Let's face it. The interest you earn on your personal investments can have a significant impact on your lifestyle and eventually your retirement. The worst thing you can do is save your money by putting it into a savings account accruing 1% interest. If you have $10,000 in a savings account at 1% interest, you make about nine dollars per month.
Those looking for higher returns than a savings account have turned to other kinds of investments like stocks and mutual funds. Institutions have made it easy to invest your money in these types of investments which is why the stock market is so popular. My personal choice has always been investing in real estate, which historically has been a very stable investment and provides a much greater return on your money.
Most people have their "net worth" already in real estate with the equity of their personal residence, and many are relying on this income for retirement. It continues to amaze me that while this is true, most people do not invest in any other real estate during their lifetime. Right under their very noses wealth is being created through real estate, yet they choose to gamble their hard earned income in the stock market.
One primary reason that investing into a stock or mutual fund is so popular is that it requires very little effort. You open an account, pick your stock or fund and never think about it again - that is until you get your statement. Unfortunately, this type of apathy can cost you thousands of dollars over the long term.
The Advantages of Real Estate
The primary advantage of real estate is that you can substantially leverage yourself into an investment of much greater value. In most cases, this is 20 percent down or less. For example, if you wanted to purchase a $500,000 four-unit property, you could do so with just $100,000 down. This down payment could be with a group of investors and the entire group would benefit from the cash flow and appreciation. If the property appreciated just 5% per year for 5 years, it would be worth about $625,000 at the end of the 5th year. This does not even consider the cash flow during the five year period, OR that the monthly mortgage payment is also paying down the principal loan balance. With good property management, the occupants of this four unit will pay your monthly mortgage for you!
If you make money in the stock market and "cash out", you must pay tax on the ordinary income. If you make money in real estate in the form of "cash flow", the income can be offset by depreciation expense. In other words, the "cash flow" can be tax-free.
These are just two reasons why real estate is a far superior investment. I also feel that you have much more control over your investment dollars in real estate. I have direct control over the performance of the real estate by utilizing a good sound management program.
I do not have this control in a stock fund.
Real Estate is a Business
For most people, the obstacle with real estate is that it requires some time and effort, and they do not want to spend the time learning. Additionally, good deals are very hard to find, but the individuals that make this decision are among the richest in the world, just look at the Forbes list.
Real Estate is a business and it should not be treated as just an investment. Those that treat real estate as an investment only usually cut corners in due diligence, financing and property management, and problems usually follow. These are the individuals that we all read about in the newspaper or see on the news. They do not understand the serious impact of their bad decisions that can affect the entire community and their own cash flow. Very basic procedures like running a criminal and credit background check on all occupants are often overlooked. An experienced and professional property manager would not allow this to happen.
Build a Team of Experts
In the third chapter of my book The ABC's of Real Estate Investing, I talk about the importance of developing a team for your real estate pursuits. In my opinion, the most crucial person on that team is a professional property manager. A good property manager is worth their weight in gold. Engage them early in your pursuit of real estate and you will find that the investment you have made will be a much better return over the long haul, and you will learn much, much more about the process.
Look for a property manager that strives and improves themselves both personally and professionally. I engage only property managers that hold designations such as the CAM (Certified Apartment Managers). These individuals want to improve themselves and are on the cutting edge of the industry. You want people like this on your team.
Over the coming months, I will be covering three very basic principles that need to be followed in every real estate transaction:
- The market is more important than the property
- The property must cash flow
- Using a professional property manager