Three different ideologies are used to get started with real estate investing. It’s important to understand what works with each one and why. I’m also going to show you the inside secrets to how all real investors invest their money in real estate.
Ideology #1 – Buy and Hold
You probably know ten people who have bought a property to buy it out and rent it out for the long term. These people build equity through slowly paying off their mortgage.
Pros:
- Mortgage payments largely come from rents
- Equity can be mortgaged for tax free income
Cons:
- Poor equity growth
- Small returns with large time commitment
- Ongoing property management
Ideology #2 – “Flip that house”
Investors basically fix the home hoping to later profit from the value they have invested into the home.
Pros:
- More often than not, investors make returns this way thus it is consider “safer”
Cons:
- You’re basically trading time for money like you do at a job
- Fixing a home takes up a lot of time, no ifs ands or buts
Ideology #3 – “Creative” Investing
To avoid physical labor, investors use creative contracts and loopholes to profit from properties and situations without having to “swing the hammer”.
Pros:
- Greater profit potential
- By using strong buying principles, equity is acquired at purchase
- No physical management through creative contracts
Cons:
- Infomercial gurus charging $1000s have made it hard to find quality resources to learn
Don’t:
Expect your property to appreciate.
Over the long haul, real estate will always appreciate in value. However, what do you do if your property doesn’t actually produce positive cash flow? What if you lose money for 10 years on negative cash flow before it appreciates in value? Do you know just how many headaches can be involved with a property for 10 years that loses money month after month? I’ve seen many landlords put in all that extra work for simply a few extra dollars to meet ends meet. There’s always someone who gets lucky by buying in the right place at the right time but remember that this is the exception, not the norm. Short term appreciation is never guaranteed.
Do:
Buy properties for less than full market value.
Positive cash flow is usually easy to attain if the property was purchased for significantly lower than market value. Instead of hoping for it to go up in value, why not look a little harder for a deal that allows you to buy equity right at the purchase? Buy great deals that have strong discounts instead of searching for a great area although admittedly both can be achieved simultaneously. A property that is half off in a “slum” is a lot more valuable than a property for full market price in a desirable area. You don’t have to stay away from the good areas, just make sure buying equity at purchase is a prerequisite for you.
Don’t:
Fix and repair properties unless of course you actually really enjoy it.
If you don’t learn to buy equity off the start, you might find as many investors I know have, that you can spend 6 months on a project and still lose money. Consider that “flipping” really just means saving out on a contractor’s wages for the fix up by doing it yourself. Exchanging physical labor for time and a preset wage is something employees do, not investors.
Do:
Contractually make someone else fix the property.
You might be surprised to know that there are a lot of ways you can structure a creative contract so that someone fixes up your property for you. If you didn’t have to swing the hammer, wouldn’t you get someone else to do it instead? Admittedly, you’ll need a background in understanding creative contracts and how to get a tenant to want to do that for you but trust me at least when I say that it’s entirely possible.
Don’t:
Physically manage your properties.
Think of a good rich investor like Donald Trump and then try to imagine the toilets and sinks he’s fixed. Most investors realize rather quickly that returns generated from buying a property for full market rent and then receiving a small positive cash flow is hardly worth all the head aches that the property generates.
Do:
Resell properties under creative terms so that you don’t have to manage them.
If you pay $30,000 less than market value on a property valued at $100,000, you’ll have a lot more options available to you than the average investor who paid $100,000 for that same property. The first thing you need to understand is how to buy your equity. After you accomplish that, your resale options will drastically increase. You can easily resell that property under a “rent-to-own” or by holding some secondary financing to make the home available to “no money down” buyers where you get paid like the bank. Rest assured that the bank gets filthy rich from your property and they do not manage it. A good creative contract is the secret to the bank’s strategy. By learning what they know, you can profit much the same way.
Don’t:
Not already have the end in mind before you buy.
Even if you’re looking as long term buy and hold as viable income generation tool, you still need to know what the numbers look like. You’re not an “investor” if you don’t take the time to look at the market rents and market value first. Most “investors” buy a 2nd property because it is a “nice place” and they can drive to it. Think about it like a business because a “profitable home” isn’t necessarily a “nice home.” If you don’t know for sure that the home you are buying will generate positive cash flow before you buy it then don’t buy it.
Do:
Plan multiple exit strategies.
Do you have lease-option tenant buyers available to you, buyers who need down payment assistance through secondary financing or investors looking for fixer uppers that will purchase your property from you all cash before you buy it? If not, you’d better get started with that. Having multiple ways to cash flow a property or generate a large lump sum payment is the surest way to have a long lasting real estate business. There’s a commitment required in the form of time and effort to achieve having those options available to you but the rewards pay very profitable dividends.
Remember that real estate is a business before you go looking for that “nice home in a nice area.” When you buy stocks, you buy them because you think the company will make money. You don’t ever buy them because you think the CEO is a nice guy or because the company is a close drive by. Failing to look at your investment as a true business investment is a recipe for disaster.
You can learn to buy equity right now at websites like www.theinvestortoday.com.
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