With a slowing economy most homeowners find that they are quickly losing equity in their homes and some owe more than their house is worth. Savvy investors see this as an opportunity to create wealth by building up an inventory of homes that can later be sold for a profit. Most real estate wealth is built when prices bottom out. Consider those that acquired California real estate in the 60’s and lackluster economy of the 70’s, homes were sold for as low as $15,000 only to be worth $300,000 10 years later.
As with any other investment real estate investors understand that there are risks involved. Unlike stocks, real estate prices don’t usually bottom out to one penny regardless of how low real estate prices go. Historically real estate has kept a reasonable percentage of its value even in a declining housing market. Stocks on the other hand can go as low as $.001 per share overnight, as many investors discovered in the recent stock market collapse.
There are countless of creative ways to invest in real estate for our example we are going to focus on single family rentals.
There are many advantages to investing in single family rentals among these are:
- Easier to rent out
- Less trouble to maintain than apartment buildings
- Long term tenants and income
- Easier to sell than multiple units
Not to mention the learning curve is much lower than investing in apartment building or property development.
This type of real estate investing is conservative by comparison to the previously mentioned. The following tips can minimize your risk and set you up to make a reasonable profit.
20% Down Payment Rule
Don’t buy a rental property unless you can put down 20%. In today’s lending environment most mortgage lenders will require at least 20%- 25% as a down payment. You will also need to have 6 months worth of payment reserves for principal, interest, taxes and insurance. Now if you would also like to generate some cash flow from your rentals you may need to put down 40%-50% down.
Does the Monthly Rent Pay Your Mortgage?
After a nice down payment make sure that current interest rates allow your mortgage to be paid by the rent you collect each month. If the mortgage interest rates available don’t allow the monthly rent to cover the mortgage payments don’t invest. You should wait until either interest rates or home prices drop lower. The last thing you want is to have to cover the shortage on a monthly mortgage for years to come.
Should you Sell When Home Prices Increase?
You won’t see a profit unless you sell. Since this type of investment is for the relative long term you determine when to sell. However, don’t miss opportunity to sell when real estate prices increase. If you have an inventory of real estate you should liquidate some of your holdings to have cash on hand for emergencies, expenses or to fund future investment projects you come across.
Build Long Term Wealth Rental Properties
A simple rules is to buy at least one rental home per year. If you have 5 or more years left before you retire you can build a nice nest egg for your self. If you acquire at least one investment property per year. Once you are ready to retire you will find that your net worth will have increased significantly. This is specially true if you compare your net worth if had not acquired any investment properties at all. Which person would you rather be in 5 years?
There are many ways to invest in real estate and many people have created amazing wealth by buying at the right time and the right price and selling when the time is right.