Having worked in and managed different types of investments, I’ve settled on real estate investing as my personal favorite. As far as return and how to make money, real estate investing is weighted with advantages. I think that knowing and maximizing those advantages can really empower you as a real estate investor and help you accumulate the wealth you need to be financially free! Over the last two week I covered the first four things that make investing in real estate so awesome: demand, leverage, cash flow and control. This week I’m covering arbitrage and equity build up.
During my time in real estate investing, I’ve found eight reasons behind why it’s such an awesome investment. Here are six of the eight:
- Cash Flow
- Arbitrage: This is one of my favorite reasons. Wikipedia defines it this way: “In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.” In simpler terms, perfect arbitrage is buying low and selling high. I believe that in real estate investing, you can almost always buy low and sell high. If you know what you’re doing, then you can buy real estate everyday for less than it is worth. How is this possible? Where here are two reasons:
- Situation of the Seller: Foreclosures and short sales are examples of this. Banks are in the lending business not the real estate business. Because of this, they will sell a property for less than it is worth just to get it off of their books. Other sellers that will potentially sell property for less than it is worth are investors looking to get out of a property, couples going through a divorce, people who are being transferred on their job, etc. The list is almost limitless. Now I never recommend taking advantage of people. But in most instances you are doing motivated sellers a favor just by taking the property off of their hands!
- Condition of the Property: In this instance you are looking for properties that need to be repaired. But really the best kind of these properties are those that just need “lipstick,” i.e. paint and carpet. As you develop your real estate business and build relationships with handymen and contractors in your area, you will be able to get good prices for professional work. This will empower you to go on to create value in areas beside paint and carpet! But it does take time to develop these relationships. That’s one of the reasons I always tell real estate investors to work on building a solid team.
- Equity Build Up: Also known as equity buy down, this is where you pay down the interest. Equity build up works like a forced savings account. It adds up tremendously. Remember there are two primary parts of a mortgage payment: principal is the first part and interest is the second part. By studying an amortization table, you can see the principal and interest separated out. Every time you make a payment, a portion of it is principal and the remainder is interest. At the beginning of a mortgage, most of the payment goes to interest. But from the second payment on, an ever-increasing amount goes to the principal. It’s basically forcing you to save. So, every time a payment is made, the amount owed on the property is paid down and equity in the property is built up. It’s like putting money in your personal bank account. Now with an investment property it gets even better: every time your tenant pays rent it’s like somebody else is putting money in your bank account for you! Your bank account is getting fatter, but you aren’t the one making the deposits. It’s awesome!
These are six of the reasons real estate is so amazing. Stay tuned next Thursday for two more reasons why real estate investing is awesome!
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