Real Estate Investing: 6 Pivotal Reasons To Get Started Today

In the steps necessary to achieve early retirement, there will come a point where you are able to save enough money to start investing.  Then comes the hard part, deciding how should you invest your savings.  What is the best way to put that money to work?

First off, there are 3 main types of investing:

1. Real Estate Investing (REI)
2. Stocks/Bonds/Mutual Funds
3. Passive income through business

This post is on my very favorite method of investing:  Real estate investing.

Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.

— Franklin D. Roosevelt, U.S. president

But first, let’s review the end goal:  Financial freedom.  There are 4 ways to reach financial freedom. The basic equation looks like this:

Passive income > Expenses

Passive income generated from business or investments needs to be greater than your expenses.  Once you reach this, you are financially independent and no longer need to rely on a paycheck.  Seems simple enough, right? 

So how do you alter either side of this equation such that it works for you?  There are 4 ways to do this:

1. Earn the same but save more (decrease your expenses)
2. Earn more and save more (keep expenses the same and save extra earnings)
3. Passively invest to earn greater returns on capital (stock market)
4. Generate passive income in the form of business (REI/business startup)

How you work towards financial freedom can involve just one of these four methods or you can employ all of them, it’s up to you and your lifestyle.  As a single mother living in an insanely overpriced area, I choose to utilize all four methods, with my main focus on decreasing my expenses and generating passive income.  What income I do generate is treated as #2, extra income that goes back into savings or gets re-invested right back into my business (which will then generate more passive income). 

Of note, my goal is to never increase my expenses, regardless of any increase in my earnings.  I’ll just let the Joneses do their thing while I work towards financial freedom.  

Of my business plans to generate passive income, REI is my favorite.  Here’s why:

1. You have full control over your investment.
2. You can leverage your investment (little to no money down and borrow the rest).
3. There are many different types of real estate investing.  You can choose the best fit for you.
4. You can be as passive or involved as you want to be.
5. Real Estate Investing can be successful in any market/economy.
6. You can take advantage of multiple wealth generators.

These are the 6 reasons why I love real estate investing so much.  Let’s take a closer look at each one.

#1: You have full control over your investment

When you invest your money in a stock, you really have no control over what happens.  The best you can do is research the company and the people running it, research the market and make your predictions, then sit back and hope for the best.  Index funds are a great way to diversify your risk and you have many different funds to chose from.  You can research the company that manages these funds for you.   But again, you can’t control how these funds will perform. 

With real estate investing, you have full control.

You can:

• Decide which market to buy in
• Control how you buy your property
• Control all aspects of managing your investment
• Renovate and add value to your investment
• Rezone and turn your property into a different form of rental investment
• Decide who can rent your property and the terms of that agreement
• Force appreciation by renovating
• Refinance or take out a line-of-credit on your equity
• Use refinance/line-of-credit cash to reinvest in even more REI

No other investment allows this level of flexibility and control.

#2: You can leverage your investment

This is my favorite reason to invest in real estate.  The bank will help you purchase your investment and your tenant will pay off your loan for you!  You just collect the cash flow in excess of your mortgage payments and other expenses.

With as little as 3% down, the bank will help you buy your home.  You can even get creative and utilize other forms of leverage such that you can purchase properties with no money down.  This means your return on your investment is infinite.  As mentioned above, you can even refinance or pull out a line-of-credit on your equity and continue utilizing leverage long after you’ve already purchased your property.  

Let’s look at an example:

You purchase a duplex for $150,000.  You decide to live in half of the duplex and rent the other half out.  Since this is not only an investment property but also your primary residence, you qualify for a loan with just 3.5% downpayment.  That’s just $5,250.  I’ll pad this a bit to include closing costs and some additional spending needed to move in and call it $8,000 out of pocket.  You now own a $150,000 investment for just $8,000!  You rent out the other half for $800/month and guess what?  Your mortgage is covered!  Your tenant is paying off your loan for you, you have no monthly housing costs.

You won’t be able to buy $150,000 worth of stocks for just $8,000.

#3:  Different forms of real estate investing

There are three main categories of real estate investing:

• Residential
• Multiplex rentals
• Commercial

Within each of these categories are additional forms that you can chose to specialize in, depending on your market, preferences and goals.  If managing an 8-unit apartment complex seems too overwhelming, that’s okay!  You can successfully invest in single-family homes instead.  Or, if managing rental homes sounds horrible to you, you could invest in industrial commercial properties and utilize a long-term lease to rent your building to a store-front business.  The possibilities are seemingly endless and there is likely an option that is ideal for you.  

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#4:  You can be as passive or involved as you want to be

From fully passive REITs (Real Estate Investment Trusts), which are similar to owning stocks in real estate, to fully managing your own apartment complex, there exists a very wide range of personal involvement.  One of the most common complaints when it comes to being a landlord is “But I don’t want to be fixing toilets at 1am!” This is what property managers are for! You can purchase your investment property factoring in the expense of hiring a property manager to take care of the ins and outs of daily management for you. 

#5:  Real estate investing can be successful in any market/economy

People will always need a home to live in.  Regardless of whether the housing market is at an all time high or low, rents remain relatively stable.  When the market crashes, people lose their homes and become renters. When the market is at the other extreme and home prices are high, many people are out-priced and rely on renting.  Regardless of where the market is, over time your investment remains relatively stable.  Assuming of course that you do your due diligence and invest in a cash flowing rental property, not all properties are good investments! 

What if you have no idea what makes a property a great investment?  That’s okay!  I’ll be providing lot’s of info in future posts as well as useful resources like those listed at the bottom of this page.  Stay tuned for a full report on my first duplex purchase coming in early June!  I’ll go into all the nitty-gritty details on the research leading up to the purchase, how I financed, rehabbed and rented, then re-financed to pull most of my investment dollars right back out again.   

#6:  Multiple wealth generators

The REI wealth generators are:

• Appreciation (forced and natural)
• Loan paydown
• Cash flow
• Tax benefits

Appreciation

“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.” — Theodore Roosevelt, U.S. president

The general definition of appreciation is the increase in value of an asset over time.  Real estate appreciation can be both natural or forced.

Natural appreciation is what you think of when you realize that your grandparents only paid $60,000 for their home that is now worth over $500,000.  It’s due to inflation and the inventory vs. demand of individual housing markets.

Appreciation can vary greatly depending on local economy.  For instance, median price for a San Francisco Bay Area home is around the $1.2 million range whereas the US average is $240,000.  The healthy job market coupled with decreasing housing inventory in the Bay Area has resulted in a five year appreciation rate around 7% higher than the US average.

Forced appreciation occurs when you add value to the property.  For example, by adding an extra bedroom or a bathroom, you greatly improve the value of the home and force instant appreciation.  By renovating a multiplex and increasing the rental value, you improve the overall value of the building.

Loan Paydown

Remember the example of buying a $150,000 duplex then living in one side and renting the other?  The amazing benefit to this is living rent free while your tenant half pays off your mortgage for you.  In a couple years you can even move out and repeat the process.

With REI you can utilize leverage while your tenants pay down your loan for you.  Your equity in the property increases every year, adding to your overall wealth.

Cash Flow

Continuing to use the duplex example, the total mortgage payments are approximately $810, assuming 4% interest rate and 3.5% down payment.  If you rent half of the duplex out for $800/month, mortgage is mostly covered and you can live in the other half, rent free.  Now let’s assume that you move out in 2 years and rent out your half for $800/month.  Now you are cash flowing.  You get to pocket the extra income after paying mortgage, taxes, insurance and other expenses.  Additionally, rent values tend to go up with inflation and appreciation.  This means more cash flow for you.  Adding value to the property can also lead to higher rental value and improved cash flow.

Tax Benefits

There are huge tax benefits for real estate investors.  There are many tax write-offs including depreciation, interest on loan payments, repairs made to the property, home office if you manage your property and travel expenses to visit your property.  REI can greatly decrease the overall amount of taxes that you pay.

Recap

“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.” — Marshall Field, entrepreneur

The journey to financial freedom begins with saving more money, then putting that money to work by investing it.  How you chose to invest is totally up to you.  That may seem overwhelming since there are so many options.  I would argue that this is the fun part.  This is where you get to find the method that fits with your goals and investing style and then sit back and watch your wealth grow.  Here’s a review of the main forms of investing:

1. Real Estate Investing
2. Stocks/Bonds/Mutual Funds
3. Passive income through business

Of the above methods, REI is my favorite.  Here’s why:

1. You have full control over your investment.
2. You can leverage your investment (little to no money down and borrow the rest).
3. There are many different types of real estate investing.  You can choose the best fit for you.
4. You can be as passive or involved as you want to be.
5. REI can be successful in any market/economy.
6. Multiple wealth generators.

Real Estate Investing has been done successfully for generations and has been the main form of massive wealth generation. 

Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.

— Andrew Carnegie, billionaire industrialist

When done correctly, with due diligence, you can protect your investment against economic fluctuation.  Deals can be found in any market and people will always need a place to live.  This isn’t to say that any deal is a good deal.  Investing does require research and a very clear plan.  But the payoffs are well worth the effort.

Useful resources

Biggerpockets.com

The Book on Rental Property Investing: How to Create Wealth and Passive Income Through Intelligent Buy & Hold Real Estate Investing!

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