Real Estate Is The Name, Wealth Building Is The Game
Posted on August 15, 2008
Real estate has gotten a bad name recently. If you talk to people on the street, they will tell you that real estate is in the tank; that it’s not a good investment. Then if you ask, “What is the best way to build wealth?” You’ll get a hesitation before most of them will tell you that over the long term, it’s with real estate investments. Then comes the fun part! Ask them to define wealth. You’ll get a hundred different answers.
The problem is that most people confuse income and wealth. They aren’t the same things. Wealth is not the big house in which you live. It’s not the expensive car you drive. It’s not the fancy clothes you wear. It’s not your country club membership or you boat or plane. All of these things may be an indicator that you have a good income, but that doesn’t mean you are wealthy. Wealth is measured by how long you can maintain your standard of living if you suddenly are no longer able to work and earn.
Wealth is an income stream; a source of passive income that doesn’t require you to trade your time for money. Passive income comes from interest, dividends, royalties or other instruments in which you have invested prior earnings or expertise. Rental income from investment real estate is also passive income and possibly the best way to build wealth.
Real estate is the world’s greatest wealth builder. It’s the only investment I know of that ordinary working people can purchase using a small amount of their earned income, yet it can produce enough revenue to pay for itself and provide a return on the cash used to leverage the purchases. Stocks and bonds can only be leveraged 50 percent, but real estate is frequently leveraged 100 percent and more. That means that under the right circumstances you can buy properties with no money down and finance the full purchase.
The biggest problem with this ability to highly leverage real estate is that it attracts speculators who have no intention of holding the properties for the income. These speculators acquire real estate to sell to others. This works fine as long as there are buyers who will pay enough to give the speculators a profit, but when the market goes cold and buyers aren’t there, it can be disastrous. That’s what’s happening right now!
Have you ever played the board game Monopoly? If so, you know that the way to win is to buy as many properties as possible, put houses and hotels on them as soon as possible, then sit back and collect the rents. Gradually, the players who were afraid to take risks and chose not to buy properties early in the game, are forced out because paying rent to those who did takes all their money. The interesting thing about playing Monopoly is that the winner is nearly always strapped for cash early in the game. He is always investing his earnings and often mortgaging properties he already owns in order to buy more.
The game is about as close to reality as it gets. The winner in Monopoly has little cash early in the game because he invests all he can. The winners in life do the same thing. Those who in their youth and spend everything they make on motorcycles, boats, big screen HD televisions, designer clothes and other things that go down in value, never enjoy life as much as those who invest. While they may initially appear to be more successful, people with this “look-at-me” lifestyle usually find themselves in an increasing struggle to keep up with the lifestyle of those who sacrifice in the beginning so they can invest for the future.
The losers at Monopoly will sit at the board with a pile of cash and pass up buying opportunities because they don’t want to risk running low on money. As a result, other players buy the properties and eventually force them out of the game. Without investments, their only income is to pass GO and collect $200. In real life, leveraged real estate has an income stream that will barely break even in the beginning. This is not exciting or stimulating unless you look at the impact of owning it over the long term. While initially it may take all of the income generated to pay expenses and mortgage payments, over time rents go up and the mortgages pay down. This produces a cash flow that starts as a trickle and grows as long as you own the properties.
The present crash has forced speculators out of the real estate market and falling prices are making it increasingly more attractive for long term investors. Granted, if you’ve never invested in real estate, it can be scary. I sat in the closing with sweaty palms and butterflies in my stomach when I bought my first investment property. Like many first time investors; I saw the mortgage payment coming from my earned income. Although I hoped the property would produce enough to make the payments, I wasn’t totally sure.
Here’s a tip! Now is the best time I’ve seen in my lifetime to start investing. Real estate is the name, wealth building is the game. Think of it as playing Monopoly for keeps. The more you learn and the longer you play the better you will get and the more comfortable you will become. I strongly recommend my Weekend Millionaire book series as a way to get started investing in real estate. You will not only find step-by-step guidance on how to make sensible investments, you will also learn what not to do as what to do, as well. Happy investing! Get started now!
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