There is money to be made in real estate. My mother in law constantly informs us of great opportunities in real estate that we could sink our hard earned dollars into. The problem with real estate investing is that most of us normal people don’t spend every waking moment of our days trying to find ways to get rich. We really aren’t informed about most of our investments. Most doctors I know want to take care of patients, get compensated fairly during the process, and spend their free time with family, friends, or with their hobbies.
For those of us who have any potential interest in real estate as a means to supplement our income, this primer is my overview to those who want to learn some fundamentals. If you want a get-rich-quick strategy or real estate investing guide, look elsewhere. If I establish any clear tips from my own experience, I will post them in later entries.
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What are the ways in which I can make money from real estate?
Real estate usually does not involve quick flips like what you see on TV. If you ever get to that point, you’re likely to already have your own real estate business and probably aren’t going to be practicing medicine anymore. I have seen doctors and other professionals who love real estate so much that they do flip homes and make a pretty dime during the process. If that is you, then read no further. You’ve nothing new to learn here. Here is my take on residential properties:
- Appreciation. One purpose that real estate serves is to provide you, the investor, a place to park your money. Think of it as a means to beat inflation. When you decide to sell your property after a decade or two, you hope that the land value has increased, the neighborhood has improved, and you will not lose anything to time. This is also one of the risks of real estate investing. Sure, if you’re investing in a metropolitan area where there is no more land to develop, your chances of having property appreciation will be higher. If you are in Lubbock, TX, you have to be more discriminating in what you buy. Remember, purchasing real estate to live in yourself is one thing, purchasing real estate for investment is another. Selling a house you purchased for $600,000 ten years ago for $625,000 probably means that you got lucky, and only lost out slightly to inflation. Looking at a ten-year period between 2005 and 2015, $600,000 in 2005 would need to grow to upwards beyond $720,000 in 2015 to have the equivalent buying power. If you lived in it the entire time, at least you had a roof over your head. If you used this property as a rental, you’d between have profited through other means.
- Cash flow. If you have a property that is rented out, you are generating income. That is your cash flow. Subtract out your mortgage costs, maintenance, and expenses and you will get your net operating income (NOI). A more detailed analysis about how cash flow incorporates into profitability will be discussed in future entries. Essentially, you would hope that your rental income will cover at least your mortgage income so that you’re looking to make a profit.
- Leverage. This principle works when you have multiple real estate properties that you manage. Typically one would take out a mortgage to purchase a rental property. The cash flow generated by the first property can also be used to purchase additional properties. In effect, you are leveraging your purchasing power to generate multiple streams of cash flow.
- Tax benefits. Yes, you can have tax breaks on real estate properties. There are depreciation benefits with properties that you can use to offset your rental costs. It’s not the sole reason why you should own real estate, but it is one benefit from the U.S. tax system. Might as well use it.
That’s it: appreciation and cash flow. There is no magic involved. If you hold onto property for twenty years or flip it in 6 weeks, these are the only ways you’re only going to make money. This applies mostly to residential properties, but in some ways to commercial as well.
Stay tuned for further articles on real estate.
(Photo courtesy of Flickr)
What other basic principles of real estate should beginner investors be aware of?