Real Estate Wealth Building: 4 Things You Need To Know8 min read
This #TableTalkThursday was held on the 20th of August, 2020.
We asked our community what their advice would be to start building wealth through real estate. We got some great responses from seasoned veterans in the real estate investing community.
Real estate is one of the most talked-about investments in the personal finance community, and it’s easy to see why. Ninety percent of millionaires invest in real estate in some form. Annual returns on residential real estate average 10.5 percent per year.
Aside from the potential for stellar returns, real estate is attractive because unlike other asset classes, it’s…well, real! A house or apartment building is a lot more tangible than a stock. You can touch it and see it.
When investing your money, the name of the game is diversification. Owning real estate is a great way to offset the volatile nature of stocks. Stocks can drop or skyrocket overnight (as we saw in March 2020). Real estate is the slow tortoise to Wall Street’s hare. It’s slower to respond to upheavals, earning steady returns through appreciation, tax benefits, and cash flow.
A Great Investment with Solid Returns
“Such a great topic. We sold our first home for $180k more than we bought it for (3 years earlier). If you know what you’re doing, you can make a lot of money with real estate.” said @finance.eh
@justour2sense expressed their joy by writing
*Stretches fingers to prepare for a long comment* 😂 We LOVE investing in real estate. We are currently on our 4th rental property and on the hunt for our 5th. There is a neighborhood near us that is suitable for investing and that is where most of our homes are. Real estate allows you to earn 10-20% on your investment (higher than stocks sometimes). Our goal is to have rentals eventually pay more than our salaries so we can retire from our day jobs and enjoy more freedom (goal would be at least $100k from rental income a year)”
There are many ways to make money in real estate, which is part of why the asset class is so sought-after.
For one, real estate generally appreciates as time goes on. If you invest in a home in a nice, well-maintained neighborhood with a solid economy, chances are you can sell the home a few years down the road and make a nice profit.
Want to supercharge your returns on your home investment? Get a roommate or two. The roomate(s) help pay the mortgage for you, and you enjoy the benefits of appreciation and free housing. It’s not a bad way to turn an expense into an investment.
Because not everyone can or wants to take on a roommate, the most common real estate investment vehicles are rental homes or apartments. You can use leverage (debt) from a mortgage to purchase these, so you can invest more and make more than you could if you had to buy a rental home with cash.
Many people that aim at early retirement use real estate rentals to replace their 9-to-5 income. This takes time, patience, and a willingness to endure the learning curve, but it is a very doable strategy to create a steady passive income stream.
Doing Your Due Diligence
“A specific strategy we use is the 1% guideline to determine if it’s a good investment. If the rental amount is 1% of the purchase price, your margins are fairly good (ex: if the home is $150k and you can rent it for $1500 a month).”@justour2sense
Becoming a real estate investor is a lot more complicated than buying a house and throwing up a ‘for rent’ sign in the yard. Careful analysis on the front end can help you avoid costly mistakes.
The famous One Percent Rule is a good litmus test to determine if you should continue due diligence on a potential rental property. This rule states that the rental has a good chance to be profitable if the monthly rent price is greater than one percent of the purchase price. If the property needs substantial repairs or remodeling, lump that in with the purchase price when you make the calculation.
The One Percent Rule shouldn’t be the sum total of your analysis, but it’s a great place to start filtering out the profitable properties from the money pits.
@moneylifementor sparked another great conversation about risk in wealth building through real estate.
“Oh, great question. Something people are not aware of is that no one talks about is the level of risk one takes on as a landlord. I highly recommend everyone have an umbrella policy that will kick in if, for example, someone got seriously injured on your property—or worse. Protect yourself! I didn’t realize this when I first became a landlord, and I didn’t have enough liability insurance until I got a new policy. And you don’t need to buy a multi-family unit to lower your housing costs; you can just buy a nice lower priced home and rent rooms to friends. Just make sure you have a lease, even if you know them really well!”@moneylifementor
“@moneylifementor Thanks for joining!! Ooh, these are great points 🔥 definitely risky and we need to take note of the tiny things like this that could end up blowing up in our faces 😳 these legalities seem like some of the key mistakes that people first entering the market might make?“@finlitdating
“@finlitdating I think it’s usually more of an afterthought and one of those things people always think it will never happen to them. But I know several landlords who have had tenants sue them, so it does happen. Important to protect yourself!”@moneylifementor
Like all investments, there is an inherent risk in real estate. Things can (and will) go horribly wrong sometimes. If you aren’t prepared, the losses can be devastating.
That said, you can protect yourself by taking common-sense steps like having enough property insurance and using a written lease instead of a handshake for your tenant contracts.
Additionally, make sure you have an attorney look over your legal documents. Screen tenants thoroughly and have an emergency fund for each unit for the repairs that will inevitably need to happen.
You will not be able to mitigate every risk, and every seasoned landlord has made mistakes—costly ones. Prepare for some common worst-case scenarios (prolonged vacancy, major repairs, eviction, etc.), and you will put some distance between you and disaster.
Real Estate is Not for Everyone
“This might be a bit different, but since we aren’t big into real estate (we are more about mutual funds and stocks) the main thing we want to do is buy our first house in cash so we have no mortgage for the rest of our lives. The goal is to buy our house in the 300-350 range in cash and then by not having any interest or owing anyone money we can then invest that money instead! Maybe down the road we will look at buying another property for rental in cash also!”@finance.couple.millennials
“@finance.couple.millennials thanks for joining! I love this plan! I hear you on not wanting a mortgage 😳 this has been the one thing that’s kept many away from real estate. How do you plan on building up that cash though?”@finlitdating
“@finlitdating building it up as we speak haha. We are living very frugally with that exact goal to buy our house in cash. In about 2 years max we should be able to put enough aside for that! 🙂 We shall see though ..haha”@finance.couple.millennials
While it boasts impressive returns, real estate is not for everyone. To be successful, you’ll need the time, energy, and patience to manage your first rentals yourself or the cash to hire a property manager.
If you lack these, don’t fret. Even if you don’t have the stomach for evicting tenants, fixing toilets, or chasing down late rent payments, there are other ways to be successful in real estate.
Real estate investment trusts (also known as REITs) are an easy way to invest in a large portfolio of properties without ever setting foot in one. Like an ETF or mutual fund, REITs are comprised of a variety of commercial and residential real estate properties, and your share includes a little slice of each one. Apps like Fundrise and Rich Uncles have made this once-exclusive asset class available to just about anyone.
And if you have no interest in rentals at all, paying off your home is a great long-term investment in real estate. Not paying a mortgage each month frees up a large chunk of your budget for investing in stocks, bonds, your own business, or whatever else you want. This method might not have the highest monetary returns, but knowing you will always have a roof over your head—even if you get sick or lose your job—pays hefty dividends in peace of mind.
If you enjoyed reading this discussion, please join us for #TableTalkThursday at 9-10am PST on Instagram for more educational and enlightening conversations on money management. Take advantage of the knowledge of coaches and experts on personal finance by joining the community.