A lot of people think that investing in Real Estate is a great way to get rich. They’re right….sort of. Can you get rich investing in Real Estate? Absolutely. Do most people get rich investing in Real Estate? No.
There are 3 ways to make a lot of money in real estate:
- You need lots of time. To turn $25k at 10% into $1,000,000, you need a little over 37 years with no flux in the rate of return.
- You need lots of seed money. $100k at 10% turns into $1,000,000 in 23 years. $500k takes only 7 years.
- You have to add significant value to a property. e.- Find a property at $500k that has potential to be a $1,000,000 property within a few years after making the necessary changes. Usually entails very high risk.
There’s no magic mirror that you can use to circumvent these scenarios in real estate. They are what they are and the truth is that for each story where an investor risked everything and made it big, there are 5 more stories about people that risked too much and lost everything. The secret to not competing for the “Biggest Loser” reward in real estate is just doing good analysis on the investment up front. That will help you avoid 90% of the mistakes that people make when investing.
As a real estate analysist, I deal with a lot of real estate investors and can tell you first hand that most people are a little dismayed to learn that the $100,000 life saving that they’ve built up for 20 years when invested well, will only generate an average cash flow of $300-$700/month. That’s not to say there aren’t other benefits to real estate investing, but a really good overall internal rate of return for a real estate investor in today’s market would be around 12%. The odds of finding a decent cash flow property with a 12% IRR is probably less than 1 in 100 investment offerings. Is there a place where someone can invest and make excellent money without huge risk? Yes… let’s start in your garage.
That lawnmower that you bought for $300. If you rent it out for $10/day and rent it 4 times per month, you’ll make $40 month. In warm climates, where grass is mowed year round, that’s $480/year (in cold climates- swap for a snow blower). Deduct 50% of your earnings to pay yourself for your time spent on renting it out and that leaves $240 in income on your lawn mower. Renting it will increase maintenance on it, so let’s take another $100 off for additional maintenance. You’ve now earned what we would consider $140/yr in passive income. When we factor for all of that, you just made 46.67% return on your $300 investment, that you really just bought so you could mow your own lawn. Even if you only get 5 year’s life out of your lawn mower, you’d still average a 37% rate of return on your original investment. Now add your power sprayer, bread mixer, portable table saw and four wheeler in. All of the sudden, we’re earning $2,000/year in passive income after being paid for our time and additional maintenance on the equipment. Rent out cameras, TV’s, video games, kayaks, the boat that you use 5 times per summer and eventually we’re now earning $20,000/year in passive income, from stuff we would have bought anyway for no return. Best of all, you still have the $100k life savings to invest how you will. There are people that literally earn $1,000’s of dollars per month renting their personal stuff out.
To be fair, Real estate has some advantages over a lawnmower. It will outlast your lawnmower by decades and will still be in demand when xeriscaping has eliminated the need for lawnmowers. Real estate typically appreciates while your lawn mower’s value will drop each year and real estate has a vibrant property management industry, where it’s likely you’ll have to manage the rental of your own garage toys (though that may change too). There’s some industry chatter about companies managing the rental and storage of your items that you’d like to rent and make additional cash flow. That’s like renting a storage unit that pays you each month.
Looking for ways to make your first $1,000,000 in investing? $20,000 worth of stuff at 37% per year, takes 12 years to grow to $1,000,000.
Nobody else is going to make you a millionaire, but everyone has something in their garage they can rent. You can do this, so quit with the excuses and get after it.