Real Estate: How to let other people make money for you

Why real estate?

There is a ton of financial literature out there that tells you that the best way to get rich, especially if you want to get rich quick, is through real estate. The reason that real estate works so well is that the value of your property will almost always appreciate in value (the yearly average appreciation is around 4-6%) and you will also be building equity at the same time. If you can get someone else to pay the mortgage for you (renters) than you benefit greatly by doing nothing. When you sell all that equity comes to you plus the appreciation of the house/apartment/condo.

Rental Income

The goal of having a rental unit is to at least break even (have your mortgage covered by your renters) but ideally you will see some passive income, or money coming back to you in addition to the expenses paid by your renters. If all you do is break even you are still making money because besides the yearly appreciation of the unit you are also building equity. So if your rent is $1000 each month and that covers your $800 mortgage plus your other fees, about half of your mortgage payment is going towards principal (the other half is paying interest). In this case lets say that $500 is going towards principal each month. That means that even though you aren't receiving money each month from your renters you are still making $500/month (or $6,000/year) from them in the form of equity.

The benefits of Equity

Equity is great for a number of reasons. Even though that money isn't available for you to use day to day, that doesn't mean you can't use it. You can take out a home equity loan (this is esentially borrowing money from yourself). When you sell the unit the equity can be transferred into a new property, or you can cash out. The benefit of rolling it into another property is that you aren't taxed on that.

Good reads

If you would like to know more about the benefits of real estate let me recommend the Rich Dad, Poor Dad series by Robert Kiyosaki, Nothing Down by Robert Allen, and automatic Wealth by Michael Masterson. Of the three I like Automatic Wealth the best and have issues with all of them. Real Estate is something that you should understand pretty well if you are going to invest in it. Kiyosawki and Allen both make it sound much much easier than it really is.