Monday, July 23, 2012

Real Estate Investing

I recently found the blog Afford Anything written by Paula Pant. I have to say after reading 12+ articles I really like the advice she dishes out. I really enjoy how she focuses on freeing time over everything else (one of my goals too). I especially honed in on her real estate investing articles.

Real estate can be an amazing investment for the refined college grad. One of the best benefits of real estate (this is especially helpful for recent college graduates) is the extreme amount of leverage it offers. There are few investments that allow a refined college grad to put more than 80-90% on the margin (cannot do that with stocks).

Paula hits on this in this article Real Estate = Great Leverage she says if she had a million dollars suddenly in her bank account she would "willingly and deliberately" go into debt. This is the smart move for a risk tolerant investor to increase cash flow. One point that is not made very clear in this article is with great leverage comes great risk (Spider-man reference complete). What I mean is that owing debt on five different income properties can be risky because if something goes wrong with one or multiple properties (neighborhood goes south, structural damages, tenant damages, vacancies   ect.) the refined college graduate may find themselves in a mess of debt and take a big hit on net worth (or worst case face bankruptcy). The point is make sure that the property you buy is the right one. A good metric for this is Paula's 1% rule (the cash flow each month should be 1% of the purchase price + initial nonrecurring expenses).

This article is the perfect example of Finding the right property  the entire property was purchased for $21K with $9K of initial repairs. Even though it isn't in the perfect location it is a great buy from the sound of it.

My conclusion is to gain real estate exposure early with little capital buy REITS (mine has returned 14.25% in less than one year not including dividends). When the right property comes along cash out of the REIT and buy the property.

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