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How to build wealth in real estate

Getting rich

Real estate is the safest way to build a wealth in my opinion.

Who are the wealtiest people today? Do they own at least one property? Many, if not all of the wealtiest people own some sort of real estate. Why not you?

Consider these facst when deciding about investing in real estate:

  • Decreasing number in lower price range of housing inventory, or so called scarcity of affordable housing. Couples and marrieds without kids are going into housing of smaller size.

  • There are unusual low number of rental vacancies - rentals are hard to find, as well as starter homes, increasing the income for landlords. It is a supply and demand situation where more renters than available rental housing are increasing the price.

  • There is increasing demand for new housing in all price ranges. Homes are sold when still under construction - "presale" and as soon as finished homes hit the market, number Days On the Market (DOM) is very low (which means they go sold quickly), still bellow 30 days, but I often see homes are gone in few days with multiple offers received.

  • Capital gains rates are near an all-time low. The mere fact that capital gain exist, allowing lower rates on sales, is unlike the situation some years ago when many sales were taxed as ordinary income rates. and in fact, the tax law of 2003 has lowered them even more.

  • Homeowners can sell nearly tax free every two years. Single person can exclude $250,000 and married couple $500,000 in capital gain from sale of their personal residence when lived in it at least two of last five years. Furthermore, if you want to sell rental, simply use Exchange 1031 to get a new property and defer the gain from sale.

  • Defering capital gain. Long term investors can defer capital gains by exchanging equity into another property of equal or greater value.

  • Lenders are willing to fund loans with as little as 1% of down payment for residence purchases. Financing is available for nearly all homes and investment purchases. Loans are approved for investment properties at 75-80% of the loan. The opportunities for funding are so wide that you need to shop around more than in the past just to get the best deal.

  • Home equity lending frees up money for investment. Funds from a home equity loan can help beginning investors make a down payment on a new property or make needed capital improvements on existing property.

  • Interest rates are at historic lows. Altough rates may not remain low, they are not likely to rise substantially either.

Research the market

These favorable factors are just starting point and well done homework in researching specific market and terms should not be skipped. You need to find out what is the best deal for YOU, not in general, for everyone.

Below are some options for starter or experienced investors to expand their portfolio.

  • Buy and fix up a house/condo for resale. Even renting out for some time can have lots of benefits. But with resale, nowhere else can an average investor start increasing wealth faster. The only skill needed is common sense. All you need to do is to secure the property at reasonable price (because it needs repair), then manage repairs (ideally by yourself) and finally resell the property to a retail home buyer. This is one of the most common venture used, because the single family fixer-upper can be sold or rented to a huge market of buyers or renters.

  • Wholesaling or flipping. This means that you sell a property, normally as is, very soon after you secure it by agreement to some investors. A wholesaler in a nut shell puts property (normally distressed property) under contract and assigns or resells the property to another investor. The investors a wholesaler sells to either use cash, lines of credit, or hard money loans. This allows quick closings on properties that sometimes need extensive repairs. A wholesaler focuses on developing two things: finding deals and their network of investors to sell to. Getting started, a wholesaler should normally not ever buy a property. You put properties under contract with a contingency and focus on quickly selling the property for more money to other investors. If you end up not being able to sell the property before you are expected to close then you utilize your contingency and walk from the contract.

  • Lease/option or "rent-to-own" property from a seller and contract future sale with a new tenant-purchaser. In a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property. In a typical lease/option deal you become sublandlord and rent out your leased property - for a higher price than you pay to the owner - to a tenant committed to buy at some future time.

  • Buy and hold single-family houses for long-term investment. This technique relies on the long-term appreciation of a property over a three to twenty years, meanwhile renting it out to a (perhaps) single tenant. Buying and holding a house that does not necessarily need rehabilitation but perhaps is worthwhile because of location or price and can end up being a bargain as time increases its value.

  • Buy and hold multifamily apartment and small commercial properties. As with previous suggestions, you may buy, fix and resell, or purchase and hold for long-term investment. An excellent way to start in long-term investing is to buy a duplex or another building of up to six or eight units. Benefits, besides cash flow, include equity buildup through appreciation, and amortization of debt. The risk includes making sure apartments stay rented and maintenance is not delayed.

Find the technique you are the most comfortable with. While you will be learning and gaining experience you will also be making money and building a financial base that will make you wealthy.

If this is anyway too much work for you (you have full time job and can't handle all the stress) you can exercise the option to invest in Real Estate Investment Trusts (REIT). These high-yielding securities provide liquidity, trade like stocks and have the added benefit of being in a distinct asset class from bonds and equities. REITs are a way to diversify our modern fixed-income portfolio against market risks. When you buy a share of a REIT, you are essentially buying a physical asset with a long expected life span and potential for income through rent and property appreciation. The final, and probably the most important, advantage that REITs provide is their requirement to distribute nearly 90% of their yearly taxable income, created by income producing real estate, to their shareholders.

With so many different ways to invest your money, it's important that any decision you make is well informed. Do your homework and research as much as possible and consult with industry experts for help - build a team of professionals: agent, lawyer, mortgage broker, insurance specialist, inspector, property manager, contractor, handyman. Sometimes a good real estate agent have all necessary connections. The magic formula for success is to use flexible strategies.

Happy investing!

To success!

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