Do you want to make money in real estate and build wealth starting from scratch? If YES, here are 20 practical steps on how to build wealth in real estate fast.
Real estate investments have always been touted to be the proverbial goose that lay the golden egg. A lot of people have savory tales to tell about it, while others have had it unpleasant due to one issue or the other.
Given all the profits one can accumulate through real estate investment, one of the things that keep people back from taking a plunge is the amount of money usually involved in the business. When you hear people talk about real estate investing, they are usually talking big numbers.
You hear about the millions to be made in the market, especially now when everyone is buying. You hear stories about the people who own 50 or more single family homes or who bought a package of 10 investment properties.
For people who cannot afford the money to go all out, it provides a downer, and should I say, the perfect excuse not to invest. But it has been found out that investing in real estate must not be done with the millions, at least not initially.
There are other ways you can invest in the industry with just minimal capital and still make profit enough to grow your business. One can go through hard/private money lenders, wholesaling, partnership, home equity, option to buy, seller financing and all the others.
If you are approaching retirement and you know that your benefits would hardly enable you live out a comfortable life, or if you just need another viable income stream, then you are just the perfect person to go into this business.
One of the best things about real estate is that you can start on your terms, that is you can build your own functional strategy. You can purchase small multifamily units with two to four units per building as your entry level strategy. This can work for you in a situation where you want to live in one apartment while renting out the rest to offset a mortgage.
A lot of real estate Veterans have attested to the fact that real estate is a viable, secure, profitable way of earning profits and with minimal risks. If you are still in doubt, here are a few advantages you can get from investing real estate.
7 Advantages of Investing in Real Estate
- Cash flow: one of the lures of real estate is its ability to generate cash flow. This is because after you have paid off your mortgage, and other housing related expenses, you would still be left with some substantial profit. This is one of the major reasons why a lot of people are turning their primary residence into an income-producing asset by renting out a bedroom or an extra space. Cash flow from real estate is stable and far more predictable than most other businesses. That’s great for entrepreneurs enduring the ups and downs of startup life.
- Ability to appreciate: a lot of time, the monetary value of properties gets to appreciate with time. This just means that the longer you have owned a property, the more it would be worth. Do you then wonder why people refer to their real estate as the ultimate nest egg.
- Tax advantages: you get to have certain tax advantages as a real estate operator, as you get to deduct items such as interest, insurance, maintenance, and even depreciation over time as business write-offs. In addition, the government offers tax breaks for travel expenses, legal fees, and property taxes. Real estate investors are also entitled to lower tax rates for their long term investments. That is not all, in certain situations, you can be able or be allowed to defer all capital-gains taxes.
- You get some leverage: one of the lesser-known advantages of running the real estate market is using the property as leverage. By consistently paying down the mortgage, you have the opportunity to tap the equity you have built up. If you own multiple buildings or buildings with several units under one roof, you have the option to cash out at any time.
- Loan Pay-down: When you buy a property with a mortgage, each month your loan balance decreases. This means, over time, your tenant is essentially paying the loan down for you, helping you build wealth automatically. Because of the loan pay down a rental property is essentially a savings account that grows automatically, without you depositing money each month.
- Inflation: One of the benefits of investing in real estate is that it provides a hedge against inflation. With high inflation, your rental income and property value increase significantly. Real estate investors welcome inflation with open arms because as the cost of living goes up, so does their cash flow.
- Potential for high profits: Unlike the stock market, the real estate market is full of inefficiencies. There is a lack of transparency relating to individual property values and also the strength of different markets, which means that real estate investments have the potential for very high profits.
What Does It Take to Build Wealth in Real Estate?
The truth is that almost anyone can get involved in real estate and make good profits from it, but there are a few things you need to have in mind before you can proceed so that you do not wonder if certain things start happening.
First is that it is really difficult to start and break even in this industry. You need to invest not only your money, but your time if you intend to make any headway. If you don’t have the time, then you will have to outsource many of the tasks, which will eat into your profits. If you don’t have the money, then you may have to seek financial backing, and if you have to seek financial backing, then you have to be available to put together the deals.
Not only that, you have to analyze, and go through the process to make the acquisition. This alone takes up too much time before they can be completed, so you should know that before you decide to take the plunge into real estate, you have free up some of your time.
Secondly, scaling your property can be quite difficult. As you scale, there are countless situations to work through. The highs can be very high and the lows very low. One month all your tenants pay on time, and the next you are hauling them to eviction court. The lows are stressful and can make any business owner second-guess whether it’s actually worth it. These drawbacks always get to cost you precious time and finances.
The third thing to keep in mind while running real estate is the wait; and it can be very long sometimes. A lot of real estate owners have the vision of making savvy buying and selling gigs in a short time frame, but that does not always come to pass.
And most times, you get to get your best deals when you hang on to your property for a while longer. While you are on the waiting game, you may be worried sick whether your property would sell, but eventually, it would get to.
20 Practical Steps on How to Build Wealth in Real Estate Fast
Indeed, starting a real estate business can be capital intensive, whether it be fixing and flipping, buying and holding, trading, etc. One of the secrets to overcome this is to use capital that is gotten from people which is usually dubbed ‘other people’s money’. Getting help from others is really your best bet towards making it big in the industry in future. These are a few ways you can get started and build wealth in your real estate business.
- Have a strategy
Indeed there are loads of strategies for one that wants to invest in real estate, but the key here is to pick one that is best suited for your situation. All these strategies are unique in their own ways and no one is quite similar to the other.
But you need to make a sustainable choice and stick to it so that you would be known for something in particular. If you keep switching up your specialties, or you take up a whole lot of other niches, not only do you never become a true expert, you also don’t allow yourself to become the ‘go to’ person for anything.
2. Be ethical
There are a lot of investors in the real estate business, and whatever you think you are offering, there are a hundred more others offering the same thing. So how do you go about staying above the market? Well, one way to do that is to be ethical in all your dealings.
By being ethical in everything you do you will automatically stand you out of the crowd. It creates an awesome selling point if you can show investors that not only will they be doing great business by working with you, they get to make a difference as well.
3. Add value to people
Quite a lot of real estate investors tend to think of themselves and their affairs all the time. But this is not how to grow. You have to reach out to other people. Join conversations aiming to help, support and encourage others. Join groups and forums where you can add value because you never know who is listening. By giving help and being available, you can also use the opportunity to market your real estate.
4. Hone your negotiation skills
While in the real estate business, there is always a tendency to go for the first deals that come your way because of the fear that you may not get to make a sale, but this is not a good strategy. You would discover that if you are able to negotiate better, you would get better deals almost always.
For example, if you are buying a property for flipping, a stronger negotiation ability would get you a property for $35,000 instead of $40,000. Once you sell a house, it’s over, you will never make any more money off of it.
But a property you hold onto will continue to make you money every year, and at the same time the value of the property will appreciate. The best part: you don’t even need to sell the home to free up money for another investment. So you see, even if it takes you time to make the sale, it’s really worth the wait.
5. Buy in appreciating areas
This is a very key point when buying properties for marketing purposes. You can use job growth and other growth indicators to find an area where appreciation would be higher, perhaps 5-8% instead of 3%. If your property is in an area that can easily appreciate, then that means you get to make more money from it in a short while. This is also the best area to buy and hold properties.
6. Know about inflation
Inflation causes the price of goods and services to rise over time. This includes food, rent, wages, real estate prices, stocks, etc. The only things that do not increase in value, as a result of inflation, are cash and bonds. In other words, cash actually holds less value over time, making it a poor choice for long-term savings.
One other asset that is always guaranteed to increase with inflation is real estate. This happens because people always have, and always will, need real estate in form of homes to live in, offices for business, etc.
As a result, real estate prices must stay aligned with average wages, taxes, and expenses so that residents can actually afford to buy homes. If you invest in the right markets, your real estate investment should increase in value along with inflation, at a rate of about 2% per year.
7. Forced appreciation
While real estate can take much longer to become profitable, but it is actually quite possible to make profit from your real estate investment within the first six months. Some investors refer to it as forcing appreciation. This is the process of buying a home and making improvements that increases the property value.
The profit is considered forced appreciation because it took effort, not just timing of market cycles or inflation. This is a great way to build wealth in real estate though it have to cost you more money. But you need to know that money is always made with money.
8. Utilize fixed mortgages
Often people think they can’t buy real estate until they are already rich. This is false. It is definitely easier to pay cash, but your returns are much higher if you borrow money. A fixed-rate mortgage is a mortgage loan that has a fixed interest rate for the entire term of the loan.
The interest rate on a fixed rate mortgage stays the same throughout the life of the loan, so it is easy to predict your monthly pay out. This predictability makes it easier to plan your budget. You pay off a little of the principal each month. That automatically increases your home equity.
9. Make your investments sellable
Whenever you make an investment, make sure there are ways you can let them go easily if you want to. Don’t just have a backup plan, ensure thou have a good one. In fact, it is recommended that each of your investments have at least five exit strategies.
The winds of a favorable real estate market can shift rapidly; the last thing you want is to be anchored to a dozen unsellable investments. This advise is indeed very valuable or any investor that wants to make it big in the real estate market.
10. Invest in learning
No matter what you are investing in, if you don’t know much about it, you are setting yourself up for failure. The same is also true for real estate. You have to know the in and out of the business so you don’t start off by making costly mistakes.
Of course in a bid to get some education on real estate and how it works, you should not sink your finances into a very expensive education. You can teach yourself online by taking cheap online courses that would give you the right pointers. But remember to not just stick to acquiring knowledge, you need to take the plunge.
11. Go for the big numbers
Yes, a lot of investors advise startups to start with something less. Start with little and gradually grow your portfolio. This is a very reasonable advise for someone who is just starting the business newly, but truth be told, it would take you a whole lot of time, maybe years, before you start hitting the big numbers.
If you are desirous of making it big in this industry, it is very advisable to take a plunge in the big numbers instead of starting small. Instead of buying 4 units, go for the 16 units. Don’t buy less. Without 16 units, you can’t have a manager, and if you can’t have a manager, you’re going to either dedicate all your attention to the property or to your full-time job.
To get 16 units, you will need to wait and save more money or use other people’s money through a loan or other means. The only issue here is that you have to know how to sell your properties. Once you master this act, then you are good to go.
12. Take advantage of tax breaks
Do you know that owning rental property can give you huge tax advantages? That’s right. You can deduct almost all expenses incurred as part of your cost of doing business, and you can also deduct things like depreciation, property taxes, repairs, maintenance, and more. All this can add up to a lot of free money at the end of the year. You need to take advantage of all this to reduce your expenses.
13. Leverage on loan leverage
Leverage is the concept that you can pay for something without coming up with the full cost. For real estate, you can use leverage by taking out a mortgage to buy a property and only put down a fraction of the total cost. Leverage is one of the greatest advantages used by real estate investors, and you can use it too. This is an important concept to understand, because it can help you achieve a much higher return on your property in the least time.
Even though you only put down a small portion of the purchase price, you are still entitled to all the benefits of the property. You get to keep all of the income generated, all of the equity build up, all of the appreciation of the property, and you get to utilize all of the tax write-offs. This is indeed pleasant news to the new investor.
14. Work with a Tax Advisor
A tax advisor is very important in real estate. You need to work with a tax advisor to ensure you have the correct information to offset income and appreciate the various tax benefits that are available to help you as your wealth grows. These benefits may include various deductions for interest, depreciation, repairs and local travel.
As a landlord, the IRS even allows you to deduct costs for legal and professional services related to the property management or maintenance, loss due to casualty or theft and insurance premiums related to the rental property. If you do not have a tax advisor, you may not know about all these leverages and may continually pass up on them. Tax advisors do come with a cost, but you are better off paying the cost than doing without them.
15. Consider Various Financing Options
A lot of investors may find it difficult to make investments with capital other than their own. This may seem like a good idea at first, but it doing this may take you a lot of time to accumulate the money you need to get started in the real estate business. Because of this, you are advised to consider other financing options before making a decision.
In some cases, it may be more profitable to invest the cash as a down payment for multiple properties that are partially financed by the bank through conventional mortgages or other lending means. The return may be higher even when there are loans involved, so it’s important to consider all options up front.