Real Estate Investing Is Cheaper and Easier Than You Think
Real estate often seems to be the "ugly stepchild" of the personal finance community.
Most individuals understand that there is something there, but don't talk about it because it appears mysterious, complicated, and only for the super rich. However, I believe real estate investing can be used by anyone looking to broaden their financial outlook and can add significant potential for building wealth to their plans. (See also: 5 Investing Basics)
- It's not just for the rich.
- It's not just for the old.
- It's not just for the risky.
Real estate investing can be right for you, now. It can take years off your day job, add thousands to your net worth, and be a lot of fun. This post is going to explore the basic process for getting involved with real estate investing and hopefully, will take some of the mystery away so you can see real estate for what it is: an opportunity.
Why Invest in Real Estate?
First, let's talk about why you should even get involved with real estate in the first place. For me, there are several key reasons.
1. Leverage Helps
Remember as a child when you played on the see-saw and you discovered that by sitting further back or closer to the center, you could affect how much weight you could lift? (Am I the only one with that memory?) Or perhaps you've heard the famous quote from Archimedes who said, "Give me a lever long enough and a fulcrum on which to place it, and I shall move the world."
The point is, leverage is the ability to use a small amount of force to move a much larger object. In real estate, the same principle is true in terms of cash. By using just a small amount of cash (a down payment) you can control and reap the benefits (and the risks) of an entire property. In other words — if you wanted to buy $100,000 worth of gold, you would need to have $100,000. However, you can buy $100,000 worth of real estate with far less than $100,000 — sometimes as little as nothing down.
2. Investor Control
Second, I love real estate investing because it's an asset class that I can control. When Google, Apple, or one of a million other stocks go up or down, there is little I can do about it but buy or sell. I have practically no say in how that stock actually moves. However, I fully control my real estate investments and the success or failure of that investment is on me — not a board of directors I have never met. (See also: Quick Ways to Know If You Should Invest in a Company)
3. Investment Variety
There are a lot of different ways you can invest in real estate, which we'll cover more specifically in a moment. The benefit of this is that you will be able to find an investment strategy that works for you, that will fit your personality, and which will work within your time schedule. There is an absurd amount of variety within real estate, which makes it even more fun to deal with.
4. It's a People's Game
Yes, there are avenues to invest in real estate on paper only — but I love the diversity of it. I'm not just looking at numbers on a page — I'm looking at real people, real money, real life.
5. Profit Today and Tomorrow
Finally, one of my favorite aspects of real estate investing is that when structured correctly, real estate can boost your checking account both now and in the future.
How Is Money Made With Real Estate Investing?
Asking this question is a bit like asking "how do Americans make money?" There are numerous different avenues to create wealth and income with real estate, and as I mentioned earlier — much of it depends on your personality and the way you want to run your investments. However, the following four streams of wealth are the most popular methods you'll see today.
1. Cash Flow
Cash flow is the income that is left in your bank account after all the bills have been paid. This is the profit you make each and every month from your rental portfolio. For example, if the rent on a property was $1,000 per month, and all the bills came to $800 — your cash flow would be $200 per month. It's basic addition and subtraction, but this one concept can change lives. Imagine receiving $200 per month in cash flow. Pretty great, but not life-changing in any regard. However, imagine receiving $200 per month per unit in cash flow. Suddenly, the picture changes. (See also: Should You Become a Landlord?)
- What if you bought two rental houses?
- What if you bought a fourplex?
- What if you bought a 100 unit apartment building?
Suddenly, we're talking about some pretty serious dough here! Obviously, most people don't jump from owning nothing to owning a 100 unit apartment complex, but the math is the same no matter the scale of the property.
To top it all off — remember the concept of leverage from earlier? You don't need millions of dollars to start making monthly cash flow from real estate investing, when you have the right leverage applied. And don't get me started on how powerful "compound interest" is when you start to recycle this cash flow back into more investments!
The second way people build wealth in real estate is through appreciation — the rising of property values. In the past, I believe investors placed far too much emphasis on appreciation and not enough on cash flow, so when the real estate market collapsed several years ago, a lot of people lost their shirts.
However, when you combine the potential for appreciation with the stability of great cash flow, you are pulling out a double barreled shotgun that can do some awesome things. Imagine holding on to your property, which is providing $200 per month in cash flow, until the market doubles in value. It might take 5 years, it might take 10 years, it might take 20 years. The point is — you are okay either way and you are building wealth every month. Now, appreciation isn't guaranteed, but over time, we can assume that in a great number of cases, you'll see some kind of positive appreciation unless the market you're investing in is severely depressed. (See also: Ways to Boost Your Home's Value)
Furthermore, each and every month you hold onto the property, your loan balance decreases, so in essence — your tenants are paying down the mortgage for you automatically. If nothing else, in thirty years (or less, depending on how long your mortgage was for) you'll own the property free and clear!
If you've ever watched one of the "flipping" TV shows, you'll recognize this strategy. House flipping is the process of buying a distressed property, rehabbing it, and reselling it — hopefully making a profit on the difference. Flipping can be one of the more risky ways to invest in real estate but with some of the highest potential for financial reward. Although flipping is more closely associated with the "buy low, sell high" model of a retail shopping store, many of the same real estate investing principles are used to make a profit in this line of work.
4. Return on Investment
Up until this point, we've dealt primarily with the more "active" forms of investing in real estate. However, many others choose to invest in real estate from a purely "passive" viewpoint, focusing instead on simply earning a good return on investment for their money. Primarily, there are two common ways to make this happen.
- REITS: A REIT, or Real Estate Investment Trust, is a security that can be bought and sold like a stock, but that uses the raised funds to invest in real estate, primarily large commercial properties. REITS can invest in either property directly, or in mortgages on property that other investors own, and the best part is that by design, they are required to pay out a dividend.
- Notes: Other investors invest in Notes (also known as "paper" or "mortgages") to earn a solid return on investment. You may have had some experience with this in the past if you've ever had a mortgage on your own home "sold" to another company. Mortgages are bought and sold all the time, though the borrowers seldom recognize this because it doesn't affect them.
Making a Plan
Let's move from the theory and jump into some of the practical ways you can get started investing in real estate. Although you may be excited to jump in and start buying property, the first step is actually to sit back, relax, and make a plan.
A plan is like a road map — it tells you the best way to get from A to B and how to avoid the dead ends, tourist traps, and potholes.
1. Get Educated
Step one in creating a road map begins with gaining a solid education on what you want to do. I'm not advocating spending thousands of dollars to go to some special school or training program, but at least spend some time reading real estate books, listening to real estate investing podcasts, or chatting with other real estate investors. By sinking into the education, you will create a solid foundation to build upon. I'm staunchly opposed to buying the latest get rich quick manual or joining some expensive bootcamp or course from the guru of the hour, however. There are plenty of great ways to learn real estate without breaking the bank — do your homework and you'll find them. (See also: 21 Real Estate Terms You Need to Know)
2. Choose an Investment Type
Step two in your plan is deciding what kind of investment you want to buy. There are numerous different choices you can pick from, including:
- Vacant Land
- Single Family Homes
- Small Multifamily Properties
- Large Multifamily Properties
- Commercial Real Estate
- Mobile Homes
- ...and more.
The more time you spend educating yourself on the different types of real estate, the more you'll find yourself drawn to certain types that fit your personality, time schedule, and checkbook. (See also: How to Evaluate a Neighborhood)
3. Determine Your Goal
Finally, look at the place you want to arrive at. Is it a million dollars in the bank? $10,000 per month in cash flow by the time you retire? Whatever your goals are, write them down. Then, simply work backward, using the knowledge you gained from your education to determine what you need to do to get there.
For example, if your goal is $10,000 per month in passive income in the next twenty years — and your plan is to buy single family homes that cash flow $200 per month, how many houses do you need? How many is that per year? How much down payment will that require each year?
To learn more about getting started with real estate investing, check out The Ultimate Beginner's Guide to Real Estate Investing that we put out earlier this year.
Real estate investing can have a tremendous impact on your financial future if you take the time needed to learn how to best get started. Whether you have millions in the bank or just getting started — I believe real estate investing can and should be a significant part of your portfolio. Use this post as a springboard to your education.
The more you learn about real estate, the more you'll see it's not the ugly stepchild of personal finance, it just might be your new best friend.
Joshua Dorkin is the Founder and CEO of BiggerPockets.com, the real estate investing social network, marketplace, and information hub, and is the host of the popular BiggerPockets Podcast. Josh built BiggerPockets to help find answers for his own real estate investing questions, and in the process has helped millions of others.