By R.W. Bowlin
Originally published by the Rental Housing Association of Washington State.
If you have the personality, the skills (or can learn them), the commitment, some cash and time, owning investment real estate can be an excellent way to create, and preserve wealth. One can do this complimenting their “day job" or they can do this as a full time pursuit. I know many couples where one spouse has a good paying job while the other builds up their rental business. The flexibility often compliments child rearing.
When rental properties work, it’s hard to imagine a better investment for the average person. Here is how to begin. Start with a smaller property, let’s say a rental house up to a four-plex, close to your home in a good location. Get it “renter ready" with durable interior surfaces, easily maintained yard and make it look good. The quality of your tenant creates your success, provide quality and you can expect quality supported with a good lease and screening process.
Once the property is up and running with solid tenants, be attentive and manage well. Be proactive, you own the property. And watch the market. Then wait. In a few years you’ve paid down some of the debt, hopefully the property has appreciated and rents have gone up. Maximize your “monthly income" so that, after repairs and improvements, your cash flow (net operating income) grows.
Remarkably, the tenant is paying off your mortgage. Demand should grow from increased population, demographics and limited land for new construction. As local incomes go up, so does demand and therefore rents.
You will find it remarkable how your equity increases, it’s almost magic. Your original cash investment (your equity), which was the down payment that was so hard to dig up, grows considerably. It “compounds" increasing in value exponentially. Track this every year, this is important. On the same day of the year calculate your equity position and your net operating income. Determine your “return on investment" (ROI). Divide the NOI and the annual change (increase or decrease) in equity by the current equity. This percent is your Total Return on your equity for the year.
Now, consider this return compared to other investments. Track the annual total return of the Dow Jones Industrials or the S&P 500, the Barclay’s fixed income indexes or the NAREIT Real Estate Indexes (publicly traded REITs). This analysis assists in defining a good, poor or outstanding investment. Patience is often required for outstanding returns but do not hesitate to change if the property is not working out as you planned.
How to make millions of dollars as a real estate investor and live a quality life.
Become a smart owner and grow up your property ownership, stay in this business for years. Develop your expertise and understanding of all aspects of rental real estate ownership. Save your money, defer gratification by saying “no“ to wants. Learn about debt and refinancing. Keep your financial profile strong so that when you borrow it’s from a position of strength.
Develop a strong “team" of professionals to provide their expertise, but always remember they work for themselves. Use discernment and understand “conflicts of interest." Have fun and enjoy others who are owners--you are who you surround yourself with. Learn from them. It makes your tuition that much cheaper from the school of “hard knocks."
Then, with additional cash, start looking for your next property. Funds could come from savings, refinancing or the sale of your first property (consider a 1031 exchange to defer capital gains tax liability). Have a plan, a comprehensive business plan defining the type of property, locations and how you manage them. Plan for your eventual “exit strategy."
Understand all the risks you are exposed to. Do not ignore any of them, risks can take you down. Instead, address them properly, there are three ways: you can insure against risk, you can absorb risk, and you can avoid risk. Manage all risks properly and the opportunities will take care of themselves because you will be making decisions from a “position of strength!“
Smaller properties can be an excellent way to learn the real estate investment business. Keep your eyes open, you may find a particular real estate niche that you enjoy and has better investment opportunities. Real estate is very broad, significant wealth has been made in retail, office, industrial, self-storage, marinas, timberland, farmland, raw land and each of these categories of many niches themselves.
Be an expert, work hard, manage your risks, be patient and seize the right opportunity. Remember when buying: quality and location, location, location. Over time, you should be a very successful investment real estate owner.
Now, go forth and conquer!