It’s often been said that real estate is one of the best ways for the average person to build wealth and make it big. That’s as true as ever these days. But unfortunately, even real estate agents may not get the complete picture of everything real estate has to offer. This leaves them unaware of the power of this incredible investment. If this sounds like you, don’t worry. Read on as we break down a few of the most important things you need to know to start your real estate journey.
1. There’s a Lot More To Real Estate Than Just Buying and Selling Houses
The average person or real estate agent most likely thinks of the industry as people buying and selling houses. In this typical scenario, agents make money on their commission and the owner pays off the mortgage through years of living there. This leaves them with a valuable asset free and clear. Many people are also familiar with mom-and-pop rental property owners as well. But these are just part of the wide world of real estate, which can include many more ways to get involved.
Some choose to “flip” houses, buying older or rundown properties, renovating them, and selling them for a profit. Others may try to develop land and build “spec” houses for buyers, while the most sophisticated may have access to syndication, where many investors pool their money for large purchases like apartment complexes or shopping centers. There’s even wholesale real estate, a popular way for many to get started in the real estate world, which we’ll discuss more later.
2. Real Estate Can Build Wealth in Four Different Ways
One of the reasons real estate is such a powerful generator of wealth is that it can make investors money in four distinct ways. The first comes when the mortgage or financing is paid every month. Part of this payment goes to decrease the principal of the loan, slowly but surely raising an owner’s equity. It’s like an automatic savings account just for paying your mortgage! Secondly, in many cases, real estate will grow in value over time, a process known as appreciation. People who’ve owned property for decades may find it’s worth two or three times what they originally paid for it. This creates incredible long-term gains.
The third method applies to those who’ve chosen to rent out their real estate – cash flow. In an ideal situation, a real estate investment will rent for more than the cost of the mortgage and other expenses like taxes. The difference is the cash flow profit that owners can take, which can serve as valuable income or seed money for future investments.
Finally, real estate also offers distinct tax advantages relative to other investments. Expenses tied directly to the operation of the property, like maintenance, taxes, and management fees, can be deducted from the property’s income to reduce taxes. Owners can also depreciate their properties. So they take a paper loss designed to represent the building’s gradual deterioration over time. This offsets real income. In addition, real estate offers tax structures that can help reduce or defer taxes in many cases.
3. Some of the Best Deals Don’t Even Hit the Market
It’s true that most of the residential real estate that sells in the United States is publicly advertised on what’s known as a multiple listing service, or MLS. This allows all agents and would-be buyers access to information on an area’s available properties. But this can often lead to intense competition and bidding wars, especially in popular markets.
Instead, some agents, investors, and others turn to “off-market” deals. These can be found in various ways. They include traditional community networking that can help learn of potential sellers before they officially list their property. Others may send direct mail or advertise in other ways to reach out directly to those who may be considering selling but haven’t made their decision yet. Because you’ll typically have less competition for these less well-known deals, they offer agents and investors a valuable chance to supercharge their returns by buying below market value.
4. You Don’t Need a Lot of Money to Get Started
This is one of the most common misconceptions that even many real estate agents perpetuate. In most markets, buyers or investors may need thousands or tens of thousands for a down payment. Plus, a strong income just to qualify for a mortgage. But other ways exist to involve yourself in real estate, even if with less cash in the bank.
Motivated investors can partner with people looking for deals but without the time to find or manage them. In essence, they’ll trade their time and effort for a portion of the investment. This the main financial partner may not have been able to find without them. Wholesalers essentially function as a middleman. They connect motivated sellers that they track down to a group of pre-selected investors with money to spend on deals. Those wholesalers make money from a small spread between the seller’s selling price and the buyer’s buying price. This method primarily relies on networking, people skills, and hustle, allowing even real estate investors who are just starting to build their capital.
Your Real Estate Education is Just Beginning
While the timeless principles of real estate will always remain the same, the industry is constantly changing and developing. Agents, investors, and others involved need to be always working to stay up to date on the best ways to make money for themselves, their partners, and clients.