It’s been said that real estate has created more wealth for more individuals than any other industry. And you don’t need a college degree or invent the next new app. Yet it’s also been said, and proven, that real estate has created more problems for more individuals than any other industry. Okay, that might be a stretch but all you need to do to verify both of those statements is to take a quick look, if you dare, at the events of the last decade. You know, from around 2001 to 2009 people made money and lost it as a housing bubble was created and subsequently burst. Yet that period is probably the worst series of events to explain real estate investing. In fact, it wasn’t investing at all but speculation. Gambling as it were. But those of us who have invested in real estate and are still active in the market didn’t participate in the housing free-for-all. We simply followed a proven method and repeated it over and over again. There really is little risk in real estate if you know what you’re doing. Real estate investing for beginners can create significant cash flow. You can invest in real estate in many ways like a rental property through an IRA or wholesaling as a beginner. Let’s first examine the benefits:

Create Regular Cash Flow

Generate your extra paycheck with property appreciation as your upside. What that means is someone else is paying off your mortgage and associated expenses for you. Well, not directly of course but the rent you receive each month should be more than enough to cover the mortgage, insurance, property taxes and maintenance costs. Plus you pocket the rest. That’s what is meant by cash flow. All the while your property over time increases in value. You’re creating wealth and getting paid to do it. That’s real estate investing for beginners and what it is really all about.

Comparing Stocks and Bonds to Real Estate

Why invest in real estate compared to other options? You may consider investing in stocks or bonds or a mutual fund with a diversified collection of publicly traded companies but your value is based upon the profitability and performance of the company controlled by a board of directors you’ll never meet. Companies can go bankrupt. Real estate will never reach zero. It does make sense to have a mix, but I can share that I’ve achieved double-digit cash flow returns on my 50 doors and that does not include their appreciating in value or other benefits from ownership like depreciation etc.

Own a Scarce Physical Asset

The amount of land we have is fixed and finite. Real estate is considered a real asset such as gold or silver. It’s an investment that you can touch and feel. Yet unlike gold or silver or any other similar commodity for that matter, real estate provides a monthly cash flow.

The 70's Condo

I purchased a two-bedroom condo as my first investment property in 2012 for $90,000 in California. My kids thought it was great as they helped me demo the kitchen. It was outdated with a dark tired kitchen and living room with wood panels and mirrors on walls – I know you can imagine exactly how it looked. It hadn’t been updated since Hotel California by the Eagles was first released in the 70’s, but it was a rental and it was in a great location. The location met my market selection criteria and the return penciled out. I put 20% down and took out a 30-year fixed mortgage and invested $6,000 in a new kitchen, removing the wood panels and some fresh paint. It was a small kitchen so I was able to install new cabinets, tile the floor and add some granite and ceiling cans. Lets consider the simplest but actual return economics.

Getting a Return in the 21^st Century

The old 70’s look had vanished, and I rented the apartment in about 2 weeks thru craigslist for $1,350 per month. I had expenses to cover of a mortgage payment, property tax, insurance and HOA fees. I also allocated a small amount for a vacancy and repair budget. After which the condo started creating around $435 per month, which was $5,220 annually.

Lets look at the return on investment based upon my initial cash invested. I had invested:

Down payment:          $14,400
Closing costs:               $2,700
Renovation:                 $6,000
Total                        $23,100

Based on the first year cash flow of $435 per month I made $5,220 ($435 x 12) and as a percentage return on my cash investment of $23,100 I made 22% before depreciation and taxes. I’d got my first investment property and was hooked, but what would this investment look like in the long-term.

Looking to the future

I like to be conservative in my assumptions and will set the following expectations going forward; rent increases at 5% (Bay Area specific), expenses increase at 3% and the property appreciates 3% annually. Below you can see the predicted cash flow and equity over time as rent increase and my tenants pay off the mortgage. The analysis that follows suggests that after 10 years I should start to see $1,000 per month cash flow and eventually reach $3,500 in 30 years whereby the mortgage is paid off and I will have created over $200,000 in equity.

So here is why real estate is a great investment opportunity

1. It provides regular monthly cash flow, that magical extra pay check
2. Provides long term appreciation opportunity
3. Protects you against inflation
4. Has significant tax benefits