Real Estate & Property Investments
Real estate or property investment is the third money vehicle and the source of wealth for a large number of successful people.
Dolf De Roos, the internationally recognized property guru and a member of Robert Kiyosaki's Rich Dad's Advisors team, reveals an interesting statistic with regard to the relationship between property investment and wealth creation:
Almost without exception, the rich either made their wealth, or kept their wealth, in real estate.
Here are some key points about property investing you might want to consider before you decide how this
fits in with your wealth creation plan:
Types Of Real Estate Investment
- Most people in developed countries grow up with the dream of home ownership and the family home is often the biggest investment the majority of people will ever make.
- Most governments offer tax concessions to people buying or selling a principal residence. In Australia there is no capital gains tax to pay upon the sale of the family home, as long as you purchase another residence within two years.
- On the negative side, you can't claim any expenses incurred in the purchase, sale or repair of your principal dwelling.
Some key considerations to bear in mind when you buy real estate:
- When you buy real estate for investment purposes, the opposite conditions apply. You pay capital gains on the profit when you sell, but you can claim all expenses related to buying, selling and maintaining the property.
- You can use the equity in your family home to buy your first real estate investment property. If the property is 'positively geared', your tenant will effectively pay off your mortgage via the rental payments.
- You can purchase investment property for capital growth (an increase in value over time) or cash flow (income over and above the regular mortgage payments).
- Is the property good value for the money? Are you buying it at a discount to its true value?
- Is it positively geared, if not immediately, then at least after two or three years?
- Is the seller motivated, i.e., is the seller disposing of the property for some pressing reason (death in the family, illness, new job, etc.)? If you discover their reasons for selling, you may be able to structure an advantageous deal that also solves their most immediate problem.
- If you're looking for long-term growth, is the property in a high growth area (over 10% per annum)? The rental return should cover the bulk (if not all) of the mortgage.
- Are you looking for immediate cash flow? If so, you might choose to invest in a lower-priced property with a decent rental return. You will rarely find a property that offers both growth and income.
Types Of Property
The types of properties you might purchase include:
Houses or Single-Family Dwellings
- Houses are always in demand because young people leave home, get married and raise families. However, excessive building in a particular region can result in a glut of new homes on the market. Look at the demand for housing in a specific area before you go shopping for real estate property.
- The location you choose will depend on whether you're looking for capital growth or cash flow.
- Your tenants can be a source of aggravation unless you decide on your best approach at the outset. Do you want to charge a higher rental fee and attract a smaller pool of presumably reliable professionals? Do you want a management service to handle tenant selection, repairs, etc.? Are you willing to pay the service fee required?
Duplexes and Apartment Buildings
- A great starting place for people on a limited budget is to purchase mobile homes for rental income or as rejuvenation projects.
- One advantage is that the length of time needed for repairs or refurbishment will be less than that required for an apartment or house because of the relatively smaller dimensions.
- Because land appreciation is the basis for capital growth in real estate, mobile homes aren't suitable for long-term investments, except as a sources of cash flow.
- When your investment budget has grown, you may wish to purchase multi-family dwellings. The higher cost must be weighed against the higher rental returns.
- Again, you can turn over the maintenance chores to a management service for a reasonable fee.
- Houses near universities or colleges are suitable for student accommodation. You can rent the house as a single unit, or rent the rooms individually.
- Renting rooms individually will net you a higher return but you'll be dealing with a more fluid roster of tenants.
- There are agencies that organize accommodation for overseas students. You can list your accommodation with them, as well as using the university's student housing office.
- One advantage of investing in commercial property is that the tenants are generally long-term, as businesses do not have the flexibility of moving frequently.
- Another advantage is that the tenant generally pays for all improvements to the property (fixtures, paint, lighting, etc.).
- On the negative side, if the business tenant goes bankrupt and needs to vacate, the property may take longer to rent.
- You can elect to purchase a tract of land, subdivide it and then hire a project manager to build houses or apartments on it.
- This is a big undertaking and doesn't always result in large profits. You need to carefully weigh up the returns versus the investment costs, which include the length of time involved.
- Because of the need to deal with zoning laws, council approval, building permits and other legal issues, you'll require a top notch professional support team (accountants, lawyers, etc.).
Approaches To Real Estate Investment
Buy and Hold
- One of the ways to grow a substantial real estate portfolio is to buy a number of properties over a period of time. Some experts suggest buying seven properties in seven years; others advise buying a minimum of ten. A single investment property, even if it has no mortgage, won't provide for a comfortable retirement unless it's an apartment building.
- Many real estate experts advise locking in your profits when you buy a property by paying a discounted price. Any subsequent capital growth is considered a bonus.
- Several approaches suggest never selling investment properties, thereby avoiding capital gains tax. Instead, you use the increasing equity to fund your retirement and bequeath the properties to your next of kin.
- In a rising real estate market, you can opt to buy properties at a reasonable or discounted price, and sell them several months later for a tidy profit. Investors often use this strategy with properties purchased off the plan (i.e., before they're actually built).
- You need to take capital gains tax and other costs into account when calculating your potential profits.
- To attract a better sale price, you may choose to spend a minimal amount to do a few cosmetic improvements (mow lawns, clean up yards, paint roofs, etc.). Or you can sell the property as is, advertising it as a "handyman's dream".
- Again, getting a good deal in the right location is the key to this approach. The same considerations apply to calculating your potential profits after taking capital gains tax and costs into account.
- Whether you buy mobile homes or small apartments for a quick sale, the key to success is to turn your projects over in a short period of time, keeping your interest payments to a minimum. In addition, a $10,000 profit over six weeks is a better rate of return than the same amount over a six-month period.
- You may elect to do more extensive renovations for a greater anticipated return but again restrict them to cosmetic changes (new kitchen, bathroom fixtures etc.). If you need to do structural renovations (replace rotten timber, add an extension, etc.), you may find your profits eroding along with the escalating costs.
- You can buy an option on a house the same way you do on a book, screenplay or any other commodity. The amount you pay for the option may be deducted from the costs when you buy, but will be retained by the owner should you walk away from the deal.
- You can use an option to set up a flip, which is a situation where you buy a property and sell it for a quick profit to another party before the settlement date, thereby avoiding the need to part with any of your own funds.
- Again, the profit after costs must make the deal worth your while.
- A wrap is a situation where you act as the banker in the sale of your own property. You sell to a buyer who has a bad credit rating and is therefore ineligible for a bank loan. You lend the buyer the funds to purchase the property at a slightly higher interest rate than the banks charge.
- In essence, the buyer is leasing to buy.
- While some observers argue that you're taking advantage of the buyer, others propose that you're actually helping someone who normally couldn't achieve the dream of buying their own home. You need to decide if this works for you.
- This system applies more to the United States than to other countries. When a property owner can't pay his mortgage, the bank that issued the original home loan will repossess the property and sell it to recoup their costs. Bargain hunters in the US can therefore pick up good properties from the banks at a substantial discount.
- In other countries, people whose houses are about to be repossessed may advertise for buyers in the newspapers. You can often find an excellent deal if you look for what are known as 'motivated sellers'.
- In the US it's also possible to buy a house by taking over the mortgage payments for a distressed owner. Different laws apply in each country so you need to do some research to find an equivalent scenario where you live.
To download a free report on investing in preforeclosure homes, click on Free Preforeclosure Report.
- Again, this is a US procedure for acquiring discounted real estate. When property owners can't pay their property taxes, the government seizes the property and must then dispose of it. For the cost of the back taxes, anyone can purchase one of these properties, which range from modest to impressive.
Because of the variety of real estate investment vehicles, there may be one or two that suit your personality type. The main advantages to real estate investment are:
- Providing you buy in a good area, property will appreciate in value over the length of the 10-12 year property cycle.
- Banks will lend you up to 90% of the cost of a property. With a minimal deposit, say $20,000, you can purchase a property worth ten times that amount. To invest that same $20,000 in shares, the banks - through margin lending - will only allow you to borrow an additional $20,000-$30,000, depending on the specific stock you wish to purchase.
- From the date of purchase you own a small percentage of your property which is known as your equity; this increases as your property rises in value. You can borrow against the equity in one property to purchase another, which allows you to build momentum in your wealth creation journey.
The disadvantages to investing in real estate are:
Your Next Step:
- Unlike shares, you can't get out a real estate deal in minutes. It takes time to sell an unwanted property, and if you're forced to do this in a slow property market, you may lose money on the deal.
- You'll have large sums of money tied up in each property you own. You may find yourself 'asset rich and cash poor'. The solution to this is to borrow against your equity, and use the money for whatever purposes you choose.
There is a wealth of information online on the subject of real estate. Here are some of the highlights:
- If your credit rating makes it difficult for you to buy property, visit Buy With No Credit for an alternative approach.
- You can buy seized property through auctions at a fraction of their value. Visit the Seized Real Estate web site for more information.
- To build wealth through real estate foreclosures, go to the Massive Foreclosure Profits web site.
- How To Build Your Free House offers information on how to buy your own custom-built house at 50% of its market value.
- If you've ever wanted to renovate houses for a living, visit Fixer Upper Fortunes and learn how.
- For information on all aspects of real estate investing, Creative Real Estate Online offers a variety of articles and courses.
- In Australia, The Investors Club offers free property investment information and mentoring in monthly meetings around the country.
- You'll find a great overview of the types of real estate investing in Robert G. Allen's book, Multiple Streams of Income, and his real estate books will give you further details.
- Robert Kiyosaki's Rich Dad book series is an excellent source of ideas on both wealth creation and real estate investing. Dolf De Roos and John Burley, both members of the Rich Dad's Advisors team, also offer great books on real estate. The titles are listed on the Financial Resources page.
- For other books on real estate investing, visit the Amazon book site:
(If the Amazon box doesn't display any book titles, just click on your browser's "Refresh" button)
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Disclaimer: This site is purely educational and we make no claims or guarantees with regard to the information presented. Please consult a certified NLP practitioner for individual coaching in the use of NLP techniques. We strongly advise consulting a financial industry professional before embarking on a wealth creation journey.