I have heard my entire life that real estate is a fabulous investment for creating wealth and that more money has been made in real estate than in all industrial investments combined (Dale Carnegie). I may have understood the argument intellectually, but it did not resonate with me, and when I began my investing career, I floundered for years.
My success commenced when I figured out my “why” to real estate. In this article, I am going to dive into the obvious reasons to utilize real estate, as well as the real reasons to invest.
Let’s start with the obvious reasons.
Real estate, when purchased correctly, will create a continuous flow of revenue. Cash flow is the life blood of any business and the number one reason why we invest in real estate. If you are investing in real estate that doesn’t cash flow, are you really investing, or are you speculating? A property that negatively cash flows is called an “alligator.” It will eat you alive!
Our rule is to buy for cash flow, and any appreciation is icing on the cake. Once you can secure a property that cash flows well, it seems as if the remaining reasons all fall into place.
I have been master of my own ship for my entire adulthood and have grown accustomed to taking control of my financial future. Real estate has allowed me to control my assets and to directly affect the performance, both positively and negatively. At the end of the day, there is nobody to blame but myself for the success or lack thereof of my investment.
Is it easier to invest in real estate? On the contrary, it takes a certain level of financial sophistication that is necessary to master, just like any other skill. It is much easier to hand off your hard earned dollars to a mutual fund company, but in the process, you will lose the control of the asset and will definitely earn a substantially lower rate of return. Mutual fund managers are beholden to their best interests, not mine.
I also find comfort in being able to drive by my real estate and touching it. I control where to buy, when to sell, how much rents should be raised, and who should be managing my portfolio. Control of an investment is one of the top three criteria for any savvy investor; the other two are leverage and liquidity.
There are very few assets that can be acquired with as little as 15% cash, yet the owner controls 100% of the benefits. For instance, we acquired our first investment, a 25-unit “mom and pop” for only 10% down, and the owner financed the remaining 10% with a seller’s note. We were able to control a $600,000 asset with only $85,000 invested. This allowed us to preserve our capital and invest it into our next deal.
Once you begin expanding your portfolio, interesting things begin to happen. Approximately three years after our first investment, we bought a 281-unit multifamily for $11,000,000 with the owner carrying the entire 20% down payment as owner financing. The banks were confident in our ability to manage the asset, and the owner was motivated to sell the asset.
We are now receiving all of the benefits of this asset: appreciation, cash flow, tax benefits, and amortization without risking any of our capital. The power of leverage works in both directions. What can easily skyrocket also come crashing down! Become an expert before risking OPM (other people’s money).
One of my dad’s favorite sayings was, “It’s not what you make, it’s what you keep.” It took me a few years of paying taxes to fully grasp the power of those nine simple words. Real estate offers incredible tax benefits to owners, in the form of depreciation and cost segregation. Is it no wonder that I come across countless doctors and lawyers who invest in real estate for these generous write-offs?
The government understands that it is not very efficient at providing affordable housing. It has created these write-offs to incentivize the private sector to step in and take over. Be sure to mention to your tax preparer cost segregation to see if you can take advantage of this incredible program.
The majority of investors forget to calculate the amortization of their loan. A loan is broken up into two components, principal and interest. Guess who’s paying the principal component? Your tenants! As your property value increases, the principal is being reduced thanks to your tenants.
Velocity of Money
This last benefit was not even on our radar when we began investing in multifamily properties. The velocity of money refers to how quickly money passes from one holder to the next. Banks are a perfect example of this fantastic strategy. They borrow your money at a fixed rate and loan it out at a rate three to four times higher. Banks are the masters of OPM and velocity of money.
This is our strategy for velocitizing money:
- Invest in an asset.
- Get your original investment back (refinance).
- Maintain control of the asset with no capital invested.
- Utilize the refinanced funds to acquire another asset.
- Refinance this second asset.
As you can see, this blueprint leads to an explosion in wealth creation. We stumbled upon this strategy after we repositioned our first investment and forced the appreciation of the property. It does take some time to realize this last benefit, but it is well worth the wait and the struggle to get there.
It is rather obvious why everyone should be investing in real estate. Unfortunately for me, the first 10 years was an absolute struggle to obtain any true success. My true success began to develop when I realized why I wanted to invest.
I was introduced to the six human needs to leading a fulfilling life. What are these six needs?
- Feeling of Significance
- Contribute More to Society
The first four needs are fundamental needs, but the last two are where the fun begins. All pain comes from when one or more of our six needs are not met. We all have ways of meeting these needs. I am learning how to be aware of my needs and then take empowering actions to attain happiness.
Related: Working With Purpose: How I’ve Found Focus By Developing My “Why”
I was meeting the first four needs, but I was falling short in personal growth. My business was becoming more of a job than a passion, and I was becoming bored and disinterested. I knew that I “should” invest in real estate, but if your should does not become a must, then you will never totally commit.
On top of that, the business was hit by the recession, and it was becoming increasingly difficult to maintain my standard of living. Simply put, when I was making money, I could bear the pain of work. Once I realized that my income would continue to drop, my “why” became energized and crystal clear.
I became totally committed to real estate as a vehicle to increase my personal growth and generate a lifestyle where I could become financially free and spend more time with my family. Up until my epiphany, I was too comfortable to make it a burning desire, and I continued to flounder.
Real estate has allowed me to grow personally and contribute my time and treasure. It has brought a level of satisfaction that was non-existent in my life, and I continue to focus my days on investing in this terrific business.
Evaluate your personal and professional situation. What parts of your life are you unhappy about? Write down the pros and cons of your life. Find out your “why” for investing in real estate. Once your “why” becomes stronger than your “should,” take the appropriate steps to launch your career. Immerse yourself in education and consider hiring a coach or mentor. Once you are all in, nothing will stop you.
Investors: What’s your “why” for investing in real estate?