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4 Main Ways to Build Wealth in Real Estate
By Erin Helle
Erin is originally from Buffalo, NY and served as an U.S. Army Engineer for 14 years. After leaving active duty, she embarked on a career as a Real Estate Investor. She is now a proud Army wife and mom to two beautiful little girls. Erin built a real estate portfolio valued at over $2M that cash flows over $6,000 per month within her first year as an investor! She coaches and teaches real estate investing @ BC Global Investments.
There are so many reasons to invest in real estate. Talk to ten investors, and you will get ten different answers. Some will say that they appreciate the extra cash the investment brings in each month, and others will say that they appreciate the appreciation (see what I did there?) and like to see their properties double and even triple in value. Still other investors will tell you that they like to have control over where their money is. The truth is, the list of reasons people invest in real estate is long, and it’s because there are many potential ways to build wealth through real estate investing. On the flipside, though, there are plenty of reasons not to invest and there is certainly risk to investing in real estate. My goal in writing this article is to show you that while no investment is risk free, and there are never any guarantees, there are many benefits to investing in real estate, and ways to mitigate your risk. Do I have your attention? Good! Now break out your scientific calculator, excel spreadsheet and a six pack, or extra-large coffee or other drink of choice, because we are about to get into some serious analysis!
Just kidding! I am going to give you the basics, the nuts and bolts, and a pathway to begin on an investment journey!
Let’s start with my answer to why I invest in real estate. I’d like to give you a clear, straightforward answer here, but it’s a little complicated. It is complicated because my answer has to do with the life that I want to lead. And I don’t just mean the things I want to do, I also mean freedom from the things I do not want to do. I don’t want to be stuck in a 9-5 job. I don’t want my husband to retire from the Army and have to get another job. I don’t ever, ever, ever want to be stuck in the rat race because of finances. I want to be able to fly to Nepal and trek the Himalayas on two weeks’ notice. I want to be able to buy a Cadillac in cash. I want to be able to resign from my job, my career, so I can prioritize my family. These aren’t just pipe dreams, guys. These are all things I’ve done, and I am just getting started!
My husband and I are both educated, driven, and so far, successful individuals. We both worked hard for what we have accomplished and where we are in life. I don’t say this to blow smoke or brag, but rather to show how alike you and I really are. Our careers allowed us to make good money, but it was always finite. When it ran out, there was nothing more. Though we weren’t living paycheck to paycheck, there was always a limit to what we could do. If we wanted to make more money, we’d have to get a second job and work more. While this might have been somewhat appealing before kids, having children changed everything for both of us. We are still hard workers, but we want to spend all the time with our kids! Additionally, we want to take them to see Mickey Mouse on a fairly frequent basis. Since all things Disney cost approximately a million dollars, we had to get serious about our finances. Except that we didn’t want to. We did not want to have to watch every dollar and go through life pinching pennies. There had to be another way.
That’s when I started considering investing in real estate. A year and a half and about 14,758 hours of podcasts and numerous books later, I finally got the guts to purchase my first investment. And it was not the best investment I could have made, but it has not been vacant for even a single day, the loan is paid down every month, and I bring home a couple hundred bucks on top of that. Furthermore, it is a safe investment and I enjoy watching its value increase. I am passively making money in four different ways on this single investment. I teach the exact systems I used to build my portfolio in my REccountability Course.
Four Main Ways to Build Wealth in Real Estate
Ok so now that you want to go out and spend all your money on a rental property, let’s talk more specifics. The four main ways to generate and build wealth in real estate include tax savings, loan amortization, cash flow and appreciation. Not every investment will bring you all these benefits, but your particular investment strategy is up to you. You could choose to flip houses in the shortest timeframe possible and take advantage of appreciation, or you could choose to hold on to properties for long periods of time while taking advantage of cash flow and appreciation, or anything in between these two strategies.
Let’s start with the most boring topic on the history of the planet: Taxes! I know, I know, but we have to go there. And honestly, I bet the more you learn about taxes, and tax savings, the more interesting this topic will become! In my opinion, this reason alone is enough to buy one single rental property. This won’t make you rich by any means, but it allows you to tap into a whole new world of tax saving strategies, and on things you already use and buy anyway. Think: your cell phone, internet bill, your home office, the list goes on and on. These are all potential write offs! Now, I am no expert, and nothing can replace the advice of your CPA, but check out this article written by someone who is much wiser than me on the topic. Oh, and did I mention that he’s a real estate made millionaire? The fact is the government wants you to buy real estate. It will incentivize you to provide housing for its citizens in the form of extra tax write-offs and 1031 exchanges, to name a few.
The next thing I want to talk about, and perhaps my favorite, is amortization. What does that even mean? In a good real estate investment, if you do it right, someone else will be paying down your mortgage. And your interest, taxes, insurance and other expenses. Hopefully even your property manager’s fee. Notice that I said in a ‘good’ real estate investment AND ‘if’ you do it right. This means that you must not only buy it at a price that makes sense, you also have to manage it effectively. Both are do-able, but neither just happen. In many markets, rents can cover all these expenses, and you can automatically build wealth simply by keeping your property occupied.
Now on to the real reason you are reading this article: you want to know how much money you can make. This is known as cash flow and is the money that an investor takes home after all expenses are paid. A good investment cash flows most of the time. Notice, I don’t say always, because there will be times when your expenses exceed your income. My properties average around $300 per month. That is money in my pocket. When I am assessing a potential investment, I consider a good investment one that brings in at least $3,000 in income per year. Again, this isn’t a huge number but when you consider that the value is likely increasing over time and somebody is paying down a mortgage for you, you can start to build some wealth passively. You can also duplicate this over and over again until you achieve your income goals.
The last topic I want to cover is the icing on the cake: appreciation. If you make a good investment, in the right area, you not only have someone paying off your loan and building you equity in your home, you also have a few hundred extra dollars in your pocket. On top of all of this, your property should increase in value each year. This is called appreciation and a conservative appreciation rate for the average property in America is over 3%. This is not a startling rate but let’s consider a $100,000 single family home investment. You put $20,000 on a 30-year mortgage at a 5% interest rate. This $80,000 loan will be paid off in 30 years, by someone else, and in that time, you should make $3000 per year in income totaling $90,000 over this term. Furthermore, if your initial investment of $100,000 increased at 3% per year, after 30 years it would be worth $235,656. Now let’s say you completed a $30,000 remodel that increased the total value of your investment by $45,000. The difference, $15,000, can now be added to your $235,656 home value and $90,000 in income. All in all, your $20,000 investment could turn into $340,656. Now, you could sell the house and net close to $310,000 after you pay realtor fees and closing costs, or you could hold onto it and enjoy a significantly higher cash flow since your mortgage is paid off.
Why You Should Play It Safe and Not Invest in Real Estate
So now that we have discussed all the reasons you should invest in real estate, we need to address the reasons you should not. When I talk to hopeful investors, I hear the same reasons repeatedly. These “reasons” are really just excuses, justifications that people use to avoid getting into the business. These include fear of the unknown, concerns about maintenance costs, lack of cash, and not wanting to fix toilets at 2 am.
First and foremost, if you are not comfortable with a particular investment, or real estate investing at all, then real estate is not for you. No amount of money or performance will ever make that investment worth it as the anxiety and stress will eat you up. Bottomline: trust your gut! I once sat on a flip after it was complete for 3 months and even though I made almost $13,000 in profit, the stress of having a house waiting for a buyer without producing any income was devastating to me on a regular basis. I’m glad I made that investment and tried a flip, but I will never do it again because I know what the stress will do to me. It made me doubt myself and my future as an investor so many times, and even if I had profited $100,000 it still would not be worth it!
Next, realize that if you commit to investing, you will likely make a bad investment at some point, or come across some costly expense that you never anticipated. Understand and accept this and your investing career will be a lot more enjoyable. You will deal with a broken water heater, a busted HVAC unit or a leaky roof, or perhaps all three at the same time. Your tenant’s dogs will pee on every inch of your carpet and their kids will color all over your once perfect walls. These are all things investors will have to deal with at some point or another. In order to ensure that these don’t bankrupt you, consider these expenses when assessing a property. If you plan for these inevitable speedbumps en route to financial freedom and put the appropriate protections (a savings accounts or line of credit) in place, you will come out on the other side. It will be a nuisance and may affect your bottom line, but no entrepreneur is free from all risk.
The lack of the cash thing can be an actual reason not to invest. However, if you listen to podcast and read about investing in real estate, you will quickly realize that you don’t even have to use your own money! Is your mind blown? I know mine was when I first learned about this. I truly believed that only people with access to lots of money or friends with deep pockets could ever begin investing. I was wrong and can happily report that I have used other people’s money to make a fair profit. You can absolutely use other people’s money as a down payment or even have a seller finance a property for you, bypassing the usual credit checks and income requirements. This is a conversation for another day, but don’t let a lack of funds keep you from getting in the business! You can learn more about creative financing in my course.
The last excuse I hear frequently usually has to do with fixing toilets or getting your tenant a copy of a house key at 2 am because they drunkenly locked themselves out. Guys, this does not have to be how it goes. You could save yourself a couple hundred bucks over the course of a year and manage a property yourself, but the chance of these things happening are low, and their frequency is even lower, especially if you keep up with your maintenance and put good tenants in your properties.
If you’re thinking about everything I said and are even remotely intrigued, I recommend that you take a few action steps.
Step one: Get out of debt! I am not talking about your personal home mortgage; only rarely would I consider that bad debt. I’m talking about car payments, college loans and credit card debt. Pay all of that off and start saving. Take a look at these extreme ways to save money. Oh, and fair warning, the title does not lie. Some of these are more than a bit extreme (hello military showers!) I can joke about this because I have literally been there! So, there I was, in Iraq, taking a rare shower and the water runs out while I am completely lathered up! Thank God for a handful of water bottles close by so I could at least get most of the shampoo out of my hair before going to work. Not my best day… Anyway, let’s get back on topic.
Step two: learn, learn, learn! Listen to podcasts, read a few books, attend a real estate networking event. Find a mentor and take a course. I am a huge fan of bigger pockets and pretty much only listen to podcasts that come from there. They are straightforward, informative, productive and usually pretty entertaining. As far as books, check out these 10 must read books and start making your way down the list. Then google a local real estate investor meetup, go grab a beer and soak in all that knowledge!
Step three: Make an offer! None of this will ever matter if you don’t take action. I am not suggesting that you run out and offer full asking price for the first house you see or listen to someone you sort of know who met a guy who has an uncle-in-law who is a real estate millionaire. I am suggesting you put to use everything you learned from the podcasts you listened to, books you read, and all your new, experienced friends in real estate. Do your homework, run the numbers, and make an offer that works for you. You will likely get denied a time or two (I had 8 rejected offers before finally getting one accepted), but each time you assess, analyze, and offer, you will learn something new.
If you’re not inspired, then I have failed you, but hope is not lost. If my experience and hypotheticals did not convince you, check out these inspiring stories and then try to fall asleep tonight without thinking about it!