Most of us know people who have dabbled in real estate and property investment. Hoping to fulfill their retirement wishes, or perhaps with a shorter-term mindset, some friends of yours may have even entered the market at the worst possible point and now find themselves “upside-down” (with negative equity) on their home. These people may have gotten into the business of real-estate investment in the first place due to what sounded like great investing tips, and the whole affair has left them embittered and rightfully so.
Because of the recent housing bust, many people are wary about entering the real-estate investment game, again rightfully so. They point out how everyone was completely convinced that the housing market 5 years ago was going to keep going up and up at an unprecedented pace forever. They talk about how for every millionaire made in the boom, two families went broke in the bust. But this article isn’t about quick cash or insane returns on huge investments.
It’s about gradually making a steady income on your investment in property, with an option at the end of making a larger lump sum, similar in fact to 401k investing. You should expect to get your primary investment payoff from the rental fees you’ll charge tenants, and then when and if you decide to sell the property it will have gained value through a combination of improvements you’ve made and natural appreciation in market value.
The housing market is currently at very low levels, due to the recent boom and bust. This doesn’t mean you should buy the first house you see and expect to get a great deal, but it does mean that it will be easier to get a “margin of safety” built into whatever investment property you do buy. A margin of safety is essentially an amount of money equal to the difference between what you paid for the property and what its actual fair value is. If you’re able to buy a property that is selling below its fair value (as is often the case today), you’ll have a margin of safety from the beginning. You can then widen this margin and increase your profitability further by making improvements to the property, such as renovations, additions, and landscaping.
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