Have You Considered Real Estate?
Some thoughts on why investing in real estate may (or may not) be best for you
Last week, I talked about both the pros and cons of getting into business. This week, I’m going to do the same for one of my personal favorite investment categories, real estate.
Donald Trump once said, “It’s tangible, it’s solid, it’s beautiful, and it’s artistic, from my standpoint. I just love real estate.” I have to agree. Yet, even more than the real estate, I love the cash flow.
What do I mean by real estate?
When I speak of real estate, I am talking about rental real estate that produces positive cash flow.
The term “real estate” covers a whole array of products, such as:
There are other not-so-common forms of real estate as well.
The Pros of Real Estate Investing
Leverage of OPM (Other People’s Money)
You may pay 10%, 20%, 30% as a down payment, and a bank, lending institution, or private party provides the rest of the funding. You can own a $100,000 property for just $10,000 or $20,000.
As you get more seasoned and sophisticated, you can leverage OPM for the down payment as well.
If the property is purchased and managed correctly, real estate can provide tremendous opportunities for cash flow.
Appreciation (an increase in the value of the property over time)
If you manage the property well, your rents will increase. When your rents increase (or your expenses go down), the value of the property appreciates. Cash flow and appreciation are two forms of revenue from rental properties.
You have control over the income, expenses, and debt of your properties.
Not as subject to the fluctuations of the markets
A cash-flowing property is not subject to the daily ups and downs of the markets. It is typically a long-term play. A down real estate market can actually be the best time to buy.
Depreciation is an annual deduction that is a percentage of the value of the property that you can write off as an expense against revenues.
Tax credits are available for low-income housing, the rehab of historical buildings, and certain other real estate investments. A tax credit is deducted directly from the tax you owe.
In some countries, the gains from the sale of real estate can be postponed indefinitely as long as the proceeds are reinvested in other real estate.
You usually have time to do your homework, make comparisons, analyze the numbers, and make the best investment decision for you.
Experience in real estate ownership
If you can buy your home or personal residence, then you can get into investment real estate.
Include your children in each rental property you purchase. You can learn together!
The Cons of Real Estate Investing
Offers, counters, appraisals, inspections, financing—they all take time.
Liquidity is the ability to convert an asset to cash. You cannot get in and out of real estate quickly.
Of the four asset classes, real estate is the second most difficult (after business). You must also deal with vacancies and bad tenants at times.
It takes time to find a good deal. Properties must be managed on a daily basis.
Start small for success
Every, and I repeat every, successful real estate investor I know, male or female, started very small. If you have or are invested in real estate, my guess is you started small as well.
There is a lot to learn, which means mistakes will be made. It’s all part of the process. But when starting out, it’s a lot easier to make mistakes on smaller properties with smaller amounts of money.
Tenzin is my sister-in-law. She was a Buddhist nun with His Holiness the Dalai Lama. She never took a vow of poverty, as that is not required, but she did live quite the frugal lifestyle.
Since a costly medical scare, she realized that money does have a large role in her life, and she began her journey into money and investments.
Her search led her to an inexpensive, relatively easy way to get into real estate—mobile homes. Mobile homes are not common in many cities throughout the world. They are prefabricated or manufactured houses that technically can be transported.
What Tenzin found was that she could buy a used mobile home for about $3,000 and receive a positive cash flow of about $200 per month. That is a very healthy return on her money.
Tenzin also discovered that in California, where she lives, a mobile home is deemed a motor vehicle. She doesn’t go through the whole real estate process of getting title for this home.
She simply goes down to the Department of Motor Vehicles and picks up the title. Being a nun with many non-income-producing responsibilities, this is a viable solution for Tenzin as she begins growing her asset column.
Lots of opportunity
The good news is that there is a ton of variety in real estate. If you think real estate is right for you, there is a deal out there that will fit your investment plan and profile.
All you have to do is start!