchased correctly. There are two types of income, passive and massive. Passive income is money that is generated on a monthly basis from rentals. Once any debt is paid, whatever is left is positive cash flow, or passive income. Massive income is generated from working short sales, wholesales, and option contracts, where you receive larger lump sums of money at closing. Investing in real estate also provides excellent deductions, depreciation, and equity build-up through appreciation. Let's see how the wealthy got this way over a period of time.
The formula is quite simple when you get out of the mindset of wanting everything right now. Yes, you can close on deals and make nice lump sums of cash, however the wealthy became wealthy by investing in buy-and-hold properties. That's right, rentals! This is where equity build-up, appreciation, and renters come into play. Over extended periods of time, not only does the house appreciate, but the renter is paying down your mortgage. The market increases the value and the renter opens up more equity as they pay down your debt.
Imagine if you will owning ten rentals for 30 years. You purchased each one for $150,000. The national appreciation average over the past 40 years is around 6.3 percent. Factor that percentage every year for appreciation and your mortgage being paid off by someone else, and your portfolio's net worth is well over $1.5 million. Imagine having twenty. Imagine having 100 units in an apartment building. I'll repeat, you must treat this as a business in order for you to achieve this potential.
I'm sure you are asking yourself, how did they keep these properties for 30+ years when there were extended vacancies, rehabbing and going through a down market? Simple, they had a cash producing business to cover the debt when needed. A well-educated investor is not going to go in head first and overextend themselves. Education is a must, along with setting up business plans and building a support team to minimize their risk.
A cash producing business can be anything. You could start off by doing short sales, wholesales, and option contracts to build cash reserves to purchase buy-and-holds. Make sure you budget cash reserves for each buy-and-hold for both debt service and maintenance. You should factor a reserve amount depending on the monthly service of each property's debt.
Finally, investors maximize leverage. This is the biggest component of being successful as a real estate investor. They leverage everything! They use other people's knowledge, cash, credit, tools, resources, contacts, partners, anything and everything. No one knows it all and has all the answers. Leveraging these areas will increase your chance of success, minimize your losses and maximize your profits.
Real estate will never go away. It will never hit zero. You have insurance for disasters and there is always value in the land. Build up your wealth over time and start a cash producing business if you want to survive and play this game successfully. It takes hard work, long hours at times and some sacrifices to get started. If you prepare yourself and build your team you will grow and the feeling is very rewarding.
Happy Investing!
Tony
