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Get Rich Slow in Real Estate?28 Aug

We thought this was a great article to illustrate one way you can build wealth in real estate.  This is not your get rich quick scheme, but a slow methodical way of building a real estate portfolio that will provide income when you are ready to retire.  Its just one real estate investing strategy, but for some investors… long term makes sense.

Get Rich Slow in Real Estate?
By David Jurewicz

So much about building wealth in real estate today assumes you wish to make a quick profit. Buy low, improve the property, put it on the market right away, sell it and make a quick profit. While that sounds good, things may not go the way you planned and you could end up losing money.

The reason for that is because real estate is really not designed for get rich quick schemes. It’s a long term investment. Those who look at it that way usually outperform those that don’t. Just look at how many have lost their fortunes during this recent real estate market downturn!

Instead, I’d like to offer an alternative based upon many people I’ve met growing up. These people didn’t have super-high paying jobs. Most didn’t have college educations. Most of these people had blue-collar jobs, carpenters, painters, etc. Yet all of them retired quite wealthy and with plenty of money. They did much better than those who pursued what was considered to be the conventional way to wealth.

Here’s how they did it: They would buy a house that needed work and was priced below-market. They would move in and do repairs over a period of about 5-10 years. By this time they paid off the house in full. Since they didn’t earn a substantial salary, that means they were very disciplined and took any extra money they had and used it to pay down the mortgage. They disliked interest because interest on money borrowed didn’t help them build equity in the property. Once the property was paid off and fixed up, it was now ready for a tenant who would gladly pay top market rent for such a nicely updated property.

Next they would buy another property and do it all over again. By the time they retired, they owned five to ten free and clear units. Imagine if you took today’s rental value and multiplied it by five or ten. You can see that this method provides plenty of income. And here’s the best part: Rental income grows with inflation. This ends that problem I see so often with retirees: When they retire, their retirement income is abundant. But just five years down the road it no longer is enough forcing the retiree to seek other sources of income. Not so if you follow the plan I’ve just described. Obviously, you set aside some of the rental income in a fund to continually take care of the property when repairs are needed.

But here’s the little known benefit to the get rich slow plan: When the real estate market gets slow, or if a tenant cannot pay the rent, because the property is owned free and clear it’s not a huge financial drain. Investors who use this plan do great in either fast or slow real estate markets and very seldom see a collapse of their real estate holdings as is so common with the get rich quick folks.

If times really get tough, you can either borrow against the equity in the property or sell it outright. And because the property is owned free and clear, there are selling options not available to those who have to pay off a loan. For example you may be able to carry the financing for the buyer. That one option alone can open the door to more potential home buyers leading to a higher sales price.

It’s rare, however to see the get rich slow people ever sell their properties, though. That’s because whenever you sell, you trigger tax consequences. If you buy but never sell, taxation on your sales profits won’t be an issue.

If this process is too slow for you, consider a slight modification of the plan. Do everything I mentioned above. But this time, instead of paying the property off in 5-10 years, you could pay the loan down to 50% of the current market value before buying the next house. This may take half the time. That means you could accumulate 10-20 units by retirement. The reason the property is paid down to 50% is because usually at that level rents far exceed monthly mortgage payments. You can use the overage to set up a buffer so if the rental income stops for whatever reason, you can weather the storm. And if the market goes down in value, you’ll still probably have some equity which can still give you maneuvering options.

So by the time you retire, you can either have some 50% of 20 units with modest risk or 100% of 10 units with low risk. Either way, I’d say you’ll be doing much better than most people who didn’t follow a plan.

P.S. Did you know there’s a way to use IRA retirement money in a special account to buy real estate? Ask your financial adviser about this option.

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