Making Money Through Real Estate

Housing Market, Houses, Home Ownership, Real Estate Investments

Growing up we are always told to own our home. True that. Owning your own home creates not just a sense of security but also the pride of home ownership. It's an investment where no matter how the day has been you know the security of having a home provides comfort for the entire family. In this article we will dive into real estate investments and figure out what circumstances lead to a profitable investment. There are basically three types of real estate investments.

Commercial Real Estate Investments :

Investing your money for the long term has been the way to beat inflation. Over a period of time interest rates offered by the banks for a CD or term deposit have far underwhelmed the rest of the investments. While the stock market serves as a healthy alternative, the ups and downs of the market do not jive with everyone’s risk profile. In addition there is not necessarily a healthy stream of income from the stock market on a monthly basis. This is where commercial real estate investment comes in.

The most common thought process is that commercial real estate requires a lot of capital to start. If you look at the commercial market you can purchase a commercial property starting at less or similar values as the house prices in your area. While having a 3 or 5 or even a 10 year tenant in the commercial space sounds very lucrative, if you are going to purchase the commercial property using loans, these loans will typically carry a higher interest rate compared to the regular housing market. Therein goes your cash flow to the bankers. You have to do your math and ensure that the loan payments do not exceed the monthly income minus all the expenses associated with the investment. The margin that you keep after loan payment is your rate of return. So for example, if you are earning $1000 per month in commercial rental income, and your expenses including HOA, CAM, Taxes and any other fixed or variable expenses are $400. That leaves you $600 to service your loan. If your loan is $300, that gives you a net profit of $300 per month. It is very critical not to leverage your investments by putting 5 or 10% down,
where the monthly payments consume all your returns. Also there will be events where the investment might remain vacant for a few months due to tenant turnover, so you have to ensure that your rental income has enough buffer for you to carry your expenses through the lean periods. Remember, start small , start slow.

Crowd Funded Investments :

This is the latest type of real estate investments on the market. There are quite a few companies on the market like Fundrise or PeerStreet, that offer crowdfunded real estate investments. This is a hands off investment, where you are depositing money with these companies, who in turn do everything for you. They pool money from investors like you and purchase bigger properties potentially costs are lowered due to scaling. They purchase the properties, maintain it, manage it on a monthly basis.You get your share of the net profits at the end of each term. In lieu of managing your investments these companies take a share of the profits. While this sounds as the next best alternative, I also have to caution you at this juncture that the cash you invest in this platform will be as illiquid as any other real estate investment. You will not be able to withdraw your money at will, but only in certain windows throughout the year.

Personal Real Estate Investments:

This is a tricky one. Of Course everyone needs a home to stay, and the pride, joy and exhilaration of home ownership cannot be surpassed. You will find tons of articles on the internet that tell you about the benefits of owning a home. While the benefits are truely much more than financial, I want to focus on building wealth through this vehicle. A home that you stay in should not be considered an asset. An asset is something that makes you money. Now in the long run yes that house will appreciate in value as

does other assets, but a home that you reside in gives you no cash flow. It is a dead asset till the time you sell it, and only then the true rate of return can be established. Yes, while you stay in the house, you don't have to pay rent, but you do pay for most people a mortgage and real estate taxes, which added together can almost equal the rent. Does this mean that personal real estate is bad? No, Not at all. Rather than considering home equity as an asset, it needs to be considered like a dormant investment. For example, If you have let’s say $100,000 worth of line of credit, it would be prudent to invest $50,000 in your own personal home where you stay and then take the remaining $50,000 and invest it in a rental income generating property. The trick is not to leverage yourself with loans on both properties, else the extended leverage can backfire. What is critical is to do this with zero leverage, the Dave Ramsey way, and enjoy the cash flows. This method takes time to build wealth, but you can sustain through economic downturns easily with this approach.

While all the three real estate investments outlined here are credible in their own right, it will come down to personal choices on which route you choose to take. There are no right or wrong choices. Remember, building wealth is possible, it takes time, patience and perseverance.