Cash in Real Estate

Becoming a landlord and starting an apartment or home rental business is easier than you might think.  This article will show you what to avoid and how to get started.

The housing boom in the US of the 2003-2005 period made a lot of people a lot of money.  Some of the biggest winners were the individuals who bought their homes 20 or 30 years ago and saw them increase in value by up to 10 times in some really hot markets.  These were, for the most part, accidental millionaires.  Other winners were among those who bought and sold properties during the heat of the market.  They flipped their properties quickly with or without improvements because the demand was so high.  The really big winners were the developers who cranked out homes and condos as fast as they could to the excited masses.  And the other really big winners were the entrepreneurs selling those "Make Mega Millions in Real Estate in Your Spare Time" seminars and packages.

The same boom also lost people a lot of money and the damages are still being tallied as the bubble bursts.  You don't hear about those failures and bankruptcies as often as you hear about the grand success stories.  Here's what happened to some of them:

• Buying on speculation with the view that the market demand was going to continue to be hot, hot; hot has led thousands of people to the situation where they now can't sell properties they bought and can't support the mortgages.

• Jumping into the fix it and flip it craze left the inexperienced flippers under water as they blew their budgets, their time tables, and their grand expectations of quick profits.

• Grabbing foreclosures turned out to be harder than promised as the demand exceeded supply and prices on even bad deals skyrocketed.

• Buying property with adjustable rate mortgages and other tricky mortgage structures turned into disasters as the interest rates rose and cash flow turned negative.

You can still make money in real estate.

The reality is that it will take you a bit longer and you will want to go in with your eyes wide open and be aware of the pitfalls and responsibilities.  Here are the secrets.

The Trumps of the world all started small.  They bought one property that they could afford and then leveraged the equity in that property to by another and so on.  They knew the areas they were buying in and made some educated predictions of future values.  They did not buy lousy properties in bad areas unless they could predict that the area would improve in the future.  They bought under-valued properties in good areas and brought them up to standards.  They were vigilant for opportunities, they evaluated them based on facts and sound forecasts, they took considered risks and they took action.

If you have lived in a particular area for a long time you have the beginnings of valuable real estate power.  You should know or can learn with research what areas have the best future, what types of properties are growing in value, what the population trends are, what the sources of real estate investing money are (banks and other lenders), who's getting old enough to want to sell, which properties are undervalued and so on.  You can research the tax liens, government demographic and real estate records, and talk to trusted real estate agents to gather more information.

Find a few target properties and do the math on what your cash flow would be if you bought it with borrowed money, made any necessary repairs or upgrades and rented it out at going rates.

The real secret to getting started in real estate

is to buy a duplex!  Do your research and pick a property.  Do your cash flow math based on living in one half and renting out the other half.  Be sure to do your math carefully.  There are plenty of books you can buy or borrow from the library that will give you step by step guidance on how to calculate your financials for investment properties.  This is the most important step so don't skip it.  Even if the opportunity looks great on the surface, you must make sure the cash flow works to your benefit.

Don't look at this as your permanent home.  Consider it to be just your first investment property...a job.  Your job is to live in the building, manage the rental half, maintain the building and to learn what it takes to be a landlord.  Once you are comfortable and knowledgeable about the landlord business and you have accumulated some more cash and equity in your property do it again.  Buy another property and repeat the process.  Over time you can accumulate significant net worth in the properties you own and get rich in real estate.

Your downsides include a potential loss in value due to decreasing property values (loss of equity), a problem in keeping the property rented (loss of income), unexpected maintenance costs (e.g. renter damage), and other hits to your cash flow.  Good contingency planning and business management can help you minimize these.

If you have a home already, you might be able to leverage your existing equity, stay where you are and acquire rental properties from that base. 

Patience and planning can make anyone a real estate millionaire.