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First,
you make money through net cash flow, principal or equity,
appreciation, and tax advantages. If you choose to be a landlord, your
net cash flow is the difference between what you charge for rent and
the monthly mortgage payment, including principal, interest, taxes and
insurance. Unless you get the property at well below market value, it
is a good rule of thumb to make at least $100 per month to offset the
occasional repairs, fix-up costs, and move-in/move-out costs.
Equity
is the amount of the original purchase price that you are actually
paying off each month. The shorter the mortgage term and the lower the
interest rate, the more equity you will accumulate.
Appreciation
is by far the best part of real estate investing. Time is your friend.
By investing in "bread and butter" houses (a term I picked up from
Robert Allen [1990]) in good locations, the value of your house will
rise each year. The better the location is, given a good economy, the
higher the appreciation. In my area of Johnson County, Kansas (a suburb
of Kansas City, Missouri), houses have appreciated over 7 percent per
year for several years.
Finally, tax advantages
include the following deductible items: depreciation of the property
and other equipment, taxes and insurance, repairs and supplies,
mileage, and office supplies used for the property.
That sounds pretty good so far. Are there any disadvantages?
You
bet! First, if you buy a house using creative financing or if you buy a
repossessed home, you are in for some fun times. Get ready for
cleaning, painting, replacing carpeting, removing trash, mowing,
raking, repairing plumbing, installing fixtures, replacing furnaces or
air conditioners, and whatever else is needed to get the property sold
or rented.
I recall a Veteran’s Administration (VA)
repossessed home that my wife and I bought in January 1996. While
fixing it up, we heard several loud creaking sounds that eventually
were followed by water spewing from broken copper pipes. Had we not
been working when the water pipes thawed, the house would have been
flooded. Luckily, the VA paid the plumbing bill because the pipes were
apparently frozen when we bought the house.
Next,
advertising for and securing a decent renter can be expensive and time
consuming. The screening process for renters is often an arduous
process of phone calls, screening, and crossing your fingers. If you
are not nervous about renting your property, I suggest watching the
movie Pacific Heights. Regardless of what your lease says, renters have inherent rights and, in the unfortunate event of eviction, you often lose.
Repairs
are the Achilles heel of the rental game. After purchasing my first
rental property, a continuously clogged sewer line led to installing a
new line. Thank you very much – there went all of my annual net cash
flow (approximately $1,200) in one fell swoop.
Finally,
if you think that selling a property is as easy as a classified
advertisement and a sign in the yard, you are wrong. Once a property
has been labeled a rental house, its inherent value is slightly lower
than owner-occupied houses. Even in a good market most buyers use a
real estate agent. Why not? It’s free after all. The seller has to
pay the realtor fees, right? In actuality, the fees come from the
real estate transaction and it may appear to be free, but really both
the buyer and seller are paying the fees.
If I haven’t scared you away, then get started in your own real estate investing career now.
Michael Williams is co-author of the book and online course, Rogue Real Estate Investor Collection,
a book that profiles the wide range of investing options available to
real estate investors in one comprehensive 500-page manual that covers
all 50 states and Canada. For two years, Rogue Real Estate Investor
Collection has been one of the top real estate books on the Internet,
selling over 5,000 copies.
Click here to learn more...
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