Why invest in real estate?
Real estate is one of the most common avenues for millionaires, but why is that? The typical view on buying a house is that you buy and live in the same home for decades. During that time the market increases and when you are ready to retire, you can sell for a profit. While this is true, this house is not truly considered an "asset" due to this real estate not generating a consistent source of income. Real estate investors are able to grow their inventory by taking advantage of equity. Equity is the current market value of the property minus what you owe on it. To increase the equity in the property you either pay down your loan, increase the value of the property, or both.
So how does equity help real estate investors? The initial barrier to entry for real estate is usually a pricy down payment of 10-20% of the house's value and can easily be $60,000 - $100,000 or more. However, once you purchase your first property and build up equity, you can borrow against that equity for a second property, then a third property and so on. Now about that consistent income mentioned earlier. How do these houses make you money without selling them? Rental income of course! If your mortgage payment and all other expenses are less than how much you are making on rent, you can reinvest those profits into another property, pay off your loan faster, or pocket the surplus as income.
Buying your first (or 10th) property!
If real estate is so great, then why do more people not do this? Between not knowing how the system works and the large initial investment for the down payment, many people think owning multiple properties is not feasible and not worth it. That first down payment is tricky. Saving up for a down payment of 5-20% will require some hard work and sacrifice. During this saving period, you can start doing your research on finding properties that will be best suited for rental income. Finding a fairly valued home is crucial when investing.
Real estate budget:
- Mortgage payment (principal + interest)
- Property tax
- Transaction costs
- Emergency Fund