The goal of real estate investment is to increase your net worth, strengthen your income, and achieve financial independence so that, if you eventually choose, you can stop working and begin living the life of your dreams. Different people have different financial goals. You could aspire to a net worth of several million dollars with a very substantial annual cash flow. Your cash flow is the money remaining in your pocket after deducting operating expenses and mortgage payments from gross rental income. Or your goal may be to achieve a $1 million or more net worth with a more modest cash flow. It depends on your particular needs, wants, and circumstances. That said, all investors – regardless of their financial objectives – need to learn the same strategies for identifying and taking advantage of opportunities.
You may already be saying: “I don't have enough money to invest.” This is a misconception. It's true that the majority of salaried workers or professionals, whether they make $100,000 or $1 million per year, spend most of it. In September 2016, the U.S. Bureau of Economic Analysis calculated that U.S. households saved only 5.7 percent of their disposable income. But that's not the lowest rate during the last half century. In July 2005, the saving rate was only 1.9 percent. In fact, World Bank data shows that the United States has one of the lowest personal savings rates among the globe's major economies. By contrast, a Chinese household socks away about 30 percent of its disposable income. (And residents of Kuwait and Bermuda save even more.) The upshot is that Americans live from paycheck to paycheck and borrow – usually with credit cards or through other high-cost methods – to get through tight times.
That may not sound promising for would-be investors seeking to enter the real estate market. But those statistics hide something important: Although savings rates are falling, the net worth of many Americans has been rising, in part because their homes have increased in value and, in some cases, because stock market investments have stabilized. This means that even without savings, most people have assets that can be turned into cash to get them started investing in real estate. You may have money available without realizing it.
Real estate is not the only place to invest, but it holds advantages over other investments. The stock market is volatile. But the volatility of the market is what brings the biggest return on investment. The higher the volatility, the higher the rewards may be, although the risks are also higher (as is the potential for crushing losses). Many factors come into play in the stock market other than the performance of a corporation. World events can affect the market. Just think of what happened on Wall Street after the 9/11 terrorist attacks. Also consider the turmoil in the Mideast caused by the war in Iraq or the rise of ISIS. One bit of news in one single day, either in this country or anywhere else in the world, can cause havoc in the stock market and horrendous losses. Not so with real estate.
Mutual funds may be promoted as a way to diversify investments and establish a “safe” portfolio. A lone mutual fund may hold securities in hundreds of companies, meaning it is less susceptible to a single company's problems. The funds may also allow people to begin their investment with as little as $500. But the value of a mutual fund fluctuates and it has no guaranteed return. Furthermore, because a mutual fund is tied to the performance of the stocks in the fund, it could depreciate in value. At the same time, the fees, sales commissions, and administrative costs for the funds can offset some potential returns.
Bonds, meanwhile, tend to rise and fall less dramatically than stocks. That means they are more stable and carry lower risk, but they also carry a low rate of return. When you invest your money in bonds, it is tied up for a period of time. If you sell a bond before it matures, you may find that it's worth only what you invested or even less. These disadvantages are not normally associated with commercial real estate investments.
There are other investment vehicles, such as Real Estate Investment Trusts (REITs). Here investors buy stock in companies that invest exclusively in commercial and residential real estate. Like any other stock, you have no control over your investment. So that brings us to commercial real estate. It is not without its risks, but if you're knowledgeable about investing in income properties, you can maximize your return while minimizing your risk. And your real estate investments, particularly well-researched investments in income-producing properties, can prove impervious to other economic ups and downs.
One of the strongest arguments in favor of commercial real estate over other investments is that you're able to control your own financial destiny. People who invest in stocks think nothing of turning their money over to someone else, then hoping for the best. Mutual funds are also managed by professional portfolio counselors. But with real estate, you remain in the driver's seat.
Your control over your investment manifests itself in many ways. For starters, you get to see exactly where your money is going. You can do a physical inspection of the property you're buying – see it, touch it, feel it. You can also judge on your own the value of your investment, negotiating the price of your property both when you buy and when you sell. And you make the important decisions about financing and refinancing, including the terms under which each deal is structured.
Beyond that, you decide who will manage your properties. That's an important advantage over the stock market, where you must trust corporate executives and board members to make decisions in your best interest. And just as you oversee the management of your real estate investment, you're also able to maintain your own books on the investment. As a stockholder, you can see a corporation's quarterly earnings or read through its annual reports, but you won't have open access to the books. With real estate, the books are in your hands.
With this level of control, you can maximize efficiencies. You have the freedom to decide whether, when, and even how improvements and renovations are made. You negotiate the leases to your properties based on your wishes and priorities. And you use your discretion to decide when the time is appropriate to make changes, including rent increases or decreases. This flexibility is important. This is your investment. You should have a say over how it is handled.
When it comes to the array of financing options available, real estate has no competition. Banks, insurance companies, pension funds, and other entities that finance real estate investments offer a wide range of terms and conditions on their loans. As a result, the opportunities to find something that matches your financial situation are numerous. You don't need volumes of ready cash. There are mortgage loans available – at all-time low interest rates – that allow you to borrow 75 percent and possibly more of the value of a commercial property based on amortization periods of 25 – and sometimes 30 – years.
Once you begin shopping for loans and comparing the terms offered, you'll see that the differences can be quite amazing. In Chapter 9, we'll explore in depth the strategic importance of how you finance your income-property purchases.
Leverage, one of the most significant advantages of investing in real estate, refers to the practice of using a minimal amount of cash to buy a property while financing the balance for the longest term possible at the lowest available interest rate. Leverage is one of the most important tools in building wealth through investment real estate. For starters, it makes real estate affordable. Most investors couldn't make such a significant investment if they had to come up with all the cash at once. Wealthy real estate moguls know the power of leverage.
And leverage, which is, of course, intrinsically linked to the ability to borrow – or access money that is not your own – carries another important advantage. While interest rates on home mortgages have been low, homebuyers generally have no room to negotiate the amount or the terms of the mortgage. In commercial real estate, negotiating the right loan is part of the deal. Commercial financing is discussed in detail in Chapter 9.
Leverage is an extraordinary tool that exists because lenders believe in the stability of choice income properties. They recognize these properties as solid investments. For investors with a strong credit rating, they