Real Estate / The Foundation for Building Wealth through Real Estate / Chapter 1
The Foundation for Building Wealth through Real Estate
In this chapter, you will learn. . .
- The difference between a real estate agent and a real estate investor
- Why real estate is a good investment
- 5 ways you can build wealth as an investor
Donald Bren. Xu Jiayin. Li Ka-shing. Hugh Grosvenor. What do these names have in common?
You guessed it right. These are just some of the world’s billionaires. But there’s another thing that these four names have in common: They are all real estate investors.
But you might be wondering, what exactly is real estate investing, and how is it different from what real estate agents do? This chapter will help you get a better grasp of the scope of real estate investing, as well as understand how investors use real estate to build generational wealth.
What is real estate investing?
As you no doubt know, real estate refers to property–whether it be residential, commercial, industrial, or land. Therefore real estate investing refers to the acquisition and disposal of such properties for the sake of profit. For example, if you buy a residential property with the intention of leasing it out or selling it sometime in the future, you are a real estate investor.
But how are real estate investors different from real estate agents?
For one thing, real estate agents facilitate the acquisition and disposal of real estate assets, but they do this on behalf of their clients. For this reason, real estate agents need to be licensed before they can transact with their clients. That is not the case with real estate investors, however, since they purchase and sell properties for their personal gain only.
Now if there’s one thing you should know about the industry, it’s that real estate is one of the safest investments you can make because as I have mentioned at the onset of this guide, it’s a hedge against inflation. And unlike highly liquid and volatile investments such as stocks, real estate is not directly affected by economic instability.
But you might be thinking, ‘If real estate is a good investment, why aren’t there more real estate investors?
The fact is, not too many people have learned enough about real estate to fully appreciate the beauty of this investment. In fact, a lot of real estate investors start a little late in their career simply because it took them quite some time before they understood just how powerful an investment real estate is.
Not only that, but there are also a lot of misconceptions about real estate investing that has hindered many from turning it into a career. Let me talk about a few:
Misconception # 1: You need to be wealthy if you want to invest in real estate.
This is one of the most common beliefs that people have about real estate investments. Unfortunately, this is a misconception. You can be a real estate investor even if you don’t have huge startup capital. In fact, I was able to invest in a real estate property even without having a lot of money in the bank.
And if you’ve watched my story, you’d know that I started out in this industry at a time when I didn’t even own a house. I didn’t even have a job back then. But that didn’t keep me from investing in my first property.
So it’s not true that you need to have lots of money in your bank account before you could invest. There are ways for you to buy your first investment property without a huge capital.
Misconception # 2: You can’t be a real estate investor if you have zero experience.
While it is true that experience can help you close deals faster, it is not true that you need to have prior experience with real estate before you can start investing. I started out with practically no prior knowledge or experience about real estate, but I was able to purchase my first investment property and make a profit from it.
And, there’s also a lot of information available online these days. In fact, you can learn virtually anything on the Internet. So if you’re interested in learning the basics and techniques for real estate investing, why not try looking up podcasts, e-books, and online courses? This can give you the knowledge you need to make wise investments even without prior experience.
Misconception # 3: Real estate investing is not for everyone.
Some people think that real estate is just for the lucky few who seem to have a knack for making money. But that “knack” can be learned, you know. True, it might seem like some real estate investors are more gifted in terms of choosing the best investments, but that is a skill anyone can acquire.
So if you think you’re too old for a career in real estate, or if you think you’re too young to start, keep in mind that everything can be learned. And that definitely includes real estate. All it takes for you to succeed as an investor is the right education plus practice. As long as you want to learn the skill and you push forward with that determination, you can and you will make it big in this industry, I guarantee you.
But how exactly do investors build wealth through real estate?
Early on, I’ve mentioned that investors make a profit out of the assets that they have acquired. And there are several ways they can do that. Let’s go ahead and look at what some of these are.
Investors primarily make a profit when their assets appreciate, or increase in value. For example, the land you bought twenty years ago would most likely sell five times its original price today. So the difference between its current market value and the value at which you acquired that property is your profit.
The value of land appreciates whether or not you develop it, but if you want to increase the property value even further before putting it on the market, you can make improvements to your property. This is exactly what developers do.
For example, if you have an acre of undeveloped land, you might want to consider setting up a commercial building in that area. That way, you increase the value of your existing property and you make it possible for you to earn more profit out of it.
A second way that investors generate cash from their investment property is by leasing it out. The most common type of rental property is residential, which allows investors to generate a steady flow of income on a monthly basis. Commercial spaces for rent are also highly profitable, provided that they’re located at an ideal spot.
So if you’re planning to invest in a rental property, make sure that you choose one that has a convenient location. For example, if you’re buying a residential rental property, you might want to look for properties located near a school or the malls. The better your property location is, the higher the rent you can command for it.
Buy and Hold
A third way that real estate investors make money from their investment properties is by practicing the ‘buy-and-hold’ method. Not sure what I mean by that? Let me explain.
The buy and hold strategy is for when you find a property worth investing in but you don’t plan on selling it in the short-term. So what you do is you hold the property with the intent of increasing its value until you can sell it at the price you want. Investors who buy and hold properties usually rent out a portion (or all of it) of the property while they wait for the property value to increase. That way they earn from the property while waiting for its value to appreciate.
Investors who have been in the industry for quite some time usually do very well at flipping properties. But how does this work? When you flip properties, you purchase an investment property with the full intention of selling it at a higher price the first chance you get. This is different from the buy-and-hold strategy since you don’t plan on holding the property for a long time.
This strategy is particularly profitable for investors who know which properties have the greatest potential at bringing in more value after a few renovations to them. While flipping properties can bring you huge profits, this method is not always as easy as it seems.
In fact, a lot of those who try to flip properties end up purchasing properties that have proven too costly to repair. So your success in using this strategy depends on how well you are able to determine the potential value of a property once you have it renovated. Your profit is then measured by subtracting the total amount you spent acquiring and renovating the property from the total price you received for it.
But how can you tell whether a property is worth investing in or not? Let’s talk about that in our next chapter.