This is the second part of the Building Wealth series. The following is a presentation that represents an investor’s life. Any similarities with actual person is purely coincidental.
So here’s Mr. (or Ms.) Investor , years after saving 50 to 80% of his annual income, he/she finally saved enough funds for investment. The problem is there are so many choices, and to make this post less than 1,000 words, let’s narrow down his choices of investment to the following: gold, silver, stocks, small business and real estate. And since I already did the title as “Real Estate Investing”, let’s stick with that one.
THe first thing our hero/heroine does is search for a lot of books, newspapers, magazines in the library relating to how to invest in real estate. Our hero went to attend a few seminars from real estate gurus all the while wondering “am I wasting my money doing this?” Having read somewhere that education is an investment – he was convinced he will learn something. Then H (for Hero or Heroine as it’s getting tiring to keep typing both genders) He spent about 3,000 hours and almost $1,500 over a few months learning everything about real estate. He even took a real estate agent course and passed it. To this day, H was still wondering how he passed it.
He attended a real estate investment club, talked to a few people that he met during seminars, and spent hours in a favorite hardware stores studying how materials work and how much they cost. To H, Home Depot is Disneyland.
Then he looked at the internet and got familiar with homes being sold at market price, avoiding the ones without photos. Then he talked to a few sales agents that deals with homes sold below market price. He advertised himself on Craigslist and other free ads stating that he buys homes.
After several weeks of looking, he finds a home that looks good (at least on paper). How did he know that it is good enough for investment? He doesn’t until after he crunches the numbers. There’s no emotional involvement here, just logical approach to buying. If he buys this house and rents it out, will he get enough cash to pay for the mortgage, insurance, property taxes, maintenance and other expenses? Yes? Then he looked at the neighborhood. Will there be a lot of prospective tenants? Enough jobs around? Is the neighborhood safe enough and pleasant enough to live in? Are there good schools around? Where’s the closest grocery store, church, park,etc?
Our hero finds out that after expenses, he will net around 10% a year on the investment. Should he go for it? Of course, he reasons – especially with banks paying less than 1% on any investment. So he closes the deal, got financing, put down 20% of his own funds and got ready for some home repairs. He could have paid off the house but he decided he will keep some of the cash just in case he finds a couple more deals. Yes, the reason why he got the house way below market price was because there are some repairs to be done. It doesn’t matter if it’s a buyer’s market or seller’s market, H knows that he has to buy at around 20-40% of the market value to make money.
Armed with encyclopedic knowledge on home materials, he proceeded to call a reliable carpenter and together, they started mapping out the necessary repairs. His plan is to rebuild the inner workings of the house with inexpensive yet durable materials. No need for much bling, just the basic reliable stuff.
He also decided to replace the appliances with inexpensive reliable ones as pointed out by several consumer research web sites. He sold the old appliances in the house to help with cash flow.
He painted the inside and outside of the house. He had a professional house inspector to check for further damage and hired a pest control to take care of any potential pest problems. Using magazines (from the library again so it’s free) as a resource for aesthetic design for the home, he proceeded to make the design contemporary at minimal cost.
Finally, a few months after buying the home, it is ready for a renter. He already advertised it two weeks ago telling the potential renter it will be ready in two weeks. Now he is ready to screen the renters. He looks at credit rating (which provides an emotionless screening) and picks only the ones with high credit standing. Then he interviews them and checks all the references. Yes, all the references, even if the prospect was a single, good-looking, hip, young professional. H used a standard lease contract available in most real estate agencies for the contract.
Then he found the ideal candidate, and the house is leased. Welcome to a new source of income!
Sounds easy? On paper, it is. But it always boil down to action and execution. But you’ll be glad to know that thousands of people are doing this year in and year out.
That means you can, too!