On the Maslow’s Hierarchy of Needs, the foundation of Humanity’s physiological needs consists of Food, Water, and Shelter. Shelter is Real Estate.
This is a guide on real estate investing. I have other guides on other types of investment strategies which I suggest you to read for a basic understanding of financial investment literacy (Part 1, Part 2, Part 3).
No matter where you are, rich or poor, during a boom or a bust, everyone needs a roof over their heads.
When you control a real estate asset, you essentially control someone else’s life. After a day’s of work, people go home, and need to sleep. On the weekends some may go out for a trip, but they are always returning home.
The Real Estate market is also one of the easiest ways to utilize leverage. For example, you can control $100,000 worth of assets with as little as 20% down, or even lower through other types of mortgages.
I’m a big advocate of rental properties, but there do exist other ways of investing in real estate.
Through rental properties, you get real control and steady cash flow. In the beginning, a rental property won’t give you that much net profit. It’s when you scale up to multiple properties when you become set apart from the middle class and obtain financial success.
The modern day landlord is equivalent to the feudal vassal. And while some vassals are weaker than others, being a vassal is better than being a peasant.
In today’s world it is so easy to start. Through leverage, one only needs a few months of savings (if you make 70k or more) to begin their land lording career.
This guide on real estate investing will show you 3 main steps for beginners.
1. Understand Leverage and Financing
The middle class of today is the poor class of yesterday. If you are currently a peasant (middle class) you will never be able to become a vassal if you don’t understand the power of leverage.
In Real Estate, leverage means that you take out a bank loan (mortgage) to finance a home. If a duplex apartment costs $60,000 you will never be able to buy it on a middle class income alone. By using a mortgage, you can buy this property with a little as 20% down ($12,000).
Lets say you have two tenants which bring in 500$ rental income. For a total of $1000 per month gross income. After all the costs on capital expenses, property management, and payment on interest, you can net, for example $300 per month.
Over time, you will regain your initial out of pocket expense ($12,000) in 3.3 years, leading to a 33% return. This is known as cash on cash return.
While your tenants pay down the mortgage and other expenses for you, you are still making positive returns.
The Main Point: For less than the cost of a car, you are getting bigger returns than even the most experienced traders on Wall Street.
Without leverage, it would take years instead of months for a person to make this kind of investment.
Note that you can get loans for as little as 3.5% with an FHA loan. But you need to buy a multifamily, live on one side, while renting out the other.
2. Learn Your Market and Analyze Good Deals
Finding good deals is the only way that Real Estate investment can work. A duplex apartment in a lower income area of the city may cost you $50,000 , while in a more affluent neighborhood homes can go up to $150,000 or more.
However, it may not always be the case that the rent in the $150,000 house will be 3x as much as the rent in the lower income district.
It could be the case that the rent just doubles, or is only 1.5x as much.
So its essential to optimize your deals, run the numbers, and analyze your properties. While everyone wants to buy Real Estate in affluent neighborhoods, an investment in a blue collar or lower class neighborhood may be more efficient and garner far greater returns.
For example, a single bedroom apartment in a working class district can go for $500 per month, while the same style apartment in a more affluent neighborhood can go for $700. But the apartment in the blue collar neighborhood can be bought at 1/3rd of the price.
You also want to make sure that you are getting a positive net return.
Don’t buy a property which you are unsure of. It will give you un-expected problems or require more capital expenditure than anticipated.
In the second part of this guide, I will go more in depth on how to analyze real estate deals.
3. Make it a Passive Investment
In the beginning, acquiring your first property requires a lot of work and study. You may need to deal with tenants yourself and put in actual time investment.
However, after getting this initial hump and beating the learning curve, your second and third deals real estate deals should only require online research.
Many people with low budgets think they can get into Real Estate because they “do the work themselves”. If this is the case, then it’s not an investment anymore.
The reason for this is because Real Estate investing is only worth it if it becomes a relatively passive source of income. Full time land lording is not worth it, because the time invested can be put towards other things that will give you greater cash returns.
This is why for every deal, I always factor in the cost of property management. Tenant screening is also the most important aspect of keeping your property safe.
Because you know how to use leverage, it is essential to budget money for a property management company. They will do the dirty work for you while you rake in the cash. Even though it may take a small chunk out of your profits, you are using your money instead of your time. Remember that you can always make more money, but you can never make more time.
Using a property management company will allow you to focus your energy on finding good deals, and spending your time on other income generating activities.
Outsourcing your land lording activities allows you to find deals even if they are not in your geographic area. It also means that you can travel and live the life you want without being disturbed.
Instead of dealing with peasantry, you can outsource this nonsense to a property management company, while you find the next deal or work on another side hustle.
If you don’t make this a passive effort, it’s not an investment anymore — it’s your job. Which means you are no better off than before.
Real estate investing can be risky or safe depending on the deals that you find. It can be passive, or an active chore of your choosing. Depending on your deal making skills you can make it big, or fail miserably.
But the main benefit is this — even if you don’t become an investor, learning about Real Estate gives you a broad understanding of a different asset class.
No one can call themselves financially educated if they can’t carry on an educated conversation about Real Estate.
Even if you aren’t interested in Real Estate investment, learning about it allows you to be well versed in a different asset class. It diversifies your knowledge. This allows you to talk to many different types of investors. It displays an abundance of knowledge, which will attract people and opportunities.
Comment below: What type of real estate investor are you? What types of houses or neighborhoods do you like?
Hopefully this guide on real estate investing has exposed potential knowledge for your learning experience. I have been a big fan of Bigger Pockets, a real estate investment forum. They provide a great resource for new investors.
While Finance and Purpose contributor James Sanders does not primarily invest in Real Estate, he personally owns 2 rental properties in the midwestern US which has funded plenty of overseas adventures.