A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life. -Suze Orman
For majority of beginner investors, the ultimate aim of investing is to achieve financial freedom.
Financial freedom is essential to enjoy a happier, richer life in our adult lives. In addition, this should be your goal as a beginner investor.
What is Financial Freedom?
The best definition of the subject I ever heard is the number of days you can live without working and maintain your present standard of living. Legendary inventor Buckminster R. Fuller coined this definition.
The Great Money Mountains
There are three great money mountains you can tap to become wealthy: real estate, stock market and marketing mountains. These three are the proven paths to wealth. Majority of individuals that make the Forbes rich list, have achieved their wealth through either one or a combination of these money mountains.
How to Approach Investing in Real estate
The ownership of property has been a proven wealth producing Money Mountains for centuries. You should make owning income producing properties as part of your long-term wealth creation strategy. There are tons of books written on techniques and strategies for investing in real estate. The most important thing you need to know is how to leverage the real estate mountain to accomplish your goals.
Three factors are critical to success in real estate investing
1- Finding: For you to become a successful investor you need to know how to find bargain properties...properties below market value that will pay for themselves and bring you profits. Successful investors know that profit comes from buying right not when you sell.
2- Funding: You must also know how to fund your property deals. There are many ways to fund deals, your ability to get financing is the key to buying bargain properties. The good news is you can easily get financing if you know where to find the money. Money follow good deals...so make sure you become good at finding good property deals.
3- Farming it: The other critical skill you need to succeed as a real estate investor is to know how to reap profits from deals. You may decide to hold on to properties you find because they have good cash flow that delivers income to your bank account. Moreover, you could also flip properties for profit. The actions you take depend, on the investing cycle you find yourself and your core investment philosophy.
Real estate is a powerful wealth-building vehicle you must consider as a beginner investor. The wealth created from investing in properties tends to be stable and less volatile compared to the stock market. You can also predict the cycles with ease compared to the other types of wealth building vehicles.
Leverage is also a big advantage of investing in real estate, because you can buy properties with little or no money down.
There are thousands of properties for sale in your city. When you have these three critical skills to success, you can weed out bad property deals, hone down to find bargain properties, fund the properties, reap the profits and grow wealthy in the process.
5 Factors Make Real Estate the IDEAL Investment
I - Income
Receive cash in-hand, monthly. Can you envision consistently collecting checks that require little-to-no work? This concept exists, passive income. Investors maintain control over a property's revenue stream. YOU make the decisions affecting the profitability of your income-producing asset. You've officially reached 'boss' status.
D - Depreciation
Earn more, pay less. Why are the wealthy taxed lightly? Phantom expenses known as tax-benefits; owners write-off property depreciation as an expense. Effectively utilizing 'loop holes', in regards to property ownership, grants flexibility. Remember the old adage, "a penny saved is a penny earned".
E - Equity
Increase ownership for free. Is this possible? Yes, with happy tenants. They pay you, you pay the mortgage. The principal balance shrinks as equity rises. Each month you own a bit more of the asset than when you initially purchased it. Get excited.
A - Appreciation
Relax as property values mature. How can assets depreciate and appreciate simultaneously? Over time; forced by the owner or the market. Owners appreciate their properties with rent increases, property repairs, home additions, etc. This is termed forced appreciation. Properties also experience market appreciation. Population growth, increased employment opportunities, and area beautification; all assist in increasing value. Competent investment decisions and management efforts not only maximize profit but grow asset value. It's not 1 way to do 50 things but 50 ways to do 1 thing; in this case, increase profits.
L - Leverage
Feel great spending other people's money. Who could resist? Investors acquire properties through mortgages. A maximum 20% down payment for total control, an exceptional deal. Anyone can prosper from this unbalanced transfer of ownership. Investors also employ current assets to acquire additional assets by capitalizing on built-in and/or earned equity. Yet another way to take advantage of a prime investment.
However, just like investing in any other assets, investing in real estate requires thorough planning, preparation and implementation work. Here are some common pitfalls to avoid before you invest in your first real estate.
Pitfall #1: Investing in real estate is not a get-rich-quick scheme
Investing in real estate is often promoted as a get-rich-quick scheme by the so-called gurus of real estate investing. However, this cannot be further from the truth. It takes time to pick a great property that will appreciate in value, and in the event if you picked the right property, more time is needed for it to appreciate in value. And just in case you are wondering, the flipping of properties in an attempt to get rich quick can be a risky endeavor!
Pitfall #2: Not doing a thorough preparation and research
Real estate as an asset class works just like any other long-term investment, you will have to plan in advance, work hard to search for worthy property deals (or get a property agent to do it for you), understand how a property can fit into your investment plan, calculate the cash flow that can be derived from the investment, and the list goes on.
Furthermore, unlike liquid assets such as stocks real estate constitutes an illiquid asset class. This means that it is difficult for you to liquidate this asset immediately without the risk of suffering loses to the actual value of the asset. Thus, a more thorough research is needed to justify the investment.
Pitfall #3: Not doing due diligence
Not all properties will appreciate in value over time. Factors such as the future development plan of the vicinity, the population trends of the city, the economic health of the city or country all contribute to the viability of a property investment.
Investors don't have to work either, because their money works for them. If you hope to become rich at some point, you have to belong to this group; because investors convert money into wealth.
Obviously, you're not going to jump from being an employee to a full time investor overnight. But you can start taking the steps to move from being an employee or self employed, by building your own property portfolio. Done correctly, income earning residential real estate can be your vehicle for getting out of the rat race!
There are also many legal tax advantages available to investors. One of the reasons the rich get richer is that in some cases, they make millions and legally pay very little tax. That's because they build their assets, not their income and make their money as investors, not workers.
Imagine you own a $1million investment property that increases in value by 10% each year. In twelve months your asset base will have increased by $100,000, yet no tax is payable on this. Wealthy property investor can borrow against the increased value of their assets and use the money to reinvest or live off.
Unfortunately, new investors make decisions to buy properties based on 'gut feeling' or on a vague idea or belief that the given properties will appreciate in value. They buy it based on the sales pitch given by their real estate agent. They don't do their due diligence about the deal, the costs or the market conditions, and they wind up draining their personal savings because the house needs extensive repairs or they can't sell it.
These are the three major pitfalls of investing in real estate. Read widely and research thoroughly in the property you are keen in investing. If you can commit to thorough research before committing to a property, you will avoid the common pitfalls that has plagued investors and radically increase your probability of making a successful investment.