How I invest in Real estate using my Childhood lessons.
While I was a young kid, my dad had bought a lot of houses and duplexes to rent out as an investment. At the time I did not understand much about this. All I knew was that I spent many of my weekends helping him do handyman projects around these properties. I found this interesting and obviously as a child I began asking many questions. I always asked dad what did you pay for this crappy looking house. He always chuckled and said this is a diamond in the rough “a term I would grow to appreciate” He always said the worst home on the best block is often a diamond in the rough. It is a home you can do some fixit work and grow instant equity. Equity, I asked? Yes, buy today for a small price, add a little elbow grease and sell tomorrow for a much higher price. Made sense to me, I was becoming intrigued with this concept of creating money like this. Equity became my obsession.
Lessons from helping my Dad
Spending all my free time helping Dad fix and remodel these homes were lessons I now use daily. I learned how to do pretty much any fix it job and that makes home ownership for me now a breeze. The best education I probably ever received was just organically learning all the real estate terms and their meanings and most important the significance of each. I now use this knowledge everyday as I invest and help people invest.
Investing using childhood lessons
Cash flow (check), Tax deductions (check), OPM (Check). The finest attributes to any investment is the positive cash flow it generates. It is paramount to any investment. Add in the ability to use OPM (other people’s money) makes this investment sweeter by increasing the ability to leverage your available cash to buy larger income producing properties or multiple income producing properties.
To further sweeten the pot there are the tax deductions. A penny saved is a penny earned and tax deductions will allow you to keep more of your investment returns further adding to your overall ROI.
The latest tax reform has made changes to these deductions; some are changes for the better, while some have restrictions. It very much depends on your situation and type of change, so you want to understand how these changes will affect your investments and strategies with your tax planner.
Cash flow is the Queen Bee and paramount to even consider an investment. Tax deductions and OPM are great additional benefits.
I find much more interest in the least talked about benefit to real estate investing. The Equity. Equity is what has created more millionaires than any other investment available.
What I rapidly learned was the concept of building equity. I found that as Dad bought these properties and did basic fix ups he would increase the value of the property. A few years later as he would sell the properties for much more often double of what he paid for them.
I was stunned to learn that he often doubled his investment. Back then he was buying property for as little as 7k and selling it for 14 k a few years later.
Wrapping my brain around this concept I thought how cool it was to double your money. Dad said, “That my son, is known as Equity,” a term I would always remember.
I asked him if this is such a cool thing how come everyone does not do this. He responded with a smirk and suggested that not everyone knew how. It is not a secret he shared but many people just do not take the time to learn all the benefits available to them. He proceeded to explain that while we spent our weekends buying and working on improving properties. Most people simply take the weekends off and spend money. He then explained there are other ways to build equity. I, of course, was a sponge as I found this so fascinating.
Over the following years I learned much about ways to build equity.
Numerous ways to build equity:
This is where it gets real interesting. There are so many ways to manifest and grow your equity position. It is almost like printing money, only it is legal.
Sweat equity: (This has become my favorite) buying property and putting your own sweat (hard work) into improving the property for an increased value. I started to relate sweating to creating money. So yes I now love to sweat.
Value play equity: basically the same as sweat equity but with a multiplier. When you repair or update something you increase its value, but when you convert something to highest and best use you generate quick accelerated value increase to the property (known as a value play).
Debt reduction equity: Dad called this tenant paid equity. As you pay down the mortgage (or your tenant pays down your mortgage, the mortgage total is reduced. Every month the equity builds larger.
Acquisition equity: Experience tells you that when you buy the property correctly you will have equity day one. Essentially paying less for the property than it is currently worth.
Make your money going in equity: Some refer to this as path of progress equity. As an example, you buy a property in the path of progress, with property values increasing as the demand for properties in the area rise, your equity also rises.
Appreciation equity: Appreciation is its own term of course, but as the appreciation occurs you are accruing more equity.
These of course are not all technical and dictionary real estate terms, but they illustrate all the ways I learned as a kid to build wealth and principles I use today when investing in real estate
Building equity I believe is the easiest and most lucrative way to build wealth and it is the principle used by over 90 percent of the wealthy people today to build their lifestyle portfolios.