When people find out that I sell real estate, they want to talk to me about it. Fortunately, real estate is my favorite topic to discuss. I love real estate. But, there are so many misconceptions about real estate. I feel that being able to recognize these lies and avoid getting caught in their trap, is the first key to successful real estate investing.
1. Your Home is Your Biggest Asset.
"Your home is your biggest asset," is the most believed and dangerous lie regarding real estate. When challenged about this false cliché, many people become offended or go straight to denial. I assure you, your home is actually your biggest liability. My point is simple. Does your home put money in your pocket or take it out? First, lets count all the ways your home takes money out.
- Property Tax.
- Debt Service (Mortgage Payments).
- Condo or HOA Fees.
Now let's count the ways it puts money into your pocket.
- Rent? (Only if you are renting a portion of it out)
- Sale? (But then you don't own it any more)
- My home gained artificial intelligence and got job with a nice salary!
You see? Unless number three happens, your home is a giant liability. The good news is that recognizing your home as a liability allows you to take action. You can turn your home, or a portion of it, into a short term rental (airbnb.com) or long term income property putting money in your pocket. You could go a step further and make your tenants pay some or all of expenses 1-6 listed above, reducing your liability. I suggest before you buy your dream home, buy assets, like income properties, that cancel out your giant liability of a home on the balance sheet.
2. Debt is Bad.
While getting over leveraged can be dangerous, not all debt is bad debt. Many people want to pay off their loans so they don't have to pay interest. I am always puzzled when someone tells me they don't want to invest their money at a 10% return until they completely pay back the money they are borrowing at 3% interest. At the risk of getting too technical, lets walk through an example.
Cindy has $10,000 she wants to invest. She can buy stock that is paying out dividends at $1,000/year or 10% annually. Or she can borrow $40,000 from the bank, at 5% interest to be paid back in equal monthly payments over 20 years, to buy a $50,000 income property that profits $5,000/year or 10% annually.
Both investments return 10% of purchase price annually so which is the better investment? The answer lies within the power of good debt. Cindy's Annual Debt Service or annual mortgage payment is a little less than $3,170. This means that Cindy would make $1,830 a year after paying the bank. An income of $1,830 dollars annually would improve her return from 10% to 18.3% annually on money invested (remember Cindy only invested $10,000 of her own money in the property).
Now lets say in 20 years neither the stock or the property go up or down in price, when Cindy decides to sell. The stock would sell for $10,000, returning all of the money Cindy invested. The income property would sell for $50,000 returning an extra $40,000 dollars more than Cindy invested with out going up in price.
This example shows how taking on good debt can allow you to enhance return on investment and build equity in more expensive assets.
3. You Need to be Rich to Invest in Real Estate.
I think a lot of the people who are currently investing in real estate may be the ones propagating this rumor. After all, who wants more competition? The reality is you just need to know where to look to get capital. If you only have $1,000 and you want to buy real estate then my advice is simple. Find a good deal; then find, partners, grants, or banks to finance the deal.
The first property I bought was a duplex for less than $15,000. I had partners. We pooled our money, bought the duplex, used grants to fix it up, and then rented it out. We reinvested our profits into more real estate. Just remember you have to start some where.
If you want to learn more about getting started in real estate investment the team at Neighbors Development wants to help. Give us a call or Email us.
Look out for my next article "That Vacant Strip Mall is a Cash Cow!"
President & Broker | Neighbors Development