Want to retire at 45? Leave a legacy for future generations? Safeguard against market volatility. Be a force for social change? Want a second stream of income? Privacy? Safety? Security? All of these are great reasons to invest in real estate. There are so many ways to make money in the real estate market that people have written thousands of books on the subject. I’m only going to address a few here.
Owning your own home.
Buying a home is one of the safest and most successful ways to generate long term wealth and financial stability. For example, a family that rents for 5 years has nothing to show for it. The same family, in the same home, if they buy it, can be expected to have $25,000 - 50,000 increase in personal wealth in the same 5 years.
I’m a Realtor and I believe strongly in the power of home ownership so I’m going to start with this one. I heard on the radio recently that for every dollar of wealth a white American has, an African American or Latin American has 10 and 8 cents. Why is that? That’s not okay. Home ownership is one of the most common ways people can build wealth.
Family A: They pay $1200 a month in rent. In five years they move out, and if they’re very lucky they get their entire deposit back and can apply it toward a new place to live.
Family B: They buy the same home for $200,000 with 0 money down at a 3.5% APR (which is high right now, but not terrible). Even if the house is still only worth $200,000 when they sell in 5 years, now they have more than $23,000 in equity. If the market continues on a modest growth rate of 3%, their home will be worth about $230k and the equity that they have earned with that investment is now more than $50,000.
Now in 5 years, one family has dramatically changed its amount of wealth and the other, has nothing to show for it. Additionally, Family A’s rent has likely increased every year, putting more pressure on their budget. Landlords don’t typically improve the property until the tenant moves out. Mortgage costs stay the same for the most part, so family B has had a stable payment amount and they can improve their property when they want to and reap the reward down the road with increased value.
Investment isn’t always about dollars though, there’s more to it than that. There are several studies that have suggested that children do better when their parents own their home. They are more likely to attend the same school for several consecutive years and develop community relationships that provide a second layer of support. Parents are more likely to engage in PTA groups and involvement in schools goes up. When school involvement goes up, grades and attendance go up.
Shared living Investment Strategy
Buy a home with several bedrooms, rent out the extra rooms at a rate that covers the mortgage and expenses. This can be short term while in college as a means to pay off student debt or a longer-term method to build a multi-property income portfolio.
Go to any college town and you’ll find a few “rooms for rent”. Great for the student that doesn’t want to live in a dorm. Especially in an age of COVID. Even better for the person who owns that property. Here is the short version.
A single student buys a 4 bedroom home. The mortgage is $1200 a month. She rents three rooms for $500 each. The mortgage is covered and the student just has to bank money for home repairs and the occasional renter moving out w/o notice. There are several nice things about this.
Having the rent covered by three people, the odds of all three failing to pay their rent is low. So it’s unlikely the owner will be stuck paying the full mortgage.
Some lenders will allow signed leases to be used as income to qualify for the home purchase.
By doing this in a college town, or place where there is a large population of single people that don’t want a long term home ownership commitment due to potential relocation, there is always someone wanting to rent. That makes it easy to replace lost renters and lessens downtime.
After college, the student can sell their property and use equity gains to pay down student loans or invest in a home near future employment, or keep the property and rent all 4 rooms and have a positive cash flow situation.
There is also an intangible benefit of being in an environment with other students that may share same classes or goals and not having a more disruptive dorm/party lifestyle.
Fix and Flip
Who hasn’t seen HGTV and thought, I can do that!
Buy a home that needs some work, little or a lot depending on your financial means and home repair skills. Get a really good deal. Fix it up. Sell it. Invest profit into next property.
Fix and Flip: This one is easy to explain, harder to pull off. Fix and flip means you buy the home at a reduced cost, fix it up and sell it for fair market value. Can you make money? Yup! People do it all the time. It is risky. Yup. People fail all the time. There is a lot to this and requires a conversation with a lot of people before you start. However, for the right person it can be a very fast path to building wealth.
Pros: It's a great income builder and done right can make a change for the better in areas that are run down or blighted.
Cons: In order to get that good deal, someone is getting the short end. You may find your self face to face with a family that has just had their belongings put to the curb, have lost a parent or loved one, or have fire contractors that aren't doing their job.
Fix and Hold
Buy a distressed property, fix it up, and rent it. Repeat.
This is a longer-term approach but rental income is usually a good investment. Owning rental properties has been a way to generate wealth for families going back generations. Do you have to buy distressed? No, you don’t. In fact, for some people, I wouldn’t recommend it. Rental markets come and go, sometimes it’s a tough life and not one to enter into lightly. However, if you can make it work, you have long term investments that you can hold on to for years and pass to your children so they can continue to have investment income.
Pros: Create an investment machine that if run properly will facilitate a growing rental portfolio.
Cons: Either pay a property management company to manage your properties, or deal with 3 am phone calls about broken heat, flooded plumbing and roof leaks.
All of these options are way more complicated than I’m stating here. This post has already been too long for most people to read, but if you’ve read it to this point, then I’m guessing that there is some interest there. What’s next?
Okay so you want to invest in your future and you want to use real estate to start. Now what do you do? Call me. Seriously. Call me. I’m happy to chat with you and answer your questions. I’m not going to push you to get in the car and start looking. I am going to give you probably more information than you want. When you’re done talking to me, call another Realtor. And then another. Then go to the library and get a book or two on the kind of investing you’re interested in. Join a Facebook group or MeetUp group. Ask your pastor at church, your parents, anyone you trust. Here are a few places to check out.
Clark Howard: Click here to for his insight into investment properties.
Dave Ramsey: How to Invest in Real Estate
Nerd Wallet: How to Invest in Real Estate
The article from Nerd Wallet is features two additional ways you can invest in real estate without all the work. REIT's and Lending. Neither of those give you anything physical for your investment. Just a promise and a receipt. You can invest $1,000 and buy a few shares of a stock. You might make money, you might lose it. But in the end, it was only $1,000 and it’s only a piece of paper. To invest in real estate, is real money and real risk and it’s not to be taken lightly. It’s also a real thing. Even if the market goes into the toilet and homes are sitting fallow for years, you still have a place to live or a place to provide housing for someone else. You have a physical, tangible investment. In the stock market, if the company goes under, your share is just gone.
Why do I take the time to write this, and consult for free about this? Well, for one thing, I’m a Realtor. I’m hoping you will use me, or let me refer you. That’s how I make a living and pay my bills. I’m just gonna own that right up front. But also, I really do believe in the power of home ownership. I believe that we make some strong progress toward the goal of racial equality. Every person deserves the right to build wealth and financial security. Every person. Regardless of their race, sex, religion, gender, age.