Can Investing in Real Estate Get You Rich?

By Laura Agadoni · Mar 8, 2017 · Mortgage

Can Investing in Real Estate Get You Rich?

Image courtesy of Flickr, Philip Taylor

You can get rich from real estate. But it doesn't happen overnight. It takes time to see some serious benefit, and you need to know what you're doing.

We've all heard of people getting rich from investing in real estate - President Trump , for one - but is the cat out of the bag now? Is there still room for the rest of us to cash in? And if there is, what's the best way to do it?

Buying real estate is not cheap. So if you do have the money or access to financing, you'll want to do all you can to ensure you're making the right decisions. Making money through real estate, despite what you might hear on TV or radio, is not a get rich quick scheme. Here are six tips, with some advice from experts, on real estate investing.

1. Get Educated

There are good ways to learn about getting rich through real estate, and there are people out there who will rip you off. "There's a lot to learn, and if you're not willing to educate yourself, the chance of losing a lot is rather high," says David Bakke, finance expert at Money Crashers.

"You can't do it the way of the infomercials, where you show up to a course and sink $20,000 into material, and then all of a sudden you're a house flipper," says Andreas Johansson, a real estate investor.

More on this here: Real Estate Seminars - Are They Worth It?

So what do you do?

Jason Shepherd, co-founder of Atlas Real Estate Group, says to align yourself with a professional. "If you want to become successful at investing in real estate, you need to work with a professional who lives and breathes it," he says. Shepherd suggests working with a broker who also has investment properties or someone with personal experience in both deal acquisition strategies and property management.

Having trouble finding someone like that? Bakke says, "Check out the website SCORE, sponsored by the Small Business Administration, to see if you can find a mentor."

2. Have an Exit Plan

Unlike a movie, you should know the way your investment plan will end. Before you invest, figure out whether you want to flip properties for a quick profit, hold properties indefinitely as rentals, or hold investment properties until a trigger occurs, such as paying for your children's education. "Each requires separate planning and separate execution," says Peter Vekselman, an Atlanta, GA, real estate investor.

3. Crunch the Numbers

No matter which type of real estate investing you choose, you can't escape doing some math to determine whether you're making a good deal. "You have to really know your numbers," says Debra Nemeth, a real estate investor with Urban Prairie Investments in Chicago and its suburbs.

She has this to say regarding flipping: "Too many first-time flippers overpay for a house, underestimate the repairs and sometimes overestimate the after repair value (ARV) and what it will sell for in that area."

If you intend to rent the property, your calculations will differ. "Research the local economy, historical housing, and rental data as well as property-specific information like insurance, taxes, gross yield, net yield, and cash flow," says Dennis Cisterna, chief revenue officer of Investability Real Estate, Inc .

4. Use Leverage Wisely

You can save up until you have enough cash to buy a property, but you don't have to do things that way. One benefit of investing in real estate is that you get to use other people's money , a concept so popular, it has an acronym - OPM.

When you finance the deal , you're using the lender's money. A typical finance deal might be that you put down 20 percent and finance 80 percent. If you have partners, you might not need to put down any of your own money, if for example, they fund the investment and you find and manage it.

Leveraging works when the cost of financing the deal is less than the money you take in. When done correctly, you leverage money to buy real estate, get a positive cash flow, and use some or all of that money to pay the loan . You're making money and building equity at the same time.

There's some risk associated with leveraging, however. The property you buy could go down in value. This will especially hurt if your exit plan is to get out quickly. Or if your plan is to rent properties, if your repair and/or vacancy costs are more than you anticipated, you might not be able to pay your loan, which could result in losing the property.

"You have to start modestly, get the ball rolling, build some equity, and be careful not to get too greedy and overextend," says Jim Esposito, a Fort Lauderdale, FL, real estate agent.

5. Learn How to Negotiate

If you're too eager for a property, you might pay more for it than you have to. But learning some negotiation skills can help you get a better deal. "Many new to the investment game will grab a property at or near the offering price when the home could have been purchased for thousands less," says Vekselman.

Once you understand what comparable homes in the area are selling for and the motivation of the seller, you're in a better negotiating spot. "The goal is to create a win-win situation for you and the seller without leaving your profits on the table," adds Vekselman.

6. Take the Tax Benefits

You can deduct practically all the expenses related to your investment, including mortgage interest and supplies you'll need. You can also deduct depreciation, which lowers your income on paper, thereby lowering your tax bill. It's a good idea to meet with a tax expert so that you don't miss any of the deductions you can take on investment property.

Bottom Line

Usually when people talk about getting rich from real estate, they define "rich" as having financial freedom, and this is definitely a goal you can achieve through real estate investing - if you have a plan and are smart about the way you invest.

"Remember that building wealth through real estate investing is a process," says Shepherd. "You won't become a real estate mogul overnight." He says to think of real estate investing as a "crawl, walk, run." "Set realistic and attainable goals over the long term."

And remember that at some point you need to stop analyzing and get in the game.

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