Real estate investment takes many forms. Some people invest through the public markets: in REIT’s, or in stock of companies such as national builders or landlords (examples are Toll Brothers, Westfield), but the vast majority of real estate investment is done by individuals who believe that owning either the real estate asset (such as a small apartment building), or the debt (such as a mortgage note) is better for them.
This series of articles will teach you the basics of investing in real estate, and help you be relatively certain of a decent return.
The basic principle of all real estate investing is that it takes time. Obviously, if you have cash enough to buy property outright, you will probably make money from “day 1.” However, most of us have to obtain loans to buy property, and then those loans pay off over time. However, there are a number of benefits to real estate investment that exist in few others:
1. Real estate is a basic need. People have to live somewhere. It’s like a utility. People have to have water, electricity, disposal systems, and communications systems. However, unlike owning stock in the local electric company, you can own the asset itself, and enjoy the production of income from it.
2. Real estate is desirable. Other people want it, too.
3. Real estate is concrete. It’s a hard asset. It’s like gold that pays a dividend. Now it’s true that real estate can go down in value, and sometimes due to events very much beyond our control, but these events can often be known in advance (Detroit is a good example–it lost its jobs and manufacturing base many years ago, and the handwriting was on the wall, so to speak, long before property values tanked).
4. Real estate is something the common man or woman can buy. It may be difficult, but in many instances it takes only a bit of savings and good credit to buy a property that will bring you many hundreds of times the initial investment.
5. Real estate can be leveraged–you can buy it with the bank’s money, and little of your own.
6. Real estate generally provides you with two kinds of return, similar to a stock that pays a dividend:
- Increase in value, roughly from 1% above the inflation rate to double that.
- Income from rents and use of the property.
7. An example:
- In the 1970’s, my father and mother purchased two “little houses” nearby. They bought them on a shoestring, and collected the rents to make the payments on them.
- Eventually, those houses paid off. Together, their aggregate value when purchased was less than $50,000; now, they are worth about $600,000 together.
- Today, the income from those houses is about 75% per year of the original purchase price. In other words, the money they originally invested (less than $10,000) is paying them a 400% return annually.
- This is the effect of time on real estate investments. They take a while to pay off, and they take a while to become truly profitable. However, both properties have good tenants, both produce plenty of income (my father is the only one of my parents living now), and both will be stable investments far into the future. Yes, they have to be managed, and sometimes need repair, but for the small investor, there is almost nothing better, and since real estate produces income as well as appreciation, you have two ways to collect.