Investing in Real Estate & Our Philosophy on Being Rich
Have you ever wondered what it would be like to wake up in the morning with enough money coming in so that you could do what you want that day? Would you consider yourself “rich?”
“Rich” is the ability to walk up in the morning with the physical health, knowledge, friends, financial freedom, and passion to do what you want that day.
Affluence is the experience in which our needs are easily met and our desires spontaneously fulfilled. We feel joy, health, happiness, and vitality in every moment of our existence. – Deepak Chopra
Financial freedom occurs when your annual investment income (your money at work) exceeds your annual lifestyle expenses. When you have this, you have what we call, “Wake-up Money.”
We have many clients who have achieved (or are on their way to achieving) this “Wake-up Money” lifestyle through their investment in local real estate – specifically homes, condos, and 2-4 unit buildings.
We have three choices in life.
- You can work. Do you worry you will have to work the rest of your life?
- Your money can work. Do you dream of someday having your money work so you don’t have to?
- You can rely on others. Do you worry about being dependent on others?
If you choose #2 and want to get on the path to “Wake-up Money,” we look forward to showing you the way.
A Simple Investment
Homes are shelter and we all need shelter. Homes, condos, and small multi-unit buildings are simple investments that most people understand because they already own one or at least live in one. Ask yourself these questions: Do I own a home? Has it been a good investment? What would my net worth be like if I owned ten of them? What would my lifestyle be like if they were all free and clear? (Yes, the past few years have been tough on the real estate market. And yet, if you look at the core neighborhoods of the San Francisco Bay Area housing market, you’ll see a stability of investment not found anywhere else.)
The Three “Rules of Thumb” That Help Investors Build Wealth Quickly
- The “Rule of 72″ is used to estimate how long it will take your money to double itself at a given rate of return on your investment. If you divide your rate of return into 72, the answer is how long it will take your money to double. For example, if you earn 6% on a savings account (good luck in today’s economy!), it will take you 12 years for your money to double in value – 72 divided by 6. If you are able to increase your return to 10%, your money will double in 7.2 years – 72 divided by 10.
- The “Rule of Leverage.” One of the most amazing investment aspects of real estate (as opposed to other forms of investment) is that you can use leverage to increase your rate of return. You leverage your investment by using a loan on the property and reducing the amount of cash (your own money) you invest. The tenant makes the payments for you by paying rent. When you leverage (obtain a mortgage), your rate of return is increased. For example, if you purchase a property for $100,000* cash and it goes up in value by 5%, you have earned 5% on your money ($5,000 divided by $100,000) plus the amount of rent collected. However, if you purchased the property with a 10% down payment ($10,000) and a $90,000 loan, your rate of return will be 10 times greater or 50% ($5,000 divided by $10,000).
- The “Rule of Return.” Here’s a simple way to figure your return on investment:
- Convert your down payment to a fraction.
- Multiply the denominator times the appreciation rate to find your first year return on investment.
- For example, if your down payment is 20%, when we convert it to a fraction your down payment is 1/5. The denominator is 5. Multiply the denominator (5) times the property’s appreciation rate (say 10%) and your first year return on investment is 50%.
Let’s test this rule to see if it works. Let’s say we buy a $100,000 property and put 20% down ($20,000) with an $80,000 loan. Our down payment of 20% converted to a fraction is 1/5. If the property appreciates 10%, it will go up $10,000 in value. $10,000 divided by our investment of $20,000 equals a 50% first year return. *Yes, we know these numbers are ridiculous for the Bay Area but you get the idea, right?
The Benefits of Residential Real Estate Investment
Residential real estate offers five major benefits. Most other investments offer only one or two.
- Cash Flow — The rent provides income, i.e. “Wake-Up Money.” This is your ultimate goal. When your property is “free and clear”, you have the maximum cash flow and “Wake-Up Money.”
- Leverage — You can own $100,000 worth of real estate with only 20% cash. You can also borrow cash out of one property to buy another. Your short-term goal is to use leverage to acquire a portfolio of real estate. Your long-term goal is to pay the loans off and own your properties free and clear.
- Debt Reduction — Real estate is one of the few investments where someone else will make your payments. In essence, the tenant makes the payments and reduces your debt.
- Tax Savings — You are allowed to depreciate the house and write off your expenses in order to reduce your taxes. (Talk to a tax professional.)
- Appreciation — Over time, the value of houses and condos goes up, if only at the rate of inflation. The average sales price of a home has more than doubled over the past 15-years.
“Free and Clear” Houses are the Ultimate Investment
These are magic words for the investor who is committed to creating “Wake-Up Money.” Many investors consider “free and clear houses” as the ultimate investment for three reasons:
- The house generates large amounts of cash flow.
- The house is appreciating in value.
- There is very little risk because there is no debt and if you are smart about location, people will always want to live where you own the home.
Top Ten Tips for Creating “Wake-Up Money”
- Buy residential properties. Houses, condos and town houses. Stay away from land and commercial real estate unless you are an experienced investor or are buying as a “business user.”
- Buy “mainstream” houses and condos. Buy properties that are at or below the average sales price. Buy properties that appeal to most buyers. Avoid high-priced or unusual properties. Buy houses and condos with at least two bedrooms. If possible, buy properties with parking. Buy in popular neighborhoods with convenient public transit and freeway access.
- Don’t buy with partners, unless you have to. If you must have partners, make sure they have the same goals and values, are of similar age, and have job, geographic, and relationship stability.
- Believe in the long run. Real estate markets are cyclical but the long-term trend has been up. Hang in there for the long run. The investor’s lament is “I should never have sold that property!” The other investor’s lament is, “I could have bought that property for $_____!”
- Take care of your property and it will take care of you. It’s your “golden goose.” If you don’t like property management or are too busy, either hire a professional property management firm or purchase condos and town houses. They require a lot less management because the homeowner’s association takes care of most of the property management.
- Get started early. Put time on your side. Albert Einstein is credited with saying that the most powerful force in the universe is compound interest. Whether he said it or not, don’t wait to buy real estate…Buy real estate and wait.
- If you don’t have the money, make a plan and a commitment to it. (Consider borrowing your investment money out of the equity in your personal residence.)
- Know your “enough.” How much “Wake-Up Money” do you need? Know when you are ready to stop accumulating property and start paying off what you have?
- Work with knowledgeable people. Assemble a team of Realtors, mortgage brokers, accountants, attorneys, and property managers who know what they are doing.
- Have a goal and a plan. Develop your goals and a plan to achieve “Wake-Up Money.”
Invest Near or Far: Great Agent Referrals Nationwide and Abroad
The Council of Residential Specialists
As a Certified Residential Specialist, we have access to the best real estate agents all over the United States and Canada. Our clients use us as resource to find highly qualified real estate professionals whenever they buy or sell property outside of San Francisco. Our client relationships are paramount so we will take your needs seriously and make sure you get the best help possible whether you are doing business here or somewhere else.
For example, we will personally contact and interview agents in your location of interest to find the best fit for you. Whether you are looking for a ski condo at Lake Tahoe, a beach getaway in Hawaii, or an income property in Austin, I will make sure you get great service, expertise and experience.
Zephyr Real Estate is one of only two San Francisco brokerages with membership in the Leading Real Estate Companies of the World (formerly known as RELO). LRECW is a cooperative network composed of the largest independent real estate companies in the United States and abroad. The network’s purpose is to provide a systematic and reliable process for sharing relocation referrals among participating companies and agents. It’s important to note that LRECW is the largest relocation network in the United States, larger even than the largest network offered by brokerages with national and international affiliates.
As our client, you gain access to the best, independent Realtors around the world.