It’s my opinion that real estate is nearing the top of the market and we should expect slower growth. However, everyone needs a place in which to live. If you do find a great deal or if there is a market downturn then real estate can play a part in your portfolio. We need to consider carefully if real estate will be an investment or a money trap. You should not spend more than 30% of your income on housing. The less you can spend on housing the better; thus you can free up money for other investments. If you can find a property that is well below your means and you can easily afford the mortgage then read on. Here is how to get started on becoming a landlord and generating cash flow.
The fastest way to achieve the million-dollar mark is to invest in real estate. For over two hundred years 90% of all millionaires have been created by investing in real estate. Most people in California that own homes have a million in assets. Being a millionaire is not what it used to be. However, it is still a worthy target to achieve. Start with a condo that you can easily afford. You may have to shop around to find a bargain. Real estate is all about location. Buy a condo near a college, military base, a good school district, nearby Costco, Starbucks or a park. All of these raise the long-term value and you are more likely to find renters. Every area that you look at to buy a potential long- term rental ask yourself, “would I want to live here for five years?” If the answer is,” no,” move on and look for something else.
After you have purchased a property, start right away paying down the principle as quickly as possible, if you’re spouse works strive to use your spouse’s income to pay down principal and live on your half. Then, keep investing in the market. Once you pay off the mortgage, don’t sell. You will be tempted to upgrade your lifestyle and buy a bigger residence with a pool. Rent the paid off house. Now you have your own ATM, that delivers cash flow every month. Keep your next house affordable, remember you will still need to pay property tax on the last house. Buy another affordably house. Rinse and repeat.
Resist the impulse to upgrade the interior. It should not be overly upgraded, but also good enough so that you can live in for a long time without having to fix it up too much. Fixing up your home is expensive and may not be a good investment unless something is broken or you are planning on selling it. Since your old condo or house is in a desired location like a military base or a college, you should not have much trouble renting it out. If it is mostly or all the way paid off, use the rent money from the condo to pay your mortgage on your new moderate house. Now you have no mortgage payment since your renters are repaying it. You are living for free. We’re done right? We are not at the end of the road yet. Think like the rich, always strive for more.
Use the money from your 9 to 5 and invest in index funds, for instance, VYM, VIG, VOO, FSTMX, or SCHA. Make sure they pay dividends, so the money grows faster. Reinvest the dividends using Dividend Reinvestment Plans (DRIPs). Soon your dividends will earn dividends. This whole process will fuel a runaway train running on compounded dividends and investments. In summary, buy a rental in a great area, pay off the rental, buy a modest next home, use the rent cash to pay your new mortgage, and use freed up money to invest in index funds that pay dividends. Keep it simple, invest more, spend less. “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.” – Warren Buffett