I've been investing in real estate for 40 years, and selling investment real estate for 35 years. I have owned, managed, sold or currently own most common types of investment real estate. I know people who have used different types of investment real estate (single family homes, duplexes, apartments, commercial, industrial, farming, moblile homes, etc.) to become millionaires. There are pro's and con's to every type of real estate investment and some types will work better than others, depending on the area you are in, your financial resources, the market, the economy, available financing, your skills, etc. First understand that there are several ways to make money in real estate (not necessarily in this order):
1.) Appreciation in value due to market conditions and/or improvements and improved management;
2.) Amortization of debt - the paying down of the loan you take out to purchase the property;
3.) Tax benefits - the savings in taxes that you enjoy by using depreciation, exchanges, and other legitimate legal means to pay less tax than you would on "earned" income;
4.) Cash flow - the cash left over each year after paying all your operating expenses, improvements, and debt service (monthly loan payments).
Most successful real estate investors use 3 or all 4 of the above. Common traits of successful investors I have seen are:
1. They are able to save, and to manage their personal finances wisely. If you are have financial difficulties or do not have good credit now, learn the skills and dicipline necessary to enable you to manage your own finances and save some money for a down payment before you get very involved in buying real estate.
2. They have (and maintain) another primary source of regular income. They do not buy a few income properties, borrow heavily against them, and expect to take much cash flow out - especially early in the investment. In most cases, you can't be taking a significant portion of the income the property generates (other than to pay yourself modestly for management and maintenance/repair work you actually perform) to support yourself, and still maintain the property properly and have funds available for the major improvements or events (new roof, furnace, vacancies, etc.) which will inevitably come along.
3. They are willing to invest their own time, in addition to their money. Time to research the market, look at lots of property, calculate income and expenses on potential investments, learn the programs and codes that apply to their property, and in general become knowledgable on the type of property they are purchasing. After the purchase, they often also manage the property, and/or perform usual maintenance as well as repairs and improvements to the property (as allowed by code and within their skill level). To summarize, they take it seriously, invest the necessary time both before and after the purchase, and treat owning investment property in a serious business like manner.
4. They are willing to take some risk and use the power of leverage by borrowing prudently to purchase investment property. Depending on the type property, it's income, etc., this usually means borrowing between 60 - 90% of the purchase price, with 80% being typical. A general rule is that the total actual income (after allowing for reasonable anticipated vacancy) should be between 110 to 120% of your total operating expenses and loan payments. Higher risk and/or older properties will require even more "cushion". It is not necessary, nor is it realistic or wise to expect to borrow 100% (or more) of the purchase price as promoted by the TV "get rich quick - buy my program" shows. Many who borrowed too aggressively in 2000 -2007 ( based on the unrealistic expectation that inflation was going to continue, etc.) are now in trouble that properties have declined in value, and could loose their investment as well as their credit. More prudent investors, however, are now picking up bargains.
5. They are patient, not staking their success on increases in value, resale at a profit or refinancing. They are willing (and able) to hold the property and continue spending the time necessary to at least oversee management (if not do the management themselves), check on the property and tenants and see that the property is well maintained - providing and planning for necessary future capitol (major) improvements such as a new roof.
6. They choose investments that will provide sufficient income to pay not only the operating expenses, but cover the principal and interest payments.
Having said the above (and running out of time), I will come full circle. I find that a good first investment for most people in most areas of the country is a four unit (or 2 - 8 unit) apartment building, particularly if they can live in one unit for a while, or perhaps a smaller leased commercial property.
Hope that helps you start. Best wishes WRP, CCIM
Aug 1, 2009