Investing in real estate is one of the world’s most reliable and venerable pathways to building wealth. When properly managed, income from renting real estate or from real estate appreciation can provide financial security to a real estate investor, allowing the investor to live comfortably for the rest of their life. The conclusion is easy to envision, but knowing where and how to begin can be overwhelming, particularly for someone who has never previously owned a home.
Every investment option has its pluses and minuses. Keller Williams The Trembley Group is a real estate company and, presumably, readers of this blog are here to learn about real estate, so this blog will focus exclusively on real estate investments.
Real estate is generally a great investment option. It can generate ongoing passive income and can be an excellent long-term investment as, historically, real estate values have increased over time. Investment real estate is an effective tool in any comprehensive strategy to begin building wealth.
Investors thinking about diversifying into real estate need to be sure they understand the real estate investment process before making the leap into investing in real estate. They need to understand the basics, like the need for a significant down payment. Buying an apartment building, a tract of land or, even a home can be expensive and will likely require a substantial amount of money upfront. That’s not to mention the ongoing maintenance costs as well as the potential for income gaps between tenants.
Most folks have heard the zero down payment sales-pitches in books and on late-night television. Yes, it is possible to buy real estate with no down payment, but those opportunities are rare and are generally very high risk. If it were as easy as it sounds, everyone would be doing it.
Anyone who has watched television past 11:30 has seen the late-night real estate infomercials where some self-described real estate guru is sipping cocktails on the backside of a beachside home, urging folks to join him in the life of luxury. For some first-time investors, one of the biggest draws to real estate investing is the idea of driving a fancy car, living in a large mansion, and ultimately being fabulously rich. The fact is, many real estate investors do build significant wealth during their real estate careers, but most successful real estate investors won’t hesitate to say that real estate investing is not a get-rich-quick scheme. There are, in fact, some real estate investors who make a lot of money in a short time, but those investors are generally the exception and not the rule.
The kind of real estate investing described on late-night television or the so-called real estate investing some folks read about in books by self-described gurus is not real estate investing at all. In most situations, what’s described as real estate investing is actually high-risk gambling or speculating.
Investing in real estate takes planning, patience, and persistence. Serious Investors shouldn’t expect to make a million dollars in their first year. Instead, prudent investors create a real estate business that steadily grows, year in and year out, enabling them to meet or exceed their short-term and long-term financial goals and ultimately fulfill their dreams.
Regardless of what’s written in books or touted by “experts” on late-night television, success in real estate investing requires hard work, just like any other field. It is also essential to know that there are no shortcuts to successful real estate investing – there are no products or tools that will do the work for you, either. A real estate investor must learn the fundamentals and then apply them. The aim of every Keller Williams The Trembley Group Real Estate Professional is to help their clients meet their real estate goals, whether that includes finding a dream home or creating a comfortable retirement income through real estate investing. They’re in the real estate business to help their clients long-term; otherwise, they would not be working for Keller Williams The Trembley Group.
“I always ask my clients. Do you know the benefits of investing in real estate? Have you ever thought about how the rich seem to make growing their wealth look easy? Do you think you will be able to retire comfortably when the time comes?” says Mike Bralley, a Real Estate Professional with an investment specialty at Keller Williams The Trembley Group. “Perhaps even more importantly, if they say they’re interested in investing, I ask if they know where to begin.”
“If they answer ‘yes’ to any of these questions, they probably have a lot more questions of their own. Today’s financial world is as equally intimidating as it is intriguing,” says Mike. “Real estate investing can be one of the most lucrative endeavors anyone does. Real estate investing, in particular, has proven – time and time again – that it can serve as a wealth-building vehicle for savvy investors.”
Benefits of Real Estate Investments
Mike Bralley of Keller Williams The Trembley Group identifies five primary benefits of owning investment real estate.
Taxes are one of the most significant expenses for anyone, including investment companies. “However, there are ways to combat the loss of money in taxes with real estate,” says Mike. “Rental houses, apartments, vacant land, commercial buildings, industrial properties, shopping centers, and warehouses all offer a variety of tax incentives. Traditionally, investment real estate has been a great tax shelter, but I always recommend real estate investors consult a tax attorney or CPA.”
“Perhaps everyone’s favorite benefit,” says Mike, “is cash flow. That’s essentially profit. Cash flow is what is left over after you collect the rent and pay your mortgage, taxes, insurance, and any repairs.”
Inflation is defined as a sustained increase in the general level of prices for goods and services. In other words, it causes every dollar you have to buy a smaller percentage of a good or service over time. Stocks, for instance, require more money to purchase with the increase in inflation. “Essentially, inflation prevents your money from going as far in the future as it does now,” says Mike “Real estate, on the other hand, serves as a hedge against inflation. Unlike almost every other form of investment, real estate historically reacts proportionately to inflation. As inflation increases, so too do rents and home values.”
When purchasing a property, an investor has the ability to use leverage (borrowed money). “It is entirely possible to purchase a $500,000 property with $100,000 cash. You don’t even have to use your own money. Banks and mortgage lenders like to loan money on investment real estate. It tends to be a safe investment,” according to Mike. “Stocks, on the other hand, require 100 percent of the investment upfront. Leveraged money also allows you to diversify a real estate portfolio because all of the investor’s funds aren’t tied up in one project.”
In the likely event an investor borrows money to complete a real estate deal, they will be required to pay it back with interest. “Each payment also gets you one step closer to paying down your principal payments,” says Mike. “You’re simultaneously building income, equity, and wealth in the same property.”
The 4 Ways to Make Money in Real Estate
Mike Bralley, an investment Real Estate Professional at Keller Williams The Trembley Group says there are several ways to make money when investing in real estate:
Real Estate Appreciation
Real estate is an Inflation Hedge – Real estate returns are directly linked to the rents that are received from tenants. Some leases contain provisions for rent increases to be indexed to inflation. In other cases, rental rates are increased whenever a lease term expires, and the tenant is renewed. Either way, real estate income tends to increase faster in inflationary environments, allowing an investor to maintain its real returns.
In addition to rental income, most real estate increases in value over time. Whether due to change in the real estate market (inflation), the underlying land becomes scarcer or busier (a shopping center is developed next door), or the property owner upgrades the property and makes it more attractive to potential buyers or renters, investment real estate values tend to increase over time. “Real estate appreciation alone is a tricky game,” says Mike. “It is a lot riskier than investing in cash flow income.”
Cash Flow Income
“Investing for cash flow focuses on buying a real estate investment property, such as an apartment building, and operating it. The owner collects a stream of cash from rent, which is the money a tenant pays you to use your property for a specific amount of time,” says Mike. Cash flow income can be generated from well-run storage units, car washes, apartment buildings, office buildings, rental houses, and more.
Real Estate Related Income
Real estate-related income is generated by specialists or experts in the real estate industry such as real estate brokers, real estate appraisers, real estate attorneys, real estate management companies, and mortgage brokers who make money through fees and commissions from buying and selling, closing sales, or managing a property.” This type of real estate related income is pretty easy to understand,” says Mike. Anyone who has ever bought or sold a piece of real estate and has taken a hard look at the closing statement has seen all the people paid by the seller and buyer at the closing.
Ancillary Real Estate Investment Income
For some real estate investments, this can be a huge source of profit. “Ancillary real estate investment income includes things like vending machines in office buildings or laundry facilities in apartment buildings,” Mike Bralley says. In effect, they are mini-businesses within a more substantial real estate investment. The real estate investor makes money, sometimes a significant amount of money, from a semi-captive collection of customers.
Risks of Real Estate Investing
A real estate investment usually produces a substantial return, mainly due to the use of leverage (borrowed money). A real estate property is usually bought with a percentage of equity (down payment), with the remainder of the purchase price financed with mortgage debt. The result is a higher return on investment for the real estate investor. The buyer makes a 20 percent down payment but enjoys the percent appreciation on the entire purchase price.
“For example, if an investor buys a one hundred thousand dollar property with a 20% down payment, the investor has a $20,000 investment at risk,” explains Mike. “If the investment appreciates 5%, that’s a $5,000 appreciation on the total value of the property. That’s also a 25% return on the $20,000 down payment investment. 25%! Not too shabby a return. I’d say!”
“But if things go poorly, leverage also works in the opposite direction. It can result in ruin far more quickly than a portfolio of fully-paid common stocks or fully paid real estate. Even during the Great Depression, stocks declined by 90%, but no one could force you to liquidate,” says Mike.
That’s why most conservative real estate investors always invest a minimum of 20% or 25% down payment. Even if rents drop due to tenant financial or economic difficulties, there is still a cash surplus – a positive cash-flow.
“The biggest mistake investors make is trying to get rich quick,” says Mike. “Prudent investors need to be content to do it the right way. They’ll have much less stress in their life, and it can actually be a lot of fun.”
Start With Your Own Home
Owning the roof over your head is a fundamental step towards real estate investing success. Furthermore, when a real estate investor lives in the home they’re buying (rather than renting it out), they will likely benefit from lower mortgage rates and a lower down payment. The logic is really quite straightforward – lenders look at a loan to an individual purchasing a home to live in as an investment in a person highly committed to the property ownership.
After owning the property for a few years, the home will have likely increased in value, area rental rates will have probably risen, and the homeowner will have likely increased their cash savings. The timing will be right for the investor to look to purchasing a new personal residence.
Since the investor will be purchasing a new home in which to live, they’ll be eligible to receive the more favorable financing once again. After they’ve secured the new home, their original home, with good financing already in place, will be perfectly positioned to be transformed into a rental property. If a future investor is seeking support with buying a first, second, or third home, the Keller Williams The Trembley Group website and the company’s real estate Professionals are full of information and ideas.
“I’ve never viewed homeownership in quite the same way most people do. Instead, I prefer to think of a person’s primary residence as a blend of personal utility and financial valuation, and not necessarily just an investment.” Says Mike Bralley. “To be more direct, a home isn’t an investment in the same way an apartment building is. At its very best, and under the most ideal of circumstances, the safest strategy is to think of a home as a type of forced savings account that gives a lot of personal use, enjoyment, and peace while residing in it.
Cast a Wide Net
The best Myrtle Beach and Grand Strand real estate investment opportunity might not always be right under an investor’s nose or right around the corner. While there are logistical and market advantages to focusing on local investments, an investor may miss more profitable opportunities along the Grand Strand in other burgeoning markets. Real estate is a long game, and patience tends to be rewarded. There’s no rush for a decision of this magnitude, so asking a Keller Williams The Trembley Group Real Estate Professional to investigate other Grand Strand communities to find the perfect property that best fits an investor’s situation and goals is worth the time and effort.
Intangible Benefits from Real Estate Investment
Ability to Influence Performance – It has already been noted that real estate is a tangible asset. As a result, an investor can do things to a property to increase its value or improve its performance. Examples include: replacing a leaky roof, improving the exterior, and re-tenanting the building with higher quality tenants. An investor has greater control over the performance of a real estate investment than other types of investments.
For many investors, rental income from real estate investment has an enormous psychological advantage over dividends and interest from investing in stocks and bonds. They can drive by the property, see it, and touch it with their hands. They can paint it their favorite color or hire an architect and construction company to modify and improve it. They can use their negotiation skills when they purchase the property and to establish the rental rate, allowing an effective owner to generate higher capitalization rates, or “cap rates.”
“One of the investors that I’ve worked with explained her attraction of buying investment real estate,” Mike says. “She smiled and explained, ‘Some nights I lie in bed and just smile. I’ve made an investment, I borrowed most of the money to buy it, and someone else – my tenant – is paying off my loan. For me, it just doesn’t get better than that.’”
Mike also warns that the psychology of owning real estate is a two-sided coin. “Another investor owned a fourplex for about nine months. It was performing exactly as projected,” Mike said. “One afternoon, I got a call. She said she just couldn’t deal with the mortgage. The rental income covered all the expenses as well as the $195,000 mortgage payment, with a little cash flow left over. But the client was a product of parents of the Great Depression, and she said that much debt kept her up at night.” Mike said. “After a lot of soul-searching and discussion, we sold the property about four months later – at a modest profit.”
🤔Some Final Thoughts on Real Estate Investing
Of course, this blog is only the beginning of a journey to understanding real estate investment. It has barely scratched the surface. Real estate investing takes years of practice, experience, and exposure to truly appreciate, understand, and master.
“The biggest mistake investors make is trying to get rich quick,” says Mike. “Prudent investors need to be content to do it the right way, one step at a time. They’ll have much less stress in their life, and it can actually be a lot of fun.”
At Keller Williams, The Trembley Group, all of the Real Estate Professionals are committed to improving and supporting the Grand Strand communities. That means offering honest and objective advice about Myrtle Beach and Grand Strand real estate investing while you are relaxing on the sand with the water between your toes.