Did You Buy Real Estate As a Kid?

Thu, Jun 13, 2013

Commercial Real Estate

Real Estate Can Help You Build Wealth

Remember playing the game Monopoly? You had all of the cash. You were raking in the dough. You bought real estate… and you built houses. You were killin’ it! People would land on your properties and they would have to pay you rent. Cash money baby!

This passive income stuff doesn’t have to be pretend. It can actually happen in the real world… to you… if you are smart about it.

For your personal finances – I’ve got one idea for you that is right under your nose. Go look in the mirror. It says real estate.

I think right now could be a great time to invest in real estate – especially homes. But why today? Real estate prices seem to have stabilized, and mortgage rates are crazy low.

You’ve probably already read something about this (Rich Dad Poor Dad?) But are you doing anything about it? I am not talking about flipping houses. I’m talking investing and owning property on a long term basis.

I am NOT a real estate expert. I’m a financial planner. I’m merely saying that investing in real estate could be a nice part of your overall financial plan. How cool would it be to get $5000 a month for doing very little? Especially as you approach retirement? You could keep your lifestyle – or even have a better one – more travelling anyone?

Investing in real estate is all about leverage and passive income. Leverage in the sense that you are borrowing money from a bank (with the exception of your down payment) – and passive income meaning that you are renting the property out to someone that is paying your mortgage, property taxes and insurance.

Keep in mind there are risks with investing in real estate. You can lose money if you buy property and sell it for a loss. There is also a risk of a renter not paying on time, or if you simply cant find a renter which means you are on the hook for the mortgage payment and other expenses. You also will spend time being a landlord and dealing with tenants. You can farm that out too although it could eat into your profits.

Real World Example

You own a house and you are looking to buy another house. Maybe you want something bigger (or smaller!), or want to move to a neighborhood with a better school district. Maybe you want a shorter commute to work.

I get this question all of the time: Should I keep my current house as a rental, and then just buy another house?

Here’s the key thing: you need enough money for a down payment on the 2nd house. You aren’t going to sell house #1 and use your equity for the down payment on house #2. Bottom line: You need to have enough cash set aside for the down payment on house #2.

(You may be thinking I don’t even have enough money to buy my first house! Why you talkin’ about house #2? I need house #1!!! It’s time to start saving – either through reducing your expenses or making more money in your biz.)

So if you move from your original house (let’s call it house #1,) house #1 becomes an investment property. You rent out house #1. You want the rental income to cover your mortgage payment, property taxes, insurance, and maintenance. The goal is to have the rental income pay all of the expenses on house #1.

At some point down the road, oila! You have no more mortgage on house #1. Your renter has been paying your mortgage for all of those years. Now you are just collecting rental income and you are sitting pretty. Sweet! That is what passive income is all about. You also have the option of raising rents which is a great hedge on inflation.

I have interviewed a bunch of smart real estate investors. They have told me to get in the real estate game. If you’re not in the game, you can’t start building wealth this way. Most of them say to start small. You don’t have to be a gazillionaire to invest in real estate. You just have to have enough money for the down payment, and enough money in cash reserves to cover the mortgage in case your renter flakes out. The smaller the property you buy, the smaller the mortgage, and the smaller the risk you are taking.

For those of you renting and are looking to buy a house, I also think now is a great time to buy, for all of the reasons I mentioned above. The key is not to spend more than 28% of your gross income on house stuff – mortgages, property taxes, and homeowners insurance. I have created a killer tool that you could use to figure this stuff out. My clients really love it. Email me and I will send it to you.

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