Nine Basics to Building Wealth through Real Estate
I can easily say the #1 most successful investment I used to start building wealth was buying a home. Whenever I meet with a younger (or not so young) person who tells me they have not yet dove into home ownership, I cheerlead them to consider jumping in. “The best time to buy a home is when you can afford it,” I will answer when they debate about market pricing, interest rates, lack of inventory or other objections. When they listen, they thank me later. Here are my nine basics for real estate investing:
Your home is not just where you live. You should consider it an investment.
If done correctly, your home becomes an asset. For many Americans, it’s our only asset. Rent is wasteful. You are building someone else’s assets. And before you start in with the comments that some real estate markets are unrealistic, overpriced, and impossible to start investing in, I want you to consider today’s nomadic lifestyle. Many of us no longer need to live where we work. The work-from-home growing trend directly lends itself to out-of-the-box thinking when it comes to real estate investing. And, the younger you are and more open to having roommates, they can help pay your mortgage way faster than you could on your own. The early bird gets the worm again.
Start off in a starter home.
I once had a friend tell me she is saving for her forever house. I tried really hard not to lecture or ridicule but instead present another perspective. On average, people live in their homes for about 10 years (16 years for less-educated and lower-waged Americans). And, it is often recommended to hold onto your property for at least five years to recuperate any lending fees. In other words, people move around in their lifetimes and if you wait too long to start building equity, you will be behind when it comes to building assets. Don’t wait for your “forever” or “dream” home. Start building equity today and see where it can take you. Of course, “location, location, location” is an adage for good reason. It was recommended to me at an early age to buy the ugliest or smallest house in the best neighborhood and make it a happy home. That advice worked.
Yes, cash is king. But there is such a thing as good debt. Embrace this idea.
There are popular personal finance gurus who suggest you should buy everything in cash and never carry debt. This advice is not only antiquated, I find it downright detrimental. This advice is like training wheels for personal finance and it’s designed to keep you in a lower economic situation (or, I guess, out of trouble with debt). I believe people have the power to make good choices, educate themselves, and rise up beyond their circumstances. Good debt allows you to use somebody else’s money to purchase assets. Assets are things that grow in value over time–real estate is a prime example.
Build equity and use it as a launching pad to upgrade.
Remember my tip about starting off with a starter home? Well, you probably won’t want to live in that starter home forever, so use the equity to get an upgrade. And, if you can keep your starter home as a rental property, collecting monthly rent from tenants, you just grew your real estate portfolio and earned some passive income. The equity in your home can be used for all kinds of smart financial moves. Yes, paying off bad debt may be an excellent idea for some. The key is to use equity to buy more assets or things that increase in value over time. Taking out equity to buy a car, take a vacation, get plastic surgery, or other nonsense, is not wise.
Know the tax advantages.
If you own a rental property and are collecting rent, you have a business. When you open up a business there are some great tax advantages. For this reason, real estate investing has some unique advantages over other types of investments. Think of it as an added perk. But, my favorite tax benefit of real estate investing is what I call the “two-year upgrade”. Currently, and this could change with any new tax laws, married couples can collect up to $500,000 ($250k for single people) from the sale of their primary residence in tax-free income. In order to get this upgrade, you must reside in a property for a minimum of two years as your proven primary residence. I have now used this tactic to propel our family’s net worth three times now. I’m about to do it again. Yes, moving sucks, but tax free income certainly makes the pain a lot more bearable.
Collecting rent is a leverage tool against inflation.
When you are a landlord and own rental property your investment grows two ways. First, your property should increase in value over time. Additionally, as time goes on, you probably can increase rent right along with inflation and the cost of living index. Not only can rental properties provide a steady stream of income, they can be used to pay down your good debt and grow your equity over time. This is one way the rich get richer. Should you look into short-term or long-term rentals? That depends on many factors, the main one being the location of your property. Is it in a desirable vacation spot? Lots of business travelers to the area? If so, short-term renting may be a lucrative strategy for you.
Flipping is for professionals.
If you get the real estate investing bug and want to take it to another level, get educated about house flipping. There is money to be made, but you can also lose if you are not well-educated and skilled in this profession. Contractors, Realtors, home designers and other home building and improvement professionals are already ahead of the curve when it comes to flipping houses. If this type of real estate investing interests you, get an education before you leap in.
Learn about REITs.
Real Estate Investment Trusts (REITs) are another tool you can use to invest in real estate and they have a couple advantages. REITs have a lower cost of entry over buying a single or multiple properties. You can also choose to invest in different types of properties in one REIT. They can focus on residential, commercial or a mix in a number of markets/locations. Plus, you don’t have to fix an overflowing toilet in the middle of the night when you own REITs. It’s hands-off real estate investing and can be a great mix in your well-diversified investment portfolio. Talk to your fee-only investment advisor and do some online research to learn more.
Make friends with a Realtor and a mortgage broker.
Great Realtors want clients for life. They don’t just see you as a single transaction. They will understand your goals and make recommendations based on your wants and needs. Mortgage brokers are lending professionals who will help you shop for your best real estate lending options. A great mortgage broker will work with you to accomplish your goals, guide you, understand your financial situation, and find the best loan to fit your needs. Building these relationships with well-respected professionals can be profitable. They should be in your arsenal of financial professionals you seek out on your wealth-building journey.
It is important to note real estate investments are not liquid. It often takes weeks or months or years to make a transaction if you need cash. Real estate investing is not a get-rich-quick strategy. I view this as a long-term play with several transactions and upgrades along the way. Most real estate investing is a hands-on project and does take time, effort and sometimes sweat equity. Done correctly and consistently, real estate investing diversifies your asset portfolio. It should be a part of an overall wealth-building strategy and sound financial plan. A good financial adviser doesn’t promote just one type of investment. Keep this in mind as you develop your plan for building wealth. I wish you happy real estate investing. If you want to continue the conversation, schedule your complimentary Q+A here.