Real estate has a great wrap in the investment community. Everyone I know somehow agrees that real estate is a sound investment. I can’t say that about stocks, gold, antique cars, or insurance. I think it’s because everyone inherently understands real estate. For those people looking to get into real estate for the first time I wanted to write a short post highlighting some of the things I’ve learned along the way. I currently own a multi-family in New Jersey, took a professional real estate investing course and have read a handful of books on the subject. I was also a certified real estate salesperson in days past (sexy, I know). I think owning real estate is a great idea as long as you educate yourself. Very few investment options allow for the safety, gains and cash flow that real estate provides. For my first post on real estate I wanted to cover a few topics:
- A single family home that you are living in is not a real estate investment. Robert Kiyosaki author of Rich Dad Poor Dad defines an asset as those investments that put money in your pocket and liabilities as those investments that take money out of your pocket. By this definition a single family house is a liability, one that potentially can make you happy, but not financially better off.
- There are a lot of different ways to invest in real estate. You can buy commercial properties, condos, multi-families, apartment buildings, tax liens, notes, etc. For newbies I would recommend buying a multi-family property for their first investment. Multi-family properties allow the opportunity for the investor (you) to live in one of units while renting the others. In the biz this is referred to an “owner-occupied” property. You’re going to learn a lot when investing in real estate so why not learn on the property you’re also living in?
- In real estate cash flow is king. This is a concept that is touted by many of the top real estate investors. The idea is to focus your analysis on the monthly cash you will receive on a potential real estate investment. A decision to buy shouldn’t be solely based on your inkling that the real estate market is going to boom in a certain neighborhood and you’ll cash in on the appreciation. Say it back to me – cash flow.
- You don’t need a lot of money to invest in real estate. Don’t use lack of money as an excuse to not invest in real estate. Government programs such as FHA allow investors to put as low as 3.5% down of the purchase price of a multi-family property. Even if you don’t have that down payment you can creatively leverage other people’s money (OPM) to invest, see below.
- Real Estate does not have to be very risky. Unlike stocks real estate is a hard asset; it has intrinsic value (i.e. people need to live somewhere). Sure it will fluctuate in value but typically at smaller deviations than other investments. When the market crashed back in 2008, speculative real estate investors lost their fortunes, but fundamentally sound real estate investors, who invested for cash flow, continued to see their rents/income rise through the crash. If you invest in real estate the right way, there is much less risk than you will find in other investments.
- Real estate investors use other people’s money (OPM) to make their investments and increase their returns. Investors and banks are willing to lend you a lot of money to go out and buy real estate. This allows you to leverage your returns and make your money go farther. Said another way: your tenants are going to pay you the same rent whether you paid for the whole property in cash or you mortgaged 100% of it. By using OPM to finance most of the investment, only a small portion of your money is being used to generate large rents aka leverage.
In another post this week I will discuss why investing in a multifamily property is the best solution for first time homebuyers.