Last week a heard a show host on am 700 KSEV (talk radio) discussing wealth. He was saying that wealth will never come from what’s in the bank, but from residual income. I very much agree. You must have several income streams to have and maintain wealth. So take advantage of this buyers market!
On Houston Real Estate Radio we have talked many times about purchasing rental properties for more income streams. With interest rates so low and rent rates on the rise, there’s never been a better time to do it. There are a lot of people out there that need to rent now and never did in the past.
Opportunities are not always clear cut. If they were there would be no risk and everyone would take them. I believe rental properties and investor properties in general are a risk, but they are a minimal risk and that’s why banks will lend money on them. Banks don’t lend people money to buy lottery tickets and stocks and bonds. Investing in real estate has never been about getting rich quick. It is an investment. It takes time to make money. Everyone cannot qualify for a loan to purchase an investment property, but if you have the cash or can get the loan, it can be a great financial move for you.
Below are 10 Steps to Building Wealth by Investing in Real Estate. They are excerpts from the Real Estate Investing For Dummies:
All real estate investors need a nest egg. That means even as you develop additional sources of income, you should hold steady on or preferably even cut current expenses in order to build up your savings. Even if you can find properties where the seller provides all the financing, you can’t escape certain out-of-pocket expenses or the opportunity cost of lost income as you expend your time and energy tracking down properties and performing due diligence.
2. Get your credit clean.
The best opportunities and the most options are available to the real estate investors who have both cash and good credit. Sellers and lenders aren’t going to provide financing to a buyer with a poor credit history. Because the purchase of real estate virtually always necessitates the borrowing of funds, make sure that your credit report is as accurate and as favorable as possible. Get a copy of your credit report and make sure it’s accurate.
3. Buy property where you think values will improve.
It’s usually a good idea to buy in areas that will continue to improve through new investment and economic activity. After you locate the best cities or neighborhoods, look for two types of underachieving real estate assets:
• Income properties that are tired and worn and have deferred maintenance.
• Those that are physically sound but poorly managed.
4. Buy the right property at the best price possible.
Sounds like a no-brainer, especially in the current environment, right? Unfortunately, it’s often easier said than done. To be successful, you’ll have to follow certain guidelines. Get-rich-right investors rarely buy new or fully-renovated properties unless they’re in the path of progress or a prime location. Why? Because the value-added or appreciation has already been taken by the current owner.
5. Don’t fall into the do-it-yourself trap if the “time” factor doesn’t make sense.
Yes, doing the work yourself may be cheaper if you know what you’re doing. But it makes no sense to have a rental property off the market for three weeks while you spend evenings and weekends painting in a misguided attempt to save the $1,000 that a contractor would charge for painting that would take two days.
6. Keep track of market rents.
One of the biggest challenges for most rental property owners is determining the proper rent to charge tenants for newly-renovated rental units. But finding the right rental rate simply requires some homework and research. The best indications of the market value of your renovated property can be found through a market survey of comparable properties.
7. Recover renovation dollars through refinancing.
A key element of the get-rich-right strategy is to keep your capital working and use leverage reasonably while maintaining sufficient equity to weather the ups and downs of local real estate cycles. Acquiring and renovating your rental property required cash, but you also have increased the income, which has created additional value. You can now use this increased value to refinance the property to cover your initial costs. While you should avoid borrowing too much and over leveraging your investments, you also don’t want to be too conservative and underestimate your cash needs. Borrow extra money or have an untapped line of credit available to allow for reserves.
8. Reposition property with better tenants.
One of the best ways to increase the income and value of your newly-renovated real estate investment is to reposition the property with new, more financially-qualified tenants. So look to upgrade your tenants by marketing to a new target tenant profile and re-leasing the property. After all, the current tenants may be the reason that the previous owner sold the property (and that it’s in need of a complete renovation)!
9. Refinance or sell and defer again.
Notwithstanding the decline in property values in most areas in the late-2000s, long-term rental property owners find that they have a considerable amount of equity tied up in their property because of the appreciation that has occurred over the decades throughout much of the country. Having some equity in the property is good and keeps you from faltering, should the local real estate economics take a hit, but too much equity just sitting in a property lowers your overall returns.
10. Consolidate holdings into larger properties.
Most long-term real estate investors find that they reach the point where their management responsibilities and duties no longer conform to the lifestyle that they can afford. They decide to simplify their lives and hire professional property managers to deal with tenants, turnover, toilets, and trash. But finding and paying for a qualified property manager for a diversified portfolio of small rental properties isn’t easy or cost-effective, says Tyson—and there is a better alternative.