Investments

Real Estate Investing With No Money How Two Friends

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

Real estate investing, if done correctly, may yield astronomical profits. Just a few short months after purchasing a rental property, I saw a return of 400% cash-on-cash. Soon after I got a great bargain on the house, a neighbor approached me about selling it to him at full market value, about twice what I had paid.

I was able to put down very little money because most of the transaction had been financed, and I made a ridiculously large profit.

Some of our past success can undoubtedly be attributed to good fortune. However, if you acquire things below their market value, you set yourself up for a lot of good fortune. Have you ever thought of dabbling in real estate? The following are the groundwork principles from which to build as you get into your training.

Why Should You Invest in Real Estate?

Investing in real estate usually pays off nicely over time, even if you don’t manage to get any incredible deals. Residential rental properties outperformed all other asset classes over the 145 years from 1870 to 2015, according to a study conducted jointly by numerous U.S. and German institutions and the German central bank.

One thing to keep in mind is that investing in physical property requires more work than investing in paper assets. While I was able to entirely automate my stock investing using a free robo-advisor, I was unable to do the same with my real estate assets. The rewards, however, are substantial, from the passive income earned right away to the massive tax savings that will be realized.

Real estate investing requires time and money, so before you make the commitment, you should have some idea of what you hope to achieve.

When formulating an investment strategy, keep in mind the following, even if the benefits of various forms of real estate investments might vary widely.

High Potential Returns

High profits are possible in real estate, as we have shown. For instance, if a house flipper spends $100,000 on a purchase and $50,000 on repairs, he or she can expect a return of $50,000. With no consideration for leverage, that’s a 50% ROI in a matter of months (more on that momentarily).

In addition to capital gain, buy-and-hold investors can expect yearly returns on rental income of 8 to 12 percent.

Several obstacles reduce potential competitors in the real estate market. Unlike the rapid gratification of the stock market, where one can put $100 into a brokerage account and be an investor, real estate investment requires far more capital, effort, and expertise.
Gaining substantial profits is consequently simplified.

Other People’s Money, Your Investments, and Leverage

One option for real estate investors is to borrow money from family and friends in order to expand their portfolios or pay for property flips.

Imagine you’re borrowing 80% of the purchase price and refurbishment expenditures in the previous flipping example. All in all, assume you invest $20,000 in cash out of $100,000 in total expenditures.

You get a 50% return, or $50,000, but only have to invest $20,000 to do so. An investment yielding such a high rate of return is equivalent to getting back 25 times what you put in. Leverage can have such an effect.

Continuous Passive Income

When you acquire a rental property, you start collecting passive income immediately in the form of rentals. And that property can carry on providing revenue eternally.

With enough rental properties, you can quit your day job and live comfortably. In this state, you are free to retire whenever you choose and your financial security is assured. There are few investments that can compete with rental properties in terms of both income potential and acceptable risk.

Predictable Returns

Long-term profits can be expected only if you invest in stock index funds and trust that the future stock market behaves similarly to the past. Profits are reliably predictable in real estate.

For instance, a home investor can estimate the following expenses: the purchase price, initial closing charges, rehabilitation expenditures, carrying costs, and marketing costs. After the repairs are made, they may estimate the home’s worth and hence their profit (ARV). The profit margin of the two companies is different.

Similarly, those who invest in rental properties are familiar with market rent and can reliably predict all costs. That gives them a typical yearly cash flow number to work with.

Tax Benefits

All costs associated with investing in real estate can be deducted from taxable income without the need for the investor to itemize.

Real estate investors may write off anything from maintenance and management fees to travel and bookkeeping expenses. Some of their costs, like depreciation, are only administrative and may be written off.

Holding onto a piece of real estate for a year or more can qualify you for the preferential capital gains tax rate. Capital gains taxes can be sidestepped via the use of strategies like 1031 exchanges (more on this below).

Inflation Protection

Humans have an inherent requirement for shelter. When inflation occurs, people will pay more for real estate because of its inherent worth.

Except in exceptional circumstances, such as with Treasury Inflation-Protected Securities, the same cannot be stated for debt assets like bonds. If you invest in a bond with a yield of 3% for a year and inflation rises by 5% over that time, you will really lose 2%.

The high historical performance of real estate relative to other asset classes has made it a go-to hedge against inflation.

Diversification

It’s unwise to put all your eggs in one basket. Even though stock market fluctuations are exciting to me, I avoid them whenever possible. Even when the stock market drops, my real estate holdings continue to bring in money, so I don’t feel too bad about my portfolio.

The housing market’s relationship to the stock market is weak. Diversification from the stock market is at its best when an investor owns real estate outright or at least shares through a private crowdfunding platform.

In contrast, investing in publicly traded REITs doesn’t provide much of a diversification benefit because its value follows the stock market more closely.

Real Estate Investing Options

Investors can choose from a wide variety of real estate investment opportunities. However, for direct investors, those choices boil down to either a buy-and-hold approach or a short-term flipping one.

Flipping

House flipping has been around since humans emerged from caves, but it experienced a massive uptick in activity during the ’00s real estate boom. Hollywood made it look glamorous, and the allure of a quick fortune is irresistible on screen.

In the hands of savvy investors, real estate flipping may provide rapid and substantial profits. The issues begin when inexperienced investors go into the market without first acquiring the proper information, erroneously assuming that success in real estate can be achieved via gut instinct alone. (I’ve spent my whole life in them, so I’ve learned a thing or two about homes.)

The success of a flip depends on the buyer finding a fantastic price, the flipper managing the renovation efficiently and affordably, and the seller closing swiftly enough to realize the full after-repair value. On paper, it appears simple, but there are more potential pitfalls than you may imagine.

However, property flipping may be a rewarding and quick method to supplement your income for individuals who are prepared to learn the ropes.

Properties for Long-Term Rental

Some real estate investors choose to acquire properties at bargain prices and hang on to them for a long time rather than buying, fixing them up, and selling them. They lock in long-term renters and then wait for the properties’ value to rise naturally over time by virtue of the leases they’ve signed.

However, property prices aren’t the only thing that tend to climb; rentals do, too, and at a rate that often keeps pace with or even outpaces inflation.

That’s encouraging news for anybody considering a fixed-rate mortgage as an investment. The decline in the value of the dollar has no effect on your mortgage payment, which means your monthly outlay will remain the same.

Vacation Rentals for Short Term

Some investors take a spin on the classic buy-and-hold strategy by renting out their houses seasonally to tourists.

Because Airbnb hosts put in so much effort on a daily basis, this approach muddies the lines between investing and operating a company. While this may seem like a lot of extra effort, many investors in holiday rentals report greater profits and the added benefit of being able to use their own home whenever they choose.

Indirect Real Estate Investing

If you want to diversify your portfolio with real estate but don’t want the hassles that come with direct involvement, you may always invest in real estate indirectly. Indirect real estate investing choices include:

  • Real estate investment trusts that are publicly traded (REITs)
  • Fundrise and Streitwise are two examples of private REITs.
  • Crowdfunded debt secured by real estate, such as a ground floor apartment
  • ETFs and mutual funds that invest in real estate-related businesses like homebuilding
  • Personal notes
  • Syndicates in real estate
  • Funds for private equity
  • Hedged funds
  • Buying and selling investment properties

In response to people who inquire about real estate investment, I often ask, “Do you have a burning personal interest in learning how to invest in real estate as a side business, or do you just want to diversify your portfolio?” ”

Direct real estate investment calls for self-control, expertise, and understanding. I think you should go after it if you feel strongly about it.

But if you merely want to spread your bets around, indirect investments like real estate crowdfunding are a better bet. Not only do they make it simpler to diversify into real estate, but they also allow you to put your money into things like apartment buildings and office buildings, rather than simply houses.

Bottom Line

If you’re looking for a hands-off approach to investing, paper assets are a good bet. or real estate-backed paper instead of buying physical properties.

The proper technique to invest in real estate is labor intensive. Learning the ins and outs of hiring, supervising, and motivating support staff takes time and effort.

Those who are prepared to put in the time and effort can reap the rewards in the form of substantial financial gains, favorable tax treatment, and a steady stream of income that can last a lifetime.

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