Warning: Real Estate Investing Can Seriously Enhance Your Wealth (Part 2)
In this article we are going to discuss how you can add value to your property and how going into debt is actually a very good plan that can make you very, very rich.
When you buy real estate, you purchase an asset that will increase in value or “appreciate” over time. On average, real estate investments double in value every 7 years. Buy a £60,000 property today and in 7 years it will probably be worth around £120,000. Sounds good to me. Even better is the fact that, unlike investing in large company stocks, you can directly influence the value of your real estate asset. You will never be able to influence the business decisions of a large public company by buying a few shares, so the value of your investment is entirely in the hands of the directors of the company and the market in which they operate. You better enjoy watching from the sidelines.
In the world of real estate investing, you come off the bench and become your own “most valuable player”! Your actions can determine what happens to your investment. By arranging simple and inexpensive renovations, you can substantially increase the value of your real estate investment. You see, spending a small amount of money on a property can cause a disproportionate increase in the total value of the property. On the other hand, perhaps you could see an opportunity to add even more value to your real estate investment by doing a larger development. You could build an extension, a conservatory or a “grandma’s annex”. Perhaps you decide to tear down the original investment and hire a construction company to build a large block of flats (paying them later, of course). Increasing the value of your real estate investment by spending money on it is called “forced appreciation” and this is a huge advantage of real estate over other asset classes (stocks/bonds, etc.). It is easy to learn to spot opportunities to add value and thus get rich. You just need to get some “real estate investment education.”
One of the greatest truths in real estate investing is that your greatest asset is time (and real estate investment education). Forget cash reserves and contacts etc. because time goes hand in hand with inflation. It is inflation that will passively increase the value of our real estate investments and rentals. It is inflation that will reduce the burden of our mortgage payments.
Inflation is a friend of real estate investors and enriches them.
What will the mortgage payments on your investment property be in 7 years? They will undoubtedly become less of a burden to you as time goes on, as inflation erodes the real value of your payments.
For example, consider an investment property today with a mortgage interest payment of £500 per month and rental income of £700 per month. That’s £200 per month of profit, so this year you’ll make a profit of £2400. Not bad.
In 5 years or so, your monthly mortgage interest payment will not have changed much from £500, but your monthly rent may have risen to £900 per month! That means a monthly profit of £400 and an annual profit of £4800 on a single property! This dramatic increase in earnings over time is due to the fact that your interest payments will be worth less and less over time, but rents will increase. Wonderful. We like the sound of that.
The miracle of inflation means that your profit margins will increase year after year. How many of those properties would you need to replace your current income?
Have you heard the scary news about the rising level of private debt in the UK? Maybe you think you shouldn’t go into debt right now, or at any time. You might think that getting a buy-to-let mortgage sounds unwise.
Well, I agree that you shouldn’t take on any “bad debt”, but you should take on as much “good debt” as you can! You see, there are two sides to the debt coin: a good side and a bad side. Let’s define what they are.
Bad debt is taken out to purchase a “liability.” A liability is anything you buy that takes money out of your pocket.
Liabilities include cars, motorcycles, vacations, and new televisions or stereos. These are things that cost you money and will never give you money back. The average Joes who spend their money this way will never be rich. Your debts will grow and your interest payments will eat up your cash. They spend all their money on consumables.
On the other hand, let’s take a look at good debt. Good debt is taken after careful analysis and consideration, to acquire “assets.” Assets, unlike liabilities, put money in your pocket and make you richer. They are things that appreciate in value and provide you with positive cash flow. Assets put money in your pocket over and over again; maybe forever!
It should be obvious that it is very important to pay off bad debts as quickly as possible and to refrain from taking on more bad debt. You should definitely take on good debt to buy assets. Enough talk.
I hope you are excited about the potential to make millions in the world of real estate investing. I encourage you to check out the free real estate investment education available online so you can arm yourself with the best skills and techniques to make your first million. If you are still hungry for information, you should read the next article in this series.