Why EVERYONE should invest (part 1) by Jonathan Beasley
To start, it’s probably worth noting that not EVERYone will invest in rental Real Estate, but ANYone most certainly can. There will always be a number of people that naysay, or otherwise find reasons as to why Real Estate investing isn’t for them. You might think to yourself, “it’s too risky” or “I don’t know what I’m doing”. When I was growing up, my parents ALWAYS talked about the horrors of rental property. . .constantly lamenting all the “what-ifs” that came along with owning rentals and dealing with the proverbial problem tenant. “They’re only going to trash the place and not pay the rent” they said. Well, as of this blog, I currently own 18 units/properties and looking to expand quickly. . . .and the storied trash-the-place-tenant outcome has yet to happen to me. And while it no doubt will happen if you play the game long enough, I’ve been at it for years now, and it still hasn’t happened. Sure I’ve had people miss rent payments, and sure I’ve had my share of evictions, but by in large tenants simply want to pay their rent, and get on with their lives. And I have NEVER had a tenant willfully destroy a unit (knock-on-wood). On that note, this was actually my first couple of lessons on wealth building. #1. NEVER TAKE ADVICE ON MONEY FROM BROKE PEOPLE . .and #2. WEALTH AND EXPANSION BOTH EXIST ON THE OTHER SIDE OF FEAR. . .or said another way, scared money doesn’t make money. Anywho, I digress. BACK to the subject at hand. . .
Why should YOU invest in Real Estate?
#1. It is the most readily available investment, for the “common man” to get into. (And I am as common as they come). With Real Estate, you can control your odds, and the dynamics surrounding your investment with almost absolute precision (barring catastrophe). Because the government literally writes the tax code, and interacts with lenders in such a way so as to encourage people to buy rental Real Estate, the barrier to entry for owning Real Estate is extremely low. And as compared to investing in the stock market (where there are forces at work far larger than you, and almost completely beyond your influence) Real Estate is extremely controllable.
You pick the house
You pick the area
You analyze the comparables
You choose the rent
You choose the tenants
You choose the wall color, the flooring, the appliances, etc
All of the above, have a component, of controlling the actual, tangible, appraisable value of the property.
#2. It only gets better over time. There are essentially 4 ways that rental property pays you out (there are other, more novel ways to make money, but for the sake of this article, we’ll stick to the main 4). And as good as each one of these 4 are now, they will likely be better in the future.
- The 1st way you make money (and my favorite) is cash flow. Cash flow is the excess money you keep from the rent, after all expenses are paid. GUESS WHAT! This is REAL, ACTUAL, SPENDABLE CASH, that goes into your bank account every month. HEAR ME, it took me a LONG time to believe that this was an actual thing. But the very first month, I owned rental property, and people wrote me a check that I cashed for letting them stay in my property, and there was more in rent, than there was in expenses, I was hopelessly hooked. It was one of the best feelings in the world. Now of course, having cash flow ASSUMES you have purchased right (and I will help you with that) and that you have found the right tenant (which I can also help you with).
- The 2nd way you make money, is with loan amortization. That is, each time you make a mortgage payment (which is covered by the rent you will charge) a portion of said payment, goes to payoff the loan itself. The beauty about this, is that it is automatic. Each time you make your mortgage payment, it is like a little savings account that is being built up for you without thought or effort. And what’s even cooler, is that because interest is generally front loaded (depending on loan type), the amount of money that goes toward your principal (i.e.., your savings account) will trend upward each month. Cool stuff right!?
- The 3rd way you make money, is through tax benefits. Since I am not a tax expert, I will defer you to a qualified CPA. BUT, the government assumes that real estate wears out over time, thus they allow you to do what is called “depreciate” the entire value of your asset, over a particular period of time. This enables you to “write off” (declare untaxable) a portion of the rental income you will be bringing in.
- The 4th way you can make money, is with market appreciation. This is a component that is less “controllable”. But historically speaking, real estate goes up in value over time. As an example, here is a chart showing inflation adjusted (national) home prices from 1970 to 2014. The appreciation is QUITE staggering (even including the great recession of 2008 where values plummeted).
#3. What is the 3rd reason you should own rental Real Estate? It not only CAN but WILL significantly change the landscape of your later yrs, particularly those of you under age 50 (though you should STILL invest if you’re a kid over 50.) On a personal level, I am terrified, for both you, I, and our children, of not having enough assets and income to enjoy our gray yrs. Politics aside, I simply do not believe that Social Security is going to be the safety net that most people believe it to be. It is open and common knowledge that the Social Security Reserve is essentially bankrupt, and they are paying out retirements to today’s retirees, based on what you and I are paying in now. And I don’t know about you, but relying on the government to ensure a lifestyle that I deem suitable for me and mine, is a risky prospect indeed. What’s more, is that EVERY TIME, I see an elderly man or woman opening doors and checking receipts at Walmart because they HAVE to have that income to live, absolutely breaks my heart. . .and simultaneously makes me throw up in my mouth just a bit. Mostly because I know that even just 2 or 3 of the right investment purchases could’ve completely changed THEIR retirement landscape. But also because it is just sad, and they don’t have the luxury of time. The bright side for you and I, is that truth be told, it’s almost impossible not to become rich in this business over time, if you really commit yourself to know and play the game correctly. But for many of you, the idea of building wealth might seem far fetched…so let’s start with just 1 bite of this Real Estate elephant. What would those 2-3 smart investments really look like? And how might they impact you over time? Well, I’ll be covering that in next week’s blog. I certainly hope to see you there!