Contrary to what you may have heard, investing should not be sexy. Fast-paced, high-risk, get-rich-quick trading is not investing—it’s gambling. Good investors should be prudent, patient, and bored to death, and the investing instrument most conducive to this approach is real estate. Unfortunately, real estate has a reputation for being complicated, risky, and reserved only for elite and extremely savvy investors. In fact, real estate is an ideal investment for everyone, regardless of income level. On August 19th, I’ll be holding a home-buying class specifically for investment properties. This week’s show laid the groundwork for that class.
After proposing a home-buying class specifically for investment properties, my office manager at Garvens Mortgage Group, Kay, mentioned that I should cover the basics on the radio before hosting the class. Many individuals interested in real estate investing may not even know what they don’t know, after all. So let’s get the basics covered.
When investing in real estate, you’ll realize returns in two ways. First, you will realize returns as appreciation, or the increase in value of the asset itself. Real estate generally appreciates consistently, if not at spectacularly high rates. There are exceptions, such as the housing bubble and subsequent implosion in 2008, or local markets that are either over-heated or in decline. But in most cases, real estate appreciates. Second, you’ll realize returns as cash flow, or net rents, from the property (assuming it’s being rented). Even with a mortgage on the property, competent investors can typically manage a 9-15% annual return just on net rents—that is, the difference between the cost of the mortgage and the revenue from rent.
Once the mortgage is paid off, all net rent goes right into the investor’s pocket. This typically won’t be for 15-30 years, depending on the terms of the mortgage and how quickly the investor pays down the mortgage. This is what I meant by a good investor being patient. An investor who accumulates rental properties early can have them paid off by retirement and secure a steady income from those properties.
Obviously, a home is an expensive asset, so most investors will need financing. Those looking to buy a property specifically for renting out will need to put 25% down to secure financing on the property. This makes sense since an individual facing tough financial circumstances is almost guaranteed to foreclose on his investment properties before his primary residence.
For those who don’t have 25% to put down, one option is to use upgrades or downgrades as opportunities to turn their old property into a rental. A family upgrading from a starter home to a larger home can keep their starter home and simply rent it out. Similarly, a retired family looking to downgrade can keep their larger home as a rental. In these instances, they will only need between 3.5% to 5% for the down payment to buy their primary residence which, in a few years, will be turned into a rental. (And, no, you can’t just say you’re moving into a property as a primary residence and then rent it out from the start. This is called occupancy fraud and is a major crime.)
I have only scratched the surface of real estate investing here. For more information on the basics, I encourage you to check out both hours of the show in the radio archive. And for even more information, and to have any questions you might have answered, sign up for the investment property homebuyer’s seminar scheduled for August 19th. We’ll cover the real estate side, the mortgage side, and you’ll hear about the experiences several of my team members at Garvens Mortgage Group had when getting into real estate investing on their own.
8-9-2014 Ready, Set, Invest! Part I
8-9-2014 Ready, Set, Invest! Part II