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Real Estate Investing for Beginners OR My Life Investment Plan with Real Estate

by Steve Homer, The HBH Group

Dollar sign2I am often asked by new investors to share with them the “Magic Key” to real estate investing for beginners. Well, I hate to burst bubbles, but that Magic Key doesn’t exist in my book of tricks.

If it did, I certainly still would NOT be working as an investor’s agent in the real estate business (that is a pretty obvious statement to most people!). In fact, we all know that getting rich quick is only used to describe “Ponzi” schemes that only take money from you and use it to line someone else’s pocket.

The real key to real estate investing for beginners is simply the fact that investing is not speculating, and speculating is not investing! When you invest in anything especially real estate you need a plan – a beginners plan for real estate investing (or for any investment vehicle really). This plan needs to be long-term. Real wealth is built over time through the “Magic Key” of compounding and whether you use stocks, bonds or real estate as the vehicle, the business model works basically the same. Based on this fact, I want to present in this article a simple concept: using your personal home as a long term investment vehicle. This is a great concept regarding real estate investing for beginners. If you can use this idea as a base plan, you can create REAL WEALTH through your lifetime.

Housecash2Now most people are in the habit of selling their current personal home and moving up to the next one every 5-7 years according to the National Association of REALTOR® statistics. This means that by some stage in your life you have a big house full of stuff that you don’t need and never use, and that you have to dust and maintain. But what if your life plan was more like a Warren Buffett? What if you purposefully lived frugally so that every home you lived in over the years was sized to be a good lease property when you were ready to move along? What if you made that move every 4-5 years from 21 years old to 70 years old? We are all living longer now and that trend will probably continue in the future with the advances in medical science, so we need to be prepared to live into at least our seventies; perhaps longer.

Simple math tells us that we own around 10-12 homes at 70, if we never sold any throughout our lifetime. Since most mortgages are a 30 year fixed vehicle, we can also assume that at least 4 of these homes would be paid off by the time you hit your seventies. I challenge you to use a spreadsheet to calculate your value at age 70 under a model like this. The numbers will astound you. Make sure you adjust for inflation and be conservative in your appreciation percentages. The magic of compounding takes hold and the cash flow on rents kicks in quickly after you begin to pay off mortgage balances.

Let me put some perspective on what I am saying here. I just ran the following model through my spreadsheet.

  1. Purchase the first home at $150,000.
  2. Annual Appreciation: 8%
  3. Rent Annual Appreciation: 6%
  4. Annual Inflation; 4%
  5. Taxes and Insurance are calculated in the model as well and adjusted for inflation.
  6. Adjusting each home for typical appreciation on purchase price.

The results were that with a purchase every 4-5 years you would own 12 homes and have a cash flow of $58K monthly at age 70. You would control nearly $13MM in real estate and only owe under $6MM in mortgages at that point. So you could sell off anything you don’t own outright and still have plenty of income to live off of, with or without social security. And this is just by keeping every personal home that you ever lived in. What would the model look like if you actively attempted to add more to your collection? And what would happen if cash flow early on was doubled up to pay your debt service sooner? See the chart below that I graphed from this simple model. Look how wealth grows fastest towards the end – The effects of compounding. This is the secret that the wealthy know that most working people never understand!

So herein is my short course in real estate investing for beginners – a simple life plan for real estate acquisition. Using this plan you Get Rich Slow, and what if you put these property holdings in a family trust. Set up that trust so that it can only acquire, never sell properties. Will it to your descendants as a cash flow for their lifetimes – What a legacy you could leave to those behind you!

The HBH Group Realty Team is an affiliate of Keller Williams Realty serving Round Rock, Georgetown, Cedar Park & Pflugerville, Texas. Call their offices at (512) 439-3772 or toll-free at (877) 268-1877 for info on free monthly real estate investment seminars in the Greater Austinarea.

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  • George

    I can’t agree more with this article. I am 59. I bought my first house in 1972, $33,000, then first apt bldg in 1972, a 6 unit, for $76,000. Budgets were tight. Any vacancy was paid for out of my own income (then about $200 per week). Then a divorce lost the first house, but I moved into the building. Another building followed in 1976 (7 units) for $150,000. Then followed remarriage, a home in 1979 (we still live there), then a 4 unit bldg, then a rental house (probate court auction), then another 4 unit, then two houses on one lot, then another 4 unit bldg, then two rental houses on one lot (one lived in by my wife’s parents), then a two unit bldg (undergoing mold remediation), and now a teardown two unit building. We have 4 mortgages now, the rest being paid off, and are (for now) stopping further investment plans til 8 of those units (that are currently vacant) are remodelled/completed. I’ve always worked at my fulltime job, and a second partt time job for about 14 years, and on the units when I had time, and never borrowed to buy anything but the properties. Cars were cash purchases, credit cards paid in full monthly. And these properties are all in the L.A. Area, in a non-rent controlled city. Outsiode of the house I lost in divorce, I have never sold any real estate I bought.

    Needless to say…Steve Homer and I shared the same thoughts a LONG time ago…

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