How To Get Started In Real Estate Investing
"Buy land, they're not making it anymore."
For many people the "idea" of real estate investing calls up images of billionaires who light up cigars with $100 bills. It seems like something they could never do with their modest income.
The truth is, real estate investing requires
- a modestly good credit rating
- a relatively small amount of cash
- some good information
This is NOT a get rich quick scheme. This is a long-term investment strategy.
“Don’t wait to buy real estate. Buy real estate and wait.”
Just how much money will you need to get into real estate investing? Let's look at an example.
Isn't it beautiful? It's best feature is that the complex is right on the beach! This unit is priced at only $139,000. It is an efficiency unit with 400 sq. ft. It is a great way to get your foot in the door of real estate investment.
“Landlords grow rich in their sleep without working, risking or economizing.”
John Stuart Mill
Don't have the $139,000 laying around? The good news is you can finance this with only 20% down. With 2% in closing costs you only have to have $30,580.
“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.”
There will be expenses with this investment such as the $245 monthly condo fee, utilities and insurance. So you need to have some available cash to pay these. Of course, once your rental income starts coming in you will pay these out of that income.
“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”
If you finance your investment with only 20% down you may have a negative cash flow situation. That means that your annual expenses may be more than your annual income from the property. This can still be a beneficial situation. Talk to an accountant about your specific situation.
Two things that can make a negative cash flow profitable.
Depreciation is a tax term that allows you to deduct part of the selling price of the real estate from your taxable income. To figure your annual depreciation for a condo you divide the selling price by 27.5 (the number of years you can depreciate real estate).
For our case it would look like this:
$139,000 / 27.5 = $5,054
Each year you can deduct $5,054 from your taxable income and your tax bracket will determine your annual savings.
To learn more about depreciation see Zillow's Tax Savings:Rental Property Depreciation Explained
Over time your property will usually appreciate in value. The rental rate will also probably increase.
To learn more about real estate investing read How To Figure The Investment Quality Of A Property.
Disclaimer: This post is specifically concerned with investing in the Gulf Shores / Orange Beach area. As with all investments there is risk involved in real estate investing. Usually, the greater the return the greater the risk. You should evaluate your level of risk comfort before making any investment.