I learned from an early age that the security of real estate – bricks and mortar – was a powerful investment tool. Over the years of both owning real estate and investing in the stock market, I have often done comparisons between my investments and, although I’ve done well in both markets, I have realized the inherent risk in stocks – they can go to zero.
In fact, there are many examples of large corporations going bankrupt and investors losing their money.
A number of years ago, I was regularly watching the stock of a large airline as it was continually dropping. The airline ended up applying for bankruptcy protection and, although they never stopped flying, the investors lost their money. Of course, a new group of investors came in and bought up the airline for pennies on the dollar, but those who invested in their publicly traded stocks were left with nothing to show for their investment dollars.
The fact is even a great company can run into cash flow and profitability troubles and end up folding. Whereas with real estate, you own a tangible asset that may sometimes devalue for a time but will not go away.
Real estate also provides the additional opportunity to leverage your money. Simply put, this means you put money down to buy a property, do what is required to maintain it, and, over time, the value of that property will generally go up. You can even speed up this process by making improvements to the property and, typically within three to five years, can refinance the property at a higher value. By using this equity as the down payment for another property, you add value to your real estate portfolio without investing any additional money. By repeating this simple formula, you can consistently double your real estate investment portfolio every three to five years – sometimes longer but, by using the right buying strategies, generally three to five years.
Of course, proper management is paramount to ensure your real estate portfolio is successful. You must take care of your buildings and look after your tenants, sometimes offering them help when they need it.
By investing in real estate that is effectively managed and not overleveraged, it is very possible to get through the ups and downs without losing your investment. Recognizing that there may be low times and ensuring there is still plenty of equity for those slow times by leveraging the properties, not overleveraging.
I recognized very quickly how well this formula worked when I went from owning my first rental property at age 23 to having two additional duplexes by age 25.
Purchasing real estate with a value-investor mindset is the foundation for good profits. If you would like to become a value investor, looking for properties in depressed areas that have plenty of reason to increase in value is a great place to start.
There are two imperative parts to establishing this value-investing mindset. First, buying in a depressed area where you can get good deals – but just because something is cheap does not mean it’s a wise investment. You must ensure the property meets the second criteria, which is that the property and area must have reason to go back up in value.
In these areas, you will often find landlords who charge cheap rent and do not take care of the tenants in their buildings. But, if you don’t allow yourself to fall into that cycle, you will find that cleaning up the building, showing some pride of ownership, and taking care of the tenants can have a very profound positive effect on the amount you can charge for rent.
As an example, we have invested in areas that were receiving $10 per square foot for commercial units and $950 a month for a two-bedroom residential apartment when we initially purchased them. After only a short period, those properties have increased in value considerably after taking these small steps. The commercial unit went up to $18 per square foot and the residential unit was rented for $1,400 per month – producing a significant increase in cash flow and overall building value based on the cap rate of the area.
There is a lot of wealth to be made in real estate. You can do it as an active landlord or a passive owner, having someone else manage the properties for you while you sit back and earn the profits.
It is important to note that if you adopt these principles of real estate investment and decide to do it passively, it’s vital that you find a property manager who shares your principles of where and when to acquire properties and how to handle the buildings and tenants to ensure the greatest return on your investment.
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