Note: Since I am not interested in real estate investment (other than through REITs), I think it's great for my readers to gain a little insight from those who do go that route. This is an interesting look at passive income through rental properties. Let me know what you think in the comments!
Seven years ago I read Rich Dad Poor Dad by Robert Kiyosaki and this book changed my life. It inspired me to become a real estate investor so I could generate passive income and quit my 9-5 day job. It almost sounds too good to be true.
I was very eager to start so I called a Rich Dad Poor Dad sales rep to take the next steps. After a 90-minute call, I was told to make a decision on the spot. The choice was to either pay roughly 7% of my life savings for access to the Rich Dad Poor Dad community of coaches/mentors, or to end the call and walk away with nothing. I walked away from this opportunity sad, angry, and confused. I was ready to invest in real estate, but I wasn?t ready to fork over a significant portion of my savings for a mentor I knew nothing about. It was too risky for me.
Rich Dad Poor Dad definitely sparked my desire to become a real estate investor, but it did not help me start investing in real estate. So what did? It was probably a combination of reading a lot of real estate books, meeting countless real estate professionals, and looking through hundreds of property listings. It was painful at times, but I stuck with it and am happy with where I am today.
At this point you may be wondering what the secret is to successfully invest in real estate. Of course there is no secret, but finding the right information is the key, and it is difficult. Below are the most important rules to follow for investing in real estate ? particularly long-term investment with an emphasis on generating cash flow.
1. Become familiar with the real estate market you want to buy in.
Go to open houses, set up property alerts on redfin.com, Zillow.com, trulia.com, etc. Contact realtors to help you find the right investment properties. Get to know your real estate market.
2. Buy in good neighborhoods.
Properties retain their value better in good neighborhoods during recessions. Although these properties are more expensive to buy, you can also charge higher rent, and the renters tend to take care of the property better.
3. Find good deals.
Once you become familiar with the real estate market you plan on investing in, you will quickly learn what is a good deal and what is not. Newly constructed or remodeled homes sell for the most, so the best investment property is one that needs some work put into it.
4. Consider remodeling after you buy.
You can charge higher rent and won?t have as many maintenance calls because everything will be new and won?t need to be replaced as quickly. Remodeling also increases your property value.
5. Calculate your return on investment correctly.
It is a terrible feeling to make an investment that loses you money, month after month. When you calculate your return on potential investment properties, be conservative with your numbers. Apart from mortgage, interest, taxes, insurance, also include maintenance costs, HOA dues (if any), vacancy, advertising, and others.
There is a lot more to consider when investing in real estate. What I?ve described above is just a brief summary for one type of strategy. Although there is some level of work involved with managing the property, the benefits can greatly outweigh the costs.
For example, one of the properties I bought cost me about $60,000 to buy and remodel. After all costs and vacancy, I make $6,000/year in passive income. That is a 10% return, and this is almost guaranteed every year. Not only do I get $500 of additional income every month, I also have increased my property value with the remodel by about $25K. Furthermore, in 30 years (when the mortgage is paid off), I can always sell the property for a large chunk of cash.