Making Money with Real Estate
Real Estate's Crashing!
All you hear these days is how bad the real estate market is. Foreclosures are going through the roof, unfinished construction exists all over the country, and commercial properties sit empty. However, the big question is...can you make money in real estate today?
The answer to that question is an absolute YES! While there are many ways to make money in real estate some are good during certain types of markets while others are a good strategy no matter what. On of the biggest pluses for owning real estate is that you can create positive cash flow without taxation problems.
One of the age old fast money in real estate is what is called flipping. This can work great if (1) you know what you are doing and (2) and a strong real estate market. However, many flippers got caught with their pants down when the market turned around. These types of investors are looking at making "Capital Gains" on the real estate market. Capital Gains is not a good strategy because you get hit heavy with taxes, especially in California where I live. Also, if you are unable to turn your property over your potential profit can turn into an actual loss very quickly.
Another way to profit in real estate is a strategy used by a person that I know. What they did was purchased a small fixer-upper and then moved in. They slowly worked on the house as they lived in it and then when they had completed and was ready to upgrade they sold it at a profit and moved into a larger fixer-upper. They did this several times until they arrived at the type of house they wanted to raise their family in.
This is a good strategy (although there is no cash flow in it) for getting to the house you want to live in without accumulating the debt of the house. By rolling over your profits you reduce the amount of debt you need on the next house. Because it is your home you avoid capital gains tax.
The downside to this strategy is that you might be living in a pretty rough place as you fix it up. If you can handle that then this strategy may work for you.
But this is not the strategy I want to talk about. I want to talk about accumulating real estate and making money in poor market conditions such as we have now.
A Strategy to Live By
Where many people make a mistake when they purchase property is they expect their profit to come from the sale of the property. This makes buying property a gamble. If they can sell it higher they make money, if they sell it lower they loose money.
However, if you look at buying profit where you make the money going in, then it doesn't matter what the market does. There is one constant about real estate and it is, people need a place to live. Therefore, if you buy property where there is a need for rentals then you can purchase property at a profit going in.
Buying right is the key. If I can buy a piece of property where I can generate positive cash flow with a fair rent, then whether prices go up or down I will make money through the rents. Understanding this makes right now an ideal time to buy property.
Personally I like multiple units and I primarily stay in the 2-4 unit properties. The reason I like multiple units is because even when someone moves out and you are looking for the next occupant you still have cash coming in from the other units. When you buy single family property you are either 100% occupied or 100% vacant.
I typically purchase property in a two-phase process. When you are looking for the right deal (and you find one) you want to have the ability to close fast. This gives you an advantage over someone who has to qualify, find a loan, etc, etc.
I like deals that need some work, are vacant, or has some other negative that is easily fixed, but the owner doesn't want to mess with it. My most recent property was a single family home (which I don't usually buy, but it was a steal). The man who owned it had it as a rental for over 20 years. He was basically a slumlord and didn't keep the place up. He owned the property free and clear and his wife had become very ill. The property was vacant and he just wanted to move the property. Because I could take the property as is (it needed a lot of repairs) and could close tomorrow (basically) I bought the home for a screaming deal.
But let's walk through a more normal scenario. Let's say that you find a 3 unit property (triplex) that is on the market at a reasonable price for your area and it needs some work. Your hesitant because you think it will need at least $25,000 in repairs and to purchase it you would have to put 30%. Between the 30% down and the repairs needed it is just too much money for you. But what if you could borrow the money using short term financing? What if you had a personal line of credit that was at 12% and you could use that money? What if there was a hard money lender who would loan you the money at 15% plus 5 points.
Most people's immediate reaction is, "That's way too high of interest!" It's only high if the deal doesn't make sense. Let's assume some numbers for a moment. Interest for one year on a $200,000 loan at 6% would be $12,000 while interest on the same loan at 15% would be $30,000. That's an $18,000.00 difference - Wow!
What if, because I could close quickly, I was able to negotiate the $200,000.00 price down to $170,000 taking it as is and once I fixed it up it would appraise for the $220,000.00? Does $18,000 scare me on a fairly priced property of $200,000 if I can purchase it $30,000 cheaper? Absolutely not because I have just made $12,000 on the spread. Do I plan to keep this financing forever? Absolutely not!
Once I clean the place up and get it rented I will obtain a real mortgage on it at current rates. I will borrow the maximum amount that I can borrow which will be at least getting all the money back that I put into it. When I am done I have a piece of property that cost me nothing out of my pocket, has a positive cash flow, and some really cool tax benefits.
Now, what if the market goes down more and the property is only worth $150,000.00? I don't care because the property is not for sale. I am not looking for capital gains I am looking for cash flow. This passive income is a real wealth builder if you do it right. You can purchase several properties a year following this strategy. It doesn't take a lot of money it just takes some common sense.
The key to the deal is buying it right going in. If you take the time to calculate the costs, the value, and the rents you will have a great way of buying property. With the benefit of depreciation you can actually have a loss while have a positive cash flow.
Is there a way that you can exponentially increase your wealth with this type of debt? There actually is. Based on the amount of money that is being pumped into our economy the ever increasing debt that America is accumulating there is a very high potential that we are going to hit some very rapid inflation.
Inflation is a horrible thing...unless you are in debt. I am not talking about having credit card debt because you bought a bunch of shirts, but when you have debt that is paying for itself like I describe in this Hub you can actually profit if we hit a heavy inflationary time.
Let me explain. When inflation starts running away our money becomes less valuable. In other words what you could purchase today with $1.00 may cost you $10.00 or $20.00 with rapid inflation. However, the debt on your real estate is fixed, so even though money is worth less the amount of your loan remains the same even though you can adjust your rents for the current conditions.
Now, let's use silver as the basis of our example and we will assume that Mr. Maloney is only partially right and that silver only goes to $1,000.00 per ounce.
In my example above we have refinanced our loan and we owe the bank $200,000.00. Today as we speak Silver is about $17.00. You can buy a one ounce American Eagle for about $20.00. If you were to go into a coin shop and purchase 200 ounces (1 ounce coins) the day I am writing this it would cost you about $4,000.00.
Now let's say that Mr. Maloney's prediction comes true and silver is now worth $1,000 per ounce. Our 200 ounces is now worth $200,000.00. In essence, we could take our 200 coins and pay off our mortgage allowing us to own this property debt free. What have we done?
This property that we have paid nearly $200,000 for was paid for with $4,000.00. That is an exponential increase in wealth. I realize that there are a lot of "what if's" in my scenario so let's say that our government officials are actually on track and our dollar will once again stabilize and nothing dramatic happens. What happens with our purchase now?
The answer to that is very simple. Renters are paying off your mortgage over a period of time while you receive the positive cash flow and tax benefits from it. If the real estate market turns around you have the option of selling it for a profit, keeping it for cash flow, or whatever your life plans warrant.
Being prepared is the key while not doing what everyone else is doing. Most people don't have money or assets because they are doing what everyone else is doing. Be different, increase your understanding, and become successful.