Why Real Estate? Is it Still the Best Game in Town?

From Rich Dad’s E-News Letter:

There are numerous real estate millionaires and billionaires in this country who, for the most part, quietly enjoy their wealth out of the limelight. Many of these investors started with nothing or very little. Some graduated from college, and others either dropped out of college or skipped college altogether. Several investors have gone bankrupt (or at least have come very close), or at one time or another have lost properties to lenders. But they recovered and are now millionaires or billionaires. Why were these investors able to recover from huge losses, even bankruptcy? Because they had knowledge—knowledge of real estate, real estate markets, and of what it takes to make money in real estate. But it wasn’t just knowledge that created their success—it was also taking action and making it happen! The bottom line is that when you have real estate knowledge and the experience of putting that knowledge into action, you can lose it all and make it all back again.

What would you do if you had enough passively earned income each month to take care of all of your expenses, and that came to you whether you were at home or in Hawaii for a month? This is what investing in real estate can do for you, and it is why so many people come to real estate when they finally decide that their nine-to-five job is not very secure or that profitable.

“But,” you say to yourself, “look at the mess real estate is in today! Surely, this is not the time to get involved in real estate investing.” Yes, the real estate market has taken a big hit recently. Are people still making money in real estate? Absolutely! Many educated investors are making more money today than ever before.

The catch is that you have to know what you are doing. You can make a lot of money in real estate, but you can also lose a lot of money if you don’t know what you are doing. Up until a couple of years ago when the housing bubble burst and the bottom fell out of the real estate market, almost anyone could make money in real estate. Just buy a home, wait a few months, and sell it for tens of thousands more than you paid for it. Homes in many areas were appreciating at record rates. You could buy high, wait for appreciation to drive the price even higher, and sell higher. It was money easily made, and a lot of “investors” made a lot of money.

But there are two kinds of real estate investors: educated investors who build in their profits when they buy, and uneducated investors who buy relying only on appreciation for their profits. The educated investor will only buy properties that will make money no matter what the general real estate market does. If the market goes up and he gains some appreciation, that is just icing on the cake. But if the market is flat with no appreciation, money is still made because the property was purchased at a low enough price to assure a profit.

People who buy properties where appreciation is the only way to make a profit are not real estate investors, they are real estate speculators. Many of the bank-owned properties on the market today belonged to speculators that bought at the top of the market, paid top dollar, and got stuck with a property they couldn’t sell as real estate prices started to drop.

There are many different ways to make money in real estate. The first thing a person needs to decide is what type of a real estate investor they want to be: an active investor who makes real estate investing a part-time or full-time business, or a completely passive investor who just wants a good return on his or her portfolio.

For the person who wants strictly passive real estate investments, there are several options. People in this category already have money to invest and can opt to diversify some of their money into real estate type investments. These investments are run by managers; investors are not involved in day-to-day decisions. Options include, but are not limited to:

• Real Estate Investment Trusts (REITs) – A REIT is a corporation or trust that uses pooled capital from many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT). REITs are traded on major exchanges just like stocks. REITs offer some benefits over actually owning properties. First, they are highly liquid—unlike traditional real estate, shares can be rapidly bought and sold. Second, they allow the small investor to benefit from various types of commercial real estate, from malls and hotels to large office buildings and apartment complexes. The right REIT can provide a nice monthly income, but, as with any investment, do your homework before you invest.

• Tenant-In-Common (TIC) Investments – Investors now have the option of investing with up to 35 other investors in a tenant-in-common type real estate investment. They can turn deeded and undivided interests in their smaller apartments (or any type of real estate investment) into partial ownership of high-quality, institutional-grade properties—formerly out of the common investors reach and only in the purview of REITs, pension funds, and major investors. Since investors are actually on the deed, these investments qualify for 1031 exchanges. Cash investors can also benefit and 1031 exchange out on the back end. For the investor who wants a monthly cash flow without any management responsibility, TIC investments make sense. But TICs are not all created equal, so do your homework.

• Hard-Money Lending – For those who want potentially big returns on their investments, helping fund a professional hard-money lender is an option. But it is not for the faint of heart. Big returns involve BIG risk.

• Limited Partnerships – A good limited partnership has the potential for a good return. As a limited partner, you are not involved in any decision making and your losses are limited to your investment. Again, do your research. Depending on the goals of the partners, the partnership may be very conservative or it could be very speculative.

A lot of new real estate investors have very little money to start with and are looking to real estate to create a good nest egg. Traditional real estate investing has many options, so it is a good idea to determine what type of investing you really want to be involved with. Real estate investing is not a one-size-fits-all business. Not everyone has the temperament to be a landlord, for example. Dealing with the three Ts (tenants, toilets, and trash) is not everyone’s cup of tea. Not everyone is cut out to deal with fix-up projects. Some might happily handle minor fix-up projects, but may not be able to handle the stress of a major fix-up. Things don’t always work out as well as they do on TV.

What are your capabilities to finance your real estate projects? A solid real estate education will open your eyes to the many ways to finance real estate, even if you have little or no money of your own.

Here is a list of several different financing options for real estate investors:

• Traditional Buy, Fix, and Sell Model – This is where most real estate investors start. Find a property that needs some work that can be purchased at a substantial discount, purchase the property, fix the property, and sell for an immediate profit. This model still works in today’s market, but you really need to make sure you understand property values in your area.

• Traditional Buy, Fix, and Rent Model – Similar to the buy, fix, and sale model, this is another basic way to make money in real estate. Instead of making your profit from a quick sale, you make your money over a period of time with monthly cash flow from the property. Over the years, the tenants pay off your mortgage, so you end up with a free-and-clear property (commonly called a cash cow). Also, over the long haul, property values have always gone up. Yes, there are up and down cycles and we are currently in a down cycle, but if you buy a property and hold onto it for a long enough period of time, you will most likely benefit from a good amount of appreciation. This is how millionaires are made.

• Wholesale the Property – This is an excellent way for someone with a little extra money to get started in real estate. You have to know how to analyze properties to determine your maximum allowable purchase price (just as with the above two models), and you have to know how to negotiate with the seller to get the property under contract. But rather than buying the property yourself, you find another investor and assign your interest in the property to them for an assignment fee. This can be an easy way to make a quick profit of $5,000 to $10,000. Your profit is based on your ability to find and negotiate a good deal.

• Lease Your Property with an Option to Buy – If you own a property that you can’t sell, you could lease the property and give the tenant the option to buy the property in the future. As long as you purchased the property at the right price, you can lease it for a positive cash flow and sell it in the future, probably for a higher price.

• Sandwich Lease Option – Rather than buying a property, in some circumstances you can negotiate a lease on the property with an option for you to buy it in the future. You then sub-lease the property to a rent-to-own tenant. You lease it to the tenant at a higher amount than your lease, and option it to the tenant for a higher price than your option price. You can make a positive monthly cash flow and make a profit when the tenant buys the property, all on a property you don’t even own. Not bad!

• Invest in REOs – REOs are properties owned by the bank (Real Estate Owned). These are properties that have been taken back through the foreclosure process and can usually be purchased at a discount. In today’s market, there are opportunities to buy bulk REOs for pennies on the dollar, but you usually have to pool your money with other investors to be able to buy a block of 100 to 200 homes.

• Invest in Foreclosures – With foreclosures, you will either deal with the homeowner prior to the foreclosure auction or will buy at the auction. It takes special skills to deal with people in foreclosure, skills that can be learned through proper education. When buying at the auction, you need to have done your homework and know what you are buying when you bid. Although some liens are eliminated at the auction sale, others are not. A title search on the property will show all current liens on the property.

• Short Sales – When a property is in foreclosure and the total liens on the property are greater than the value of the property, one of the ways to help the homeowner is to negotiate a short sale with the lien holders (banks, as well as other lenders and lien holders). Many times, the banks will accept an amount less than the current loan balance as settlement for the debt, which allows you, the investor, to buy the property at a price that will allow you to make a profit and allows the homeowner to get out of the situation without a foreclosure on their credit report. In this scenario, the bank loses less money than they would during the complete foreclosure process. This is truly a win-win-win situation.

• Land Development – Taking a piece of ground and improving its value through the various phases of development. The development process starts by determining the best use of the property, the determination of which is based on the zoning or proposed changes in zoning. Basic designs and layouts are then produced and presented to the city for approval and permits. Once permits are issued, ground preparation and improvements (water, sewer, etc.) start. After all improvements are made, building can begin. An investor can be involved at any or all of the stages. As each stage is completed, the land becomes more valuable.

• Investing in Tax Liens and Tax Deeds – When property taxes are not paid, cities and counties use various means to get the taxes for their operating budgets. Property taxes are always a lien on a property. One way cities get their tax money is to sell the tax liens at an auction. People who purchase the tax liens make a good interest rate on their investment when the property owner finally pays the taxes.

There are many other ways to be involved in real estate investing, but most are just variations of these basic models.

Real estate investing is a very good way to make a little or a lot of money. Your success really depends on having an excellent real estate education and taking action. Your success also depends on how much time and effort you are willing to put into your real estate business. With real estate, you don’t have to do it all yourself; you can leverage your money and your time by using other people’s money and other people’s efforts.

Just remember, not every wealthy person made their money in real estate, but most of the wealthy own a lot of real estate. It’s been said, “Invest in real estate, they aren’t making any more land, you know.”

Now is a great time to start investing in real estate. Get educated and get going. Even if you only buy one extra house in your lifetime, you’ll be glad you did! Real estate still is the best game in town.