Real estate is the best long-term way to build wealth, ever. Hands down. No argument. Case closed. It’s millionaire math—really. This unique housing climate presents opportunity like we’ll see few times in our lives. Here are seven reasons why we are unbelievably fortunate to be living at this period in history.
1. Warm, Fuzzy and Familiar. We need homes; a roof is a must. Real estate is everywhere. You can touch it. Its value isn’t affected by corporate theft or takeovers. Keep it insured and it’s not going anywhere. It’s simple to identify, easy to understand, established and surprisingly painless to locate and attain. We know a good neighborhood or property when we see it, and there’s no obscure prospectus or abstract business plan to evaluate.
2. Current Crisis Creates Opportunity. The recent fall in home prices is a checkered flag to investors to get serious about real estate again. Those who buy during this downturn are going to position themselves to make some serious future returns. Remember, the magic key to profits is to buy low. In many geographic areas, real values are popping up.
The drop in values was sad for those who purchased at the top of the market, but what a fantastic “gift horse” if you’ve got some cash to invest. Some homeowners will return to renting, increasing the demand for rental units. Veteran real estate trainer James Smith says to start by locating potential tenants first. Build a list of families that want to live in a nice home but don’t have a down payment. You’ll have built-in tenants even before you buy.
3. Flexibility for a Fine Fit. Want to build wealth faster? Buy a Chrysler instead of a Lexus and put the difference into another building. What if you snowballed a few times over the years and leveraged into larger and larger or more and more properties? An IRS 1031 exchange allows you to buy up to three properties each time without incurring capital gains taxes.
Want to be more conservative, instead? Go for debt-freedom sooner with the shorter term of a 15-year loan. You’ll have the best luck covering your payment with properties that house four families (my personal favorite building). If you’re more comfortable when there’s no mortgage to pay, you’ll reach your happy place in half the time.
Let’s look at a simple $25,000 investment in a $100,000 property. Very conservative borrowing, right? But it illustrates what a great return real estate can produce with no more than you would spend to buy an average automobile.
Conforming guidelines allow for as little as 10 percent down on one- to two-unit investment properties and 20 percent down for three to four units. Occupy one of the units yourself and explore FHA financing for an even lower down payment. If you pursue properties with more than four units you’ll have to tackle commercial financing, so keep that in mind.
In our example, your $75,000 loan, taxes and insurance are around $750 monthly. Initially, your rental income should be at least that much. Keep a reserve cushion to cover periodic vacancies and incidental maintenance. In many areas, higher rents could generate a positive cash flow from Day One.
The multiple tenants of three- and four-family buildings, my favorite, lower your vacancy risk and here’s why. When one renter moves you’ll only miss a fraction of your rental income until you lease the unit again.
Deducting depreciation of $2,700 or so on Schedule E of your tax return produces a 3 to 5 percent bonus return annually. Here’s where the numbers really get fun—and most property investors miss the boat. A steady tweak in rents of just 2.5 percent yearly will slowly create an escalating cash flow over the years. By year 15, the graduated rents alone will yield 27 percent. In the 28th year, fully depreciated, it’s pumping a plump 45 percent. Wow! Sure beats the pants off a CD or 30-year bond return.
Oh, yeah! Now your loan is zero and your free-and-clear property has quadrupled to $400,000 (applying the Rule of 72 for estimating compounding periods to the U.S. 5 percent historic appreciation rate). Your tidy little business is churning out a $13,000 net income that increases every year. Why stop with only one of these little money machines?
Think there’s a better investment? The best safe non-real estate vehicle I could find has an historic 8 percent return, avoids taxation and stock market crashes along the way (hint: it’s in the insurance industry). But in 27 years, it would only grow to $75,000 and, at best, produce just $6,000 annually. It comes in second.
4. Larger with Leverage. I see huge value in utilizing “other people’s money,” or OPM, and rolling into more buildings with higher values over the years, so targeting for paid-off real estate doesn’t really fit my personal wealth plan. Zero mortgage debt is not my priority—creating greater wealth, however, is. My own real estate portfolio has more than 25 units now, and counting.
A couple of my friends have formulated their real estate leveraging plan into a science. They strategically seek only new or almost new properties and acquire an additional one every year. Home warranties cut way down on their maintenance expenses.
5. Reduce Risk with Diversification. Real estate frees you from dependence on the flaky returns of the stock market. Those smart friends of mine also diversify among geographic markets and locate excellent property management near their purchases. While this expense cuts down on return, it frees up time, reduces stress and removes geographic barriers.
They brilliantly locate cities where the municipality is investing in local infrastructure, employers are moving in to stimulate job growth and universities hover nearby. Towns with these criteria are superb choices when seeking protection from economic downturns that impact long-term values. When they have too much in Salt Lake City, they may rebalance by exchanging for a property in Boise or Austin.
6. Hoorah for History. Surges in annual home values more than 20 percent do happen, but aren’t likely sustainable. They eventually adjust back to reality, smoothing into a steady, long-term upward gain. The historic nationwide housing price index (HPI), calculated by the Office of Federal Housing Enterprise Oversight, documents appreciation at 5 percent annually. In the last year, only six U.S. states lost more than 1 percent in property values, while nine states increased more than 5 percent—one exceeding 9 percent.
Smart investors should seek values and shy away from spiking markets. Rein in any urges to follow the speculation lemmings. Only open your checkbook when true values come into your crosshairs. No other investment beats the long-term wealthbuilding value of real estate. We live in it, we know it, everybody needs it and it’s everywhere. A smart and steady strategy can easily make you a real estate millionaire—for real. It’s better than a row of plastic hotels on Boardwalk.http://justpaydayloan.blogspot.com/
