People can make money all sorts of ways. Most of us need to work for a living, but that is often not enough to build wealth. Some people invest in the stock market, and that has proven for many to be a good way to build wealth. The thing with the stock market, though, is that there really is only one way to make money and that is by buying and selling a stock or bond.
Real estate is one of those great investments that offers more than one way to make money and build wealth.
This is a simple concept for most people. Buy a property with 20% down, finance the rest of the purchase with a mortgage. Figure out what the taxes and other expenses are on the property and then rent the units in the property for more than the sum of the expenses. This will produce income.
Usually the property will appreciate in value over time. Let’s say you live in an area where property value is going up at 5% per year. The value of your rental property will double in about 14 years. As an example let’s say you purchase the property for $300,000 with a down payment of $75,000, you rented the property for the whole 14 years, and you covered all your costs. You could now sell that property for $600,000 and have made back 8 times your investment. That’s a much better return than banks are paying on savings accounts.
There are always some properties out there that can be purchased for less than their value. Unforeseen circumstances, poor money management, job transfers and a host of other reasons often mean that a person needs to sell a house fast and is willing to sell at less than the market value of the home. Anytime you can buy a home a less than the market value, you should be able to turn a profit by selling it.
In periods of low inventory, which now exist in most areas of the United States, homes are selling at prices above their market value. Doing a little extra to a home, like professionally staging it, can easily bring in offers over and above the market value of a home. Compared with the stock market, where stocks always sell at market value, this makes real estate a better way to make money.
You have probably heard the term OPM, an acronym for Other People’s Money. When you take out a mortgage to purchase a rental property you are increasing your equity with every rental payment. As long as the rental payments at least cover the mortgage and expenses, you are building wealth month and month.
Leverage Increase Returns
Let’s use that example from above where you purchased a three family home for $300,000 with 25% down. Even though you put 25% down, you get rent on 100% of the property. Say you rent the property for $1500 per month per unit. With taxes, insurance and upkeep your monthly expenses are going to be about $817.00 and your monthly mortgage payment is going to be about $2616.00. That’s a total monthly expense of about $3825.00. Your profit each month is $675.00. That’s about 10% per year on your initial investment of $75,000.00