Invest Like a Millionaire-Part II 7/29/07
Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
Invest Like a Millionaire-Part II
The Birmingham News
by Stewart H. Welch, III
“Investing Like a Millionaire- Part II”
Last week, I began a three part series on how self-made millionaires invest their money based on my book, “The Complete Idiot’s Guide to Getting Rich”. Last week, I discussed stock market investing. This week I’ll focus on investing in real estate. There is no doubt that one of the most successful millionaire strategies is real estate investing. While there are numerous strategies for investing in real estate, I want to begin with some of the basic principles to ensure your success. Investing in real estate offers you the opportunity to significantly magnify the power of your money because lending institutions (and often individuals as well) will gladly loan you money to help with your purchase. By following a few simple rules, you’ll minimize your risk while enjoying double-digit returns.
Build in a profit when you buy your property. The best way to make sure you make a profit on any particular deal is to make your profit when you buy the property. This might sound strange, but it is a perfectly sane objective. You see, unlike the stock market where the value of a stock is absolutely known from moment to moment, the real estate market is very imperfect. Values and sales prices vary widely depending on a number of factors including the number of buyers for a particular property, the sophistication of the seller (and buyer), and the particular circumstances surrounding the sale (divorce, bank foreclosure, property tax lien, etc.). Your goal is to find special situations where the seller is highly motivated to sell and therefore will sell the property for less than its true value.
Never purchase real estate where going in you have negative cash flow. Cash flow is the name of the game in rental real estate. Positive cash flow, to be more specific. Always, always make certain the property you buy is projected to produce a positive cash flow from day one.
Only buy property where the property stands alone as the collateral for your loan. One of the great things about real estate is that lending institutions love it so much that they will allow it to stand as the sole collateral for a loan. You do not have to personally guarantee the loan will be paid off. If the worst case happens, you lose your down payment and any other monies you put in the property, but you have preserved all your other assets.
Minimize your down payment/maximize your loan. On the surface, this rule would seem to increase the risk of owning a property. This is definitely true if you don’t strictly adhere to the previous rule that says the property must have a positive cash flow. Assuming your property has positive cash flow, a low down payment allows you to own more properties and further diversify your holdings.
I was certainly scared when I bought my first property and you may be as well. But you can get help. Consider working with a realtor experienced in investment properties. You can find one by calling the manager of a local real estate office. Start small, build your experience and confidence and soon you’ll be on your way to millionaire status!