I’m known for writing the #1 personal finance book of all-time, but most people recognize me as a “real estate” guy. It’s my personal favorite investment category.
In a civilized world, a roof over your head is as essential as food, clothing, energy, and water. That why there will always be a real estate market. And real estate investors are essential to keeping this vital human need available, from reasonable prices to luxury prices.
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 itself, I love the cash flow.
What I Mean by Real Estate Investing…
There are many different ways a person can participate and prosper with real estate. For most people, their only real estate dealing is where they live—their personal residence.
But what I’m talking about is rental real estate that produces positive cash flow. Cash-flowing real estate not only provides for monthly income that I don’t have to work for but also massive tax benefits—another thing Trump likes about real estate investing.
During the real estate boom, many amateurs got involved with “flipping”—buying low to sell higher. But as you know, many flippers flopped… and lost everything. While flipping is one method of investing, and a valid if extremely risky and work-heavy one, there are more sophisticated, less risky ways to become wealthy with real estate.
The term “real estate” covers a whole array of products, such as single-family homes, duplexes, fourplexes, apartments, offices, retail, storage, the list goes on. And you can buy into and rent out any of them.
The Pros of Real Estate Investing
1. Leverage of OPM (Other People’s Money)
The term OPM has become a popular acronym for the concept of raising capital. OPM can refer to borrowed capital as well as equity capital. 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. My investments are just about always for infinite returns now; meaning I put none of my own money into the deal, but I reap the rewards.
2. Cash flow
Rich dad said, “When you find a great investment, you will find the money to make it happen.” If the property is purchased and managed correctly, real estate can provide tremendous opportunities for cash flow. So if all it takes is building up the initial capital for the investment, you have to be willing to do whatever it takes to get it. You can always find investors. You just need the financial intelligence to make the investment worthwhile.
This is the price of the unit going up in value over time. It’s also known as capital gains. Most people invest for appreciation. But also, if you manage the property well, your rents will increase. When your rents increase (or your expenses go down), the value of the property also appreciates. The benefit of appreciation is that I can access the appreciation without selling the property.
Unlike the stock market where you have no control of the business in which you are investing, you have control over the income, expenses, and debt of your properties.
5. 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. As I pointed out earlier, there will always be a need for housing.
6. Tax advantages
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. It is not an investment that you get into overnight.
The Cons of Real Estate Investing
1. Time lag
That “slow” pro can also be a con. Offers, counters, appraisals, inspections, financing—they all take time.
2. Not liquid
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, my sister, 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. Since opportunity is all around us and the challenge is to sort through the many to find the best, I believe the most important aspect of the opportunity is to become skilled at analyzing opportunity.
All you have to do is start!
Editor, Rich Dad Poor Dad Daily