Four Basic Reasons to Invest in Real Estate

Every time I see someone advocating that "Stocks are clearly better to hold than real estate", I have a reflex reaction in my mind that says, "If they thought about it in a different way, they could be much wealthier, with a much more secure position at any given time."

For example, in Ramit Sethi's blog "I Will Teach You to be Rich", I see a comment from a poster saying they think stocks are better to hold, but that the proceeds from real estate could be put into stocks.

One of the best ways I've seen it put is on the web site for Flagstone Properties, which summarizes Dolf de Roos' 4 questions to ask yourself when comparing Real Estate to stock based investments.

Basically, it explains why:
1) Real Estate is secure. Banks will lend you money to buy Real Estate, but not stocks or mutual funds
2) Gains in Real Estate are multiplied when you borrow on a mortgage.
3) The value of Real Estate can be manipulated by the investor much easier than stocks.
4) You can buy Real Estate at a bargain because of market inefficiency.

There are other good reasons, such as using home equity loans for downpayments means you don't need to save up the cash (ROI is again multiplied), and the interest costs on mortgages are tax deductable (they aren't in Canada for your principle residence, but they are for income properties).

To me, its a no-brainer. Your mileage may differ, but if I do my due diligence on the property and the people I use to manage, maintain, buy and sell, then I can't see a more secure or profitable investment.

- Scott

Passive Income

Passive income is simply income that your investments generate each month. It takes no additional work for it to happen. If you invest in assets that generate cash each month with no money from you, then eventually, the passive income stream will exceed your monthly expenses. When that happens, as long as your monthly expenses don't keep increasing, then you have "infinite wealth", meaning you can retire and live off of your investments.

Oops, My Expenses Grew, Too!

I mention "as long as your monthly expenses don't keep increasing" because I realize that if you don't make a conscious decision to budget and pace your spending it gets very easy to change your lifestyle to match your new passive income. There's nothing wrong with increasing your standard of living as your means increase, but just realize that you won't be able to retire until you make an effort to live within your means.

OK, There's Still a Bit of Work...

So, the way I look at it, if you are looking to retire on passive income, the only work you should need to do to "stay retired" is to manage your expenses to stay within your means.

For more discussion on passive income, please read the link below posted on Robin J. Elliott's blog.

Passive Income at Real Success Blog.

Should you decide to go further with Robin Elliott, and join the Dollarmakers.com Joint Venture Forum, which explains how to generate passive income with no money and no risk (but some education and a small amount of time), please indicate that you found him through "Scott at Money Mindset Blog".




Thanks,

... Scott

It Doesn't Take Money to Make Money

This is a simple statement. However, you might be surprised at how some people interpret this universal "truth".

Many investment gurus will make this statement. Inevitably, they have proven it, using their own success as a testamonial. So, it must be true.

What I have found is that there is usually a way to structure investments so that I end up with an asset, and ultimately, I have no less money in my bank account than I did before I made the investment. This is based on theory, and I do know a few people who are doing this.

By most people's definitions, this kind of investment approach could be called "creative investing".

I have tried several investments using these approaches. In some, I have been able to make an investment, and within a few months, I have a new asset and no less money in my bank account. This doesn't mean I didn't use money to get the asset. It's all in the definition and implications.

Sometimes you can ask people to sell you a house and hold 100% financing, which means you don't need to put any money down up front. Of course there are likely to be land transfer taxes and legal fees. So you can't really say that you don't need "any" money. But it's not impossible.

For me, the key thing is that it is much "easier" for me to make an investment if I have some cash to put into the deal. Then, there are ways to get back the money I put in within some period of time, so I can use it for my next investment.

Someday, I hope to have the skill to partner with people in a way that leverages someone else's money and my skills in putting together investment opportunities. I believe it can be done. But it requires a lot of knowledge about what partners are looking for in an investment. It may not appear complicated, but it is not necessarily easy, depending on your investment knowledge, experience and credibility.

If it was a simple AND easy thing to do, I think most people would at least know someone who is doing it, and eventually most people would be doing it. I don't know very many people who are able to do this. But I'm working on being one.

It doesn't always take cash out of my bank account to invest in an asset that will earn me money, but without the skills to do it right, I think it is much easier if you have the cash.

So, I'd plan on spending a lot of time (and money) developing my ability to invest without taking money out of my bank account.

Let me know what you think by posting a comment below.

... Scott

Making use of home equity for investing

Before I started investing in real estate, I really thought it was years away before I could gather enough money to put into investments of this size. After I read a few books on real estate investing I realized that this wasn't true. I discovered that being the owner of my own residence makes it very possible because there is often value that you can borrow against for putting downpayments on investment properties.

Secured Lines of Credit

The concept of a secured line of credit can make it much more achievable. What I did was take out a secured line of credit on my house. First of all, I used a mortgage broker that can shop around for the best rates. They also know how to approach the lenders who give the kinds of terms you need as a real estate investor.

The main mortgage lenders in Canada will usually lend up to 75% of the value of your house on a line of credit that is really a mortgage (either a first or second mortgage). They will not usually allow you to owe more than 85% on your house in total mortgages. When you are borrowing more than 75% of the value of your house, the portion above 75% usually costs you in terms of a higher interest rate (eg. 10% rates or more, compared to 5 or 6% for a first mortgage of no more than 75%).

The equity is defined as the difference between the current appraised value of your house (what they think you could sell the house for), and what you still owe on the house. As long as you are not going above 75% (or 85% for a second mortgage) in debt, you may be able to borrow against equity that has been accumulating as you pay down your mortgage, or as your house appreciates in value.

An Example Line of Credit for Investment

If I bought a house for $100K with a 25% downpayment (75% mortgaged) 10 years ago, I might have paid down $20K, and maybe I now owe just $65K on the mortgage. In that 10 years, my house might have appreciated by $60K. That means that the house is worth $160K and I owe $60K. A bank might allow me to owe up to $120K in first mortgage debt (75% of $160K). If I have good a good credit rating and a solid income, I might qualify for a line of credit of $60K ($120K minus $60K owing on my original mortgage).

With $60K, I could buy a $160K investment property with a 25% downpayment ($40K). I would keep the other $20K available on the line of credit to cover any emergency repairs or mortgage payments during vacancies. This way, expenses that can be treated as tax-deductable for the purposes of investment property can all be kept in the same account.

It's important to keep in mind that as you use your available secured line of credit, the equity in your house decreases. You should think of your mortgage as being the total of any original mortgage plus any secured line of credit balances.

How Do I Use a Line of Credit After the Downpayment?

I also use a line of credit that requires only interest payments each month. Since the interest is tax-deductable and princpipal repayments aren't, this is actually to the investor's benefit. If you're really lucky, or make it clear to your mortgage broker, you might find a line of credit that allows you to automatically capitalize interest payments.

What that means for me, as a landlord, is that if rent payments are late, or there are vacancies, then mortgage payments, taxes and everything else can be covered on the line of credit, plus the interest payment on the line of credit gets added back onto the principal amount. So, if the rent cheques don't get deposited by the day the interest is due on the line of credit, the balance goes up for a few days. Then, when rent cheques are deposited, the balance goes back down to cover the related expenses.

Investments Shouldn't Adversely Affect Your Monthly Cashflow

So, with the right structured line of credit, I can ensure that my investment related expenses don't impact my day-to-day cashflow. The way I look at it is, any money that a bank would loan me for investment purposes is money I should have working for me instead of being worried about getting my home mortgage paid off.

The banks actually like this setup because they get more opportunities to collect interest from you while you are accumulating net worth with leveraged assets.

... Scott