MIDEAL Investments

For the last several years, there’s been a lot of talk about how it is a bad time to invest in real estate, but I feel that real estate is always a safe bet if you’re buying them right. There is an acronym that’s been around for many years about why real estate is the IDEAL investment, however in today’s market, I’ve adjusted it a little, I like to say that real estate is absolutely still the MIDEAL investment.

The “M” stands for Motivated Sellers. Motivated sellers NEED to sell, not just WANT to sell. Somebody that really NEEDS to sell is less likely to hold out for top dollar on their property. There are several methods to find motivated sellers, but right now we have a HUGE one: Foreclosures! Both pre-foreclosures AND bank-owned properties

The “I” stands for Income. In real estate, there are 2 types of income you can earn

1st type of Income: Quick Cash. You get checks when you buy them, fix them up, and sell them and collect $10,000, $15,000, $20,000, or more. In fact, there’s one method called “wholesaling” where you make $5-10,000 and you never even own the property or make any repairs!

2nd type of Income: Long Term Income. This is where you buy a property, stick a tenant in it and collect $200 a month positive cash flow for the rest of your life. Obviously the trick is to have several of those! Many parts of the country would argue right now that if you go out and buy a house today, you can’t rent it for enough to cover the payment, and that’s true…but remember, we don’t pay full retail for properties when we buy from motivated sellers. So if you pay 150k for a 150k house, you may have a hard time renting it for enough to cover your payment, but if you only paid 100k for it, can you see how you would have a higher cash flow? The rental market doesn’t care what you paid for it, they only care what it’s worth!

The “D” stands for Depreciation. In a business, when you buy equipment such as a copier, the tax code let’s you write off the amount that equipment goes down in value as it ages (a 4 year old copier is worth much less than a new one!). If your business is owning rental properties, what is the equipment you purchase to use in your business? Exactly! Your houses! So we get to claim the amount it goes down in value as a loss on our taxes, and this “loss” can offset other income you made this year. But did your house really go down in value? Probably not, so this is what is called a “paper loss” which means we lose it on paper, but not in “real” life. I like to say it’s where we get to legally lie to the IRS, they even encourage you to do it, and you can even download a form where they’ll tell you how to do it the right way!

Here’s one key difference though, you can write off the copier 100% in a matter of just a few years, but on a house or other real estate holding, you can only write off the “improvements”, not the land itself, and it will take 27.5 years!

This means if you buy a $100,000 house and you determine that $20,000 of that is land value, then you can depreciate the improvements, or $80,000 over 27.5 years which would be $2,909 per year that you “lost” on paper above and beyond what you actually experienced on that property. And since this offsets your ordinary income, what if you owned 10? That would be a $29,090 write-off per year! As always, check with your CPA, some people have limits on how much depreciation they can take, but even then it’s most likely still $25,000 per year, which is pretty good at saving you some taxes!

The “E” stands for Equity. Equity is the difference between what you owe and what it’s worth, so if you owe $80,000 on a house that is worth $100,000, you have $20,000 in equity, and every year as you make payments and pay your mortgage balance down and as the market appreciates and your house goes up in value, your equity grows. But with motivated sellers, they might need to get rid of a house worth $150,000 that you can buy for only $100,000, so you instantly get handed 50k equity on a silver platter, and THEN it starts to grow from there! That’s your net worth! You just added $50,000 to your bottom line. So how about if you got 10 of those! Your net worth will go up a half million dollars instantly! Then it starts to grow from there!

The “A” stands for Appreciation. Appreciation means the amount of value your house goes up every year, so if it is worth $100,000 today in a market with 3% appreciation, it is worth $103,000 next year. First of all, take the last 3 years history and crumble it up into a ball and throw them away (go ahead and do it, it’s fun!). Many parts of the country were experiencing higher than normal appreciation rates. As an example, Florida historically runs about 5% appreciation per year, so a $100,000 house this year is worth $105,000 next year. The following year is is NOT $110,000, because appreciation is based on current value, so next year it’s 5% over the $105,000, so it would be worth $110,250. But that’s not even the coolest part! Let’s go back to depreciation…the IRS doesn’t care what it’s worth, just what you paid for it, so if you’ve found a motivated seller and you buy a house worth $150,000 and only pay $100,000 for it, you will only be able to depreciate the same $80,000 in our example above…but in Appreciation, the market doesn’t care what you paid for it, they only care what it’s worth, so in our example, our $150,000 house will be worth $7,500 more next year, or $157,500…how about if you had 10 of those? Your net worth will go up 75k in one year!

So we’ve gone over M for motivated sellers, I for income, D for depreciation, E for equity, and A for appreciation…with those 5 factors can you see why real estate is such a powerful investment strategy? But when we throw in the L, it makes the whole thing a no-brainer…

Let me ask you a question…if I want to buy $100,000 of Disney stock and actually hold the stock certificates in my hand, how much cash do I need? You guessed it! $100,000!

However, if I want to buy $100,000 worth of real estate, how much cash do I need? $30,000? $20,000? Well it actually depends on my credit and what kind of loan I can qualify for, but you realize I don’t need the whole $100,000

That’s what the “L” stands for…Leverage! Leverage means that we can use Other People’s Money (OPM) to buy real estate that WE fully own and control! (here’s a quick secret…a lot of the houses we buy don’t look too good, so the banks won’t make a loan on them, so a lot of investors use something called “private money” or “hard money” to fund our deals, and sometimes they even loan us MORE than our purchase price so we get the money to do the repairs too!) By the way, Fannie Mae has a 10% down investor program, and there are loan programs that will let you put as little as 5% or even 0% down!

So picture this…if $100,000 just dropped out of the sky into your lap, are you ready? THUMP! What could you do with it? Well, you could buy ONE, $100,000 house and pay cash for it, and that would be great because you would collect that rent as income for the rest of your life, but do you see why putting 20% down on each of five $150,000 houses that you can buy for only $100,000 would be even better? You just added $250,000 to your net worth (5X $50,000), 5 tenants paying you rent every month instead of one (yes, you have a mortgage on each property, but if you’re clearing $200 per month per property, that’s still $1,000 per month), 5 depreciation write-offs, 5 houses growing equity each year as your tenant pays YOUR mortgage off for you (another example of OPM), 5 houses appreciating instead of one, and best of all, it took the same $100,000 to buy all 5! What if you put 10% down on each of ten of those same $150,000 properties that you were able to negotiate down to just $100,000 properties? Imagine the possibilities!

I hope you now have a deeper understanding of the powerful benefits of owning and investing in real estate. Throughout American history, many powerful millionaires have been made through real estate, and right now in our society, 96% of all millionaires made their money in real estate…I hope the information in this article is the beginning of YOUR successful investing experience.