Most of us imagine owning our own home, but just like a game of real life Monopoly, it doesn’t have to end there. Owning multiple properties can provide just as much financial security as a career does, if not more. The trick is to invest smart and start young. The U.S. Census Bureau reported that there are over 25 million homeowners in the U.S., and you can be one of them.
In real estate investing, multiplication is key. So how does it work? Here’s a simple look at a process that can repeat over the course of your life:
Buy Your First Property
With the many loan opportunities now available, you may not need as much cash as you think. What you will need is a good credit score, a steady job and possibly money for a down payment, depending on the type of loan you choose.
• Traditional fixed-rate loans. These usually require a down payment of at least five percent, have a fixed interest rate and payment for a set number of years — 30 years is standard.
• Adjustable rate mortgages (ARM’s). These have lower initial interest rates. Consider carefully the terms of an ARM — if interest rates rise significantly, an ARM could cost you a lot more in the long run.
• No money down mortgages. While it is better to have a down payment to lighten up monthly payments, there are 100 percent loans available that require little or no money down to purchase a home. Your parents may need to be willing to cosign if you don’t have stellar credit.
To determine what type of loan is best for you, you need to consider your financial situation and future plans. See your financial institution about any mortgage programs they offer. Always leave room for hidden costs you will have when purchasing property. A reputable and experienced loan officer can help you with this.
Allow Equity to Build
Equity is simply the value of your property over and above your debt. Most real estate market values appreciate at a pretty constant rate; however, some appreciate much faster than others — it depends on the location. In addition to market appreciation, you can add value to your property by fixing it up. Keep in mind, though, that building equity doesn’t happen overnight. It can take years to see a substantial gain, so be prepared to be patient.
Sell and Buy Another
You will want to own and live in your property long enough to exclude the capital gains (the increase in worth since the purchase) at tax time. If your property has been your primary residence for at least two years, you are unmarried and you aren’t excluding the gains of another property, you can exclude up to $250,000 from the sale. Once the value of your property has increased to an amount that you are happy with, consider selling. You can use the built up equity you’ve created as a down payment for one or two more properties, and rent out what you are not living in. This process can snowball until you have a bunch of rental properties paying for themselves, appreciating and making you a healthy profit.
Keep in mind that investing in real estate is not without its risks. Knowing and understanding the chances you are taking is crucial. The real estate market varies by region and tends to be cyclical. Just because property values may have shot up in one place this year, does not mean the same trend will continue on. Smart investors do their best to study and accurately predict the market, but they are always speculators. Whether it’s real estate, the stock market or even fashion, getting in before everyone else does (or while everyone else is getting out) will influence your success rate.