Welcome to Summary School
Top 6 Reasons to Invest in Real Estate in Alpharetta
Have you ever asked yourself, Should I invest in real estate? Well today, we are going to answer that question.
I love real estate investing and I think it is a fantastic vehicle to build security and accumulate wealth. So, I am going to lay out my top six reasons to invest in real estate.
- Invest in What you Know
Given my career it’s true I know more about real estate than other potential investments. But, I bet you also know more about homes in your local area than you do about corporate boardrooms of multi-national corporations. I don’t know everything about how a house works, but I know how to call a plumber or an electrician. Plus, you and I are probably better at managing home repairs than timing margins on currency trades.
2. Real Estate is a hard asset.
If you own a house anywhere in the world, you can go there and touch it. It’s real, it exists. This is true with mortgages, liens, and other forms of real estate paper. These documents are backed by a hard asset somewhere that you can reclaim if the payee forfeits. On the other hand, if your buying on the futures market and the price of oranges doesn’t work out, you can’t drive to Florida and pick up the number of bushels you think you are due.
3. The base value isn’t zero.
What happens if we make a mistake on evaluating a property and the numbers don’t work out? Well we might lose some money in the short term but we won’t lose the entire investment. Here’s an example, I buy a house for $100K, I budget $50K in renovations and hope to sell at $175K. But, an unexpected repair comes up and I spend $75K in renovations and I made a mistake in valuation so the home is only worth $150K. Two major mistakes and I paid $175K for a house that is worth $150K. Certainly not fun and not a great investment. But, if I sold it now, I would only lose the $25K, not all $175K I had invested. Compare that scenario with picking the wrong stock, if the company ends up being a bad investment and the company closes down, your investment goes to $0. Here’s an easy illustration of that scenario, Enron.
4. Multiple exit strategies.
Using that same property, let’s talk about ways to fix the mistake with multiple exit strategies. So we’re into a renovated property for $175K and it’s worth $150K.
Strategy 1, Sell it now and take the loss. Strategy 2, Turn it into Long term rental. Strategy 3, Use it as a Short Term Rental. Strategy 4, Lease Option. Strategy 5, Owner Finance. Strategy 6, Refinance the debt and keep investing. Strategy 7, Move into the property. Exit strategies are only limited by our creativity and the particulars of the property or location.
5. Real Estate can be leveraged.
Buying stocks on margin can be extremely risky. Buying investment property with mortgages is standard operating procedure. Use financing to purchase more properties, create greater economies of scale and still claim 100% of the ownership benefits. Imagine you have $200K to invest, the money might come from your savings, or you raised money from friends and family or by moving your 401K to a Self-Directed Real Estate IRA. You can either buy one home for $200K or you can put $50K down on 4 homes. At first glance this seems like it would create the same profit margins, but that leads us to the 6th reason I love investing in real estate.
6. Time improves the investment.
If you consider the first example where we overspent by $25K to renovate a house, much of that loss can be negated by properly managing any 6 of the 7 exit strategies over time. But, time is even better when you buy right, use leverage and are smart about your choices. Using the $200K example earlier, assuming all expenses are equal and an appreciation rate of 2.5% per year. If you use the $200K to buy one home at the end of 15 years that property would be worth about $283K. If instead, you bought four homes with a 15 year mortgage, at the end of 15 years you would have a combined value of over $1.1 million. Clearly, using time to leverage real estate can provide amazing returns.
These are my top 6 reasons to invest in real estate, there are certainly many I didn’t cover but for me, these reasons are compelling enough. If you are ready to have your money work for you send me a message and let’s get started.