| Real Estate investing is one of the best tools to | | | | this case, one is using the increase in values over |
| build long term wealth and financial security. About | | | | time, generally in conjunction with rental income, |
| 70% of millionaires in the US built their fortunes in | | | | to increase their personal wealth. The renter is |
| Real Estate, so it is obviously an excellent tool. | | | | the key to this being a hugely profitable strategy. |
| There are several ways to incorporate Real | | | | An example of this would be: |
| Estate into one's overall financial picture. | | | | $200,000- purchase price ($40k cash, $160k |
| Flipping | | | | mortgage) |
| The first method I'll cover to invest in Real Estate | | | | $485,000- selling price (after 30 years at a |
| is a shorter term option called "flipping". Basically, | | | | conservative 3%/yr.) |
| flipping a property is buying a property at a below | | | | $1,500/mo.- carrying cost (this will go up slightly |
| market price and then selling it at a market price. | | | | as taxes and insurance increase) |
| The property may be purchased below market | | | | $1,600/mo.- rent (first year) |
| value because it needs repair, or because the | | | | * A note about the rent: I would rent to the "right |
| sellers have a need to sell the property quickly. | | | | tenant at a discount to keep them longer term. |
| The advantage of flipping a property is that it | | | | Also, the rent, which will increase around the |
| creates a shorter term profit compared to holding | | | | same as property values over time will go from |
| a property. The disadvantage of flipping a | | | | $1600 in the first year to $3900 in the 30th year. |
| property is that one needs to sell it to recapture | | | | Keep in mind that while the carrying cost will go |
| their expenses. A mortgage or Home Equity Line | | | | up, they won't go up nearly at the same rate as |
| of Credit (HELoC) may also be used to bring cash | | | | the rent. |
| back out of the property, but may reduce the | | | | While there are a few things to plan for, such as |
| overall profit from the sale. When flipping a | | | | repairs, upgrades and time without renters, if one |
| property, one needs to be very aware of not | | | | held the property for 30 years, they would have |
| only the purchase price, but also the full cost of | | | | a property worth almost $500,000 with no |
| acquisition, renovations, selling the property, and | | | | mortgage. I would feel confident in saying that the |
| cost of carrying the property. Keep in mind that | | | | cash flow from the rents (especially as they |
| loan costs for this type of venture are generally | | | | increase) will cover any expenses in the long |
| more that of a primary residence. Taxes and | | | | term. Compare this to a 6% return on the down |
| insurance will also be higher. An investment | | | | payment from a mutual fund, and the $40k down |
| scenario might look like this: | | | | payment would possibly yield $230k. |
| $165,000- purchase price | | | | Shifting classes |
| $ 1,650- acquisition costs (about 1% of purchase | | | | Either of these strategies can be used with both |
| price) | | | | commercial and residential properties, as well as |
| $ 10,000- renovation budget | | | | undeveloped land. The property may also be |
| $ 11,700- carrying costs (budgeted as $1950/mo | | | | shifted from one class to another. Land can be |
| for 6 months) | | | | flipped by building a home (residential) or shopping |
| $ 18,000- selling costs (6% for real estate | | | | center or warehouse (commercial). A warehouse |
| commissions, and 2% for other costs) | | | | type of building may be renovated into loft |
| $225,000- projected sale price after renovation | | | | apartments (B&H, and residential) or sold as |
| $ 18,650- projected profit | | | | loft condos (flipped). A home on a busy street |
| One thing to keep in mind is that the Return on | | | | may be renovated to offices and be re-zoned |
| Investment (RoI) is actually higher than it first | | | | commercial and either rented or sold. Obviously |
| appears. Initially, it would appear to be a 10% | | | | there are a lot of variations that can be |
| profit (about $186k invested to return about | | | | employed. |
| $18,650). Over a six month span, that isn't bad. | | | | But what about for a different budget? |
| However, the return is actually much higher. | | | | Also, the price and financial commitment can be |
| Generally, the loan requirements for this type of | | | | varied as well. Condos ready to be flipped often |
| property will only require 20% down (or less, but | | | | come on the market at prices well under $100k, |
| at a higher loan cost). So, that means the actual | | | | and occasionally as low as $50k. A $15k |
| cash investment is closer to $55,000 ($33k down | | | | investment may be able to yield a $25k or $30k |
| + $10k rehab + $12k carrying costs). This makes | | | | return. Also, one can partner with others looking |
| the RoI almost 34%. Not bad, but remember this | | | | to do the same type of investment and form a |
| isn't like owning a stock, there is a lot of work | | | | partnership. This arrangement adds complexity, |
| that goes into making this happen. One also needs | | | | but also spreads the risk. |
| to be in a position to "carry the property if it | | | | Lastly, remember to talk with your accountant |
| doesn't sell as fast as planned. The bottom line is | | | | and/or tax preparer about the tax ramifications |
| that if one is realistic in their expectations, a lot of | | | | of these types of investments. One may be able |
| money can be made pretty consistently. | | | | to employ deductions and credits to lower their |
| Buy and Hold | | | | tax liabilities from their investments. If you have |
| Another tool in the bag of the Real Estate | | | | any questions, or would like to get started in real |
| Investor is the "buy and hold option. Buying and | | | | estate investing, please feel free to contact me. |
| holding a property is a longer term strategy. In | | | | |