Friday, October 9, 2015

5 Steps to Start Building Wealth in Real Estate

When my wife and I bought our first investment property over 10 yrs ago, I regularly saw my friends holding back from investing in real estate. Whether they had little money or didn’t know where to start, the result was the same – they were not actively trying to grow their wealth. Most people I spoke to did not invest because they felt overwhelmed and didn’t know where to start.  They held back telling themselves they would start someday. It does not have to be that way. In fact, investing in real estate can be relatively simple if you have the right mindset, focus, and team around you. This mindset, when added to a long-term view of building your wealth, will set you up for success.

Start Investing by Paying Yourself First

It’s not really a shocker, but you need some money to invest in real estate just like any other investment such as, the stock market, gold, start-up ventures, etc. This can be a challenge if you’re a recent graduate or are paying off debt, but you can do it. Examine your budget for opportunities for savings and put a 20/30/50 plan together where you invest 20% of your take home pay in yourself first!  This could mean cutting back on $5/day on Starbucks to pay yourself $150/month first, or finding ways to make extra money. Determine an amount you want to start with and set a goal to reach it in a specific time.  The key is to take 20% of your take home pay and invest in your financial freedom before buying the new car or TV or vacation, etc.

Do Your Homework
There are thousands of markets and options to consider when it comes to investing in real estate. This can overwhelm you if you’re new to investing. Don’t let that hold you back. Just as there are many investment options, so there are resources to help you start investing in real estate.  A simple Google search for real estate investing will produce many online resources.  Like anything in life, you first have to invest in educating yourself and that starts by doing your homework.

Pick Somewhere to Invest

Now that you have some money saved and a knowledge base to work with, you need somewhere to invest. You should consider two options – short-term real estate investments in markets with high appreciation that you might only hold for a few months to a year or long-term real estate investments with the strategy of monthly cash flow and appreciation.   Flipping houses for short-term gains makes sense if you have a skillset or value to reduce your financial risk and maximize your returns, such as you’re a contractor and can do 80%+ of the remodel work yourself or possibly you’re a realtor and can save 3-6% on the transaction fees.  In high value markets like SF Bay Area or NYC, 3% savings on a $1M property is $30k on each side or $60k on the buy/sell flip transaction; that’s not bad.  For long-term cash flow and appreciation over time, it comes down to focusing on a market you believe in and can build a team in that market to support you long-term to build monthly passive income.

Come Up With A Plan

When you invest, it’s best done with a plan. Just like a budget can help you make decisions on how to spend your money, an investment plan can help direct how you will invest. This will require some thinking on your part to determine what your goals are for the money. Below are some of the common goals new investors have:
  • Starting to save for retirement
  • Be able to buy an investment house in the next 24 months
  • Building $10k/month passive income over the next 10 yrs
There are many more motivations to invest, but you get the point. Determine what your goal is and formulate a plan to meet that goal. This will help separate emotions from your investment decisions and base your action on quantifiable goals.

Don’t Be A Stranger

Once you start investing you might think you can set it and forget it. There is a fine line between thinking long-term and simply forgetting your investments. The former will serve you much better over your investing years.  Think about your investments as running a business that sets you up for financial freedom and building wealth over time.  The exact interval will depend on your goals and needs. That might mean once a month, once a quarter or twice a year you check-in on your property manager and financial statements, but I would encourage you to analyze your situation regularly and be more active in building your wealth. Whatever it is, make sure to do it to stay on top of how your investments are doing.  If you do that and ignore the white noise of the media that tells you to do this thing or that you’ll set yourself up for greater long-term success.  Investing in real estate can seem overwhelming, but it doesn’t have to be. With a clear focus, the correct mindset, and a team around you focused on building your wealth, you’ll begin to grow real wealth over time one step at a time.