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Making Money Investing in Real Estate

28 08 2006

real estate

You always hear about people who made their fortunes investing in the stock market, and you also hear about other investors who lost their shirts playing the same game. But you hardly ever hear about real-estate investors who go bankrupt, and that’s because it doesn’t happen often.

That’s right, those individuals who invested wisely in real estate many years ago are living a very comfortable lifestyle. Investing in real estate wisely can garner lots of money, so if you’re just getting started, or have considered investing in real estate, the information that follows is invaluable.

take the risk

No one hears about how much money one can make investing in real estate. That’s probably because it is a little well-kept secret. If everyone knew about it, everyone would be doing it, right?

Wrong. Much like starting your own business, investing in real estate requires entrepreneurial skills and a vision. Which is why not everyone is jumping on the real estate bandwagon.

Not everyone is willing to take the additional risk that real-estate investing entails. And these are the same people or renters that will make you rich. The little secret is that there are hundreds of individuals who choose to procrastinate for every one individual who has a vision and chooses to take the risk with investing in real-estate.

what lies ahead?

When I initially started investing in real estate, I really didn’t have a clear vision. The only thing I was sure of was that I wanted financial freedom. Of course, achieving these goals did not come without a price, and only afterwards did I develop a plan and vision of where I was headed.

Investing in real estate requires a lot of time; you need to deal with a vast array of tenants — good ones as well as bad. Just like a business, you also have to deal with operating and fixed expenses — such as heating and electrical bills, as well as renovation costs.

On the other hand, I don’t have to wear a suit and tie all day, and run around doing someone else’s bidding. You see, to me, that’s big. My dress code consists of shorts and a shirt 6 months out of the year, unless I’m on vacation of course — then it’s 10 months out of the year.

If I want to go out of town for a few days, I go. I don’t have to ask for vacation time. While I’m out of town, my rents keep ticking away 24 hours a day, 7 days a week, whether I’m on the job or not. And those loans keep amortizing. The magic is happening just the same.

There are plenty of benefits in real estate…

the benefits

Aside from being your own boss, having the freedom to travel while earning profits, increasing your net worth, and having a place of your own to call home, there are greater benefits of investing in real-estate:

1. Cash Flow
Cash is the difference between your income and your expenses on a piece of property. You can have a positive or negative cash flow. Obviously, you’ll feel a lot better if the cash flow is positive.

Some people prefer to reduce debt as quickly as possible and sacrifice a little, and keep a negative or zero cash flow. My advice on cash flow is this: Never use all of your positive cash flow with rapid debt reduction. You will be walking a thin line. By keeping a strong positive cash flow, you will have more options and space to maneuver.

2. Appreciation
Appreciation is the increase in value of a property. There are 2 kinds of appreciation. The first is from economic conditions beyond your control, such as inflation. But you wouldn’t gain much from this type of appreciation since the gain is offset by the higher cost of living.

The second kind of appreciation is market appreciation. This kind of appreciation, you can control . When you improve a property (through renovation), you are, in effect, forcing its value higher. You can purchase a piece of property in need of repairs and bring it back up to neighborhood standards or slightly higher. This will give you a property that is much higher in value.

3. Leverage
Leverage is the ability to borrow a percentage of the value of a piece of property. Real estate, in comparison to other investments, offers a very high degree of leverage. In some cases a couple buying a single-family home can obtain 95% financing. This allows individuals to purchase real estate with little, if any, of their own money. What other investments offer such a high degree of leverage?

4. Amortization
With leverage, or the use of other people’s money, comes a repayment schedule. Your outstanding balance is being reduced with every payment you make. Part of each payment goes to interest (applied first), and part of your payment goes to principal. The principal reduction is called amortization — reducing debt. Hence, amortization can make you wealthy — slowly and steadily.

5. Tax Advantages
Owning real estate with the goal of making profit allows you to deduct interest payments and other expenses come tax time. But, don’t be fooled into buying real estate for the tax advantages; buy real estate because it makes economic sense to do so.

Owning a real-estate business is a great way to achieve your financial freedom. What could be more worthwhile than taking up real estate as either a full-time business or even a hobby? The benefits are definitely there.

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