Draw Me Self

I often tell people that becoming a millionaire in the real estate business is an easy thing to accomplish. They usually give me a look of bewilderment. I say that you don't have to understand every aspect of real estate in order to begin investing. The best thing to do is start with a basic buy-and-hold strategy purchasing whatever type of property you are capable of buying with as little money down as possible. How you buy something with as little money down as possible depends on your financial situation and what types of mortgages you're capable of qualifying for. Since guidelines for mortgages and government intervention changes daily, it's impossible for me to tell you the best way to do that. I can tell you how I did it for years using the all-money-down technique I described earlier in the book. But I'll give you a quick refresher course below.

If you bought $100,000 house through conventional means, you may have to put 20 percent down is $20,000 plus closing costs that will cost you approximately $3000. In this example, you put $23,000 down to buy $100,000 investment property. Using the all-money-down technique, you would buy a $100,000 property for cash putting all $100,000 down plus the closing costs of $3000. At this point, you have $103,000 down on the property and you begin to invest an additional $5000 to fix the property up. You now have a total of $108,000 of your money into the property. You put the property up for rent and you find a good tenant, so now you're empty investment property is a business making money and shows a profit. Now you go to the bank and you get the property appraised with the intention of doing a cash-out refinance. Because you fixed up the property and it's a money-making business, the property appraises for $114,000. The bank is willing to lend you an 80 percent mortgage on the $114,000 appraisal giving you a mortgage of $91,200. You originally put down $103,000 and received back a mortgage for $91,200 making your out-of-pocket costs $11,800.

When using the all-money-down technique as compared to buying a property through conventional methods, you save $11,200. Now of course, you're going to have a higher mortgage and less cash flow coming from the property, but you're also going to have $11,200 to buy the next property with.

Sometimes the homes you buy are going to cost you $10,000 to buy; other times you're going to break even on the deal. You might even be lucky enough to actually get paid to buy a house, which has happened to me once or twice. The goal was simply to just keep buying as many properties as possible until you build up a portfolio worth millions of dollars. You will make a profit from the cash flow, but most likely that's going to go back and do things like repairs and vacancies in all the other issues that come up with real estate. If you do end up banking $10,000 during the year from the cash flow of your buildings, there is your down money to buy an additional property and expand your portfolio further.

I have constantly repeated that you're not going to find the cash flow to be something of tremendous value to you. The cash flow will help pay for the necessary things and give you down money for future deals, but in the end you will work hard for very little money. The real surprise will come when you've ridden the cycle from bottom to top and created a gap between your portfolio's value and the amount of mortgages that you owe for the building. Accruing equity in your buildings, you will slowly begin to see your net worth increasing as the years go on.

For example let's just say you bought one property a year for five years valued at $100,000 a property. Since the five years that you bought the properties, values have gone up somewhat and the mortgages have gone down, and your net worth is the equity in between. As you begin to see this throughout your investing career, especially when the market is on the rise, it can be an exciting time.

Your expectations should be to live off of the income from your job while the profit from the rental property business is used to fuel its needs. You'll usually get to a point somewhere when a real conflict will develop between your current career and your real estate investments. It's hard to be in two places at once, and ultimately it will begin to catch up with you. For me this conflict was easily resolved since I only wanted to be doing real estate anyway, but if you love your day job and you plan to continue it through your life, you're going to have to make some tough decisions. You could keep your day job, but someone is going to have to run your portfolio.

I maintain that getting a seven-figure net worth in equity strictly in your real estate holdings is not that difficult to do. I recommend you join real estate investment clubs and read as many books as you possibly can. As you begin to make investments, you'll find friends in the businesses that relate to your industry such as people in the mortgage business. I recommend that you associate with as many of these people as possible so that your knowledge of the industry expands tremendously.

A friend of mine who's an intelligent guy took some of this advice and began moving quickly. In his first year, I think he bought two properties, but by his second year he was already doing $300,000 flips and buying multiunit investment properties with a partner that he has. First of all, I'm not a big fan of partnership for the deal size he was doing, and second, I think he was growing a little too fast. If he didn't have a job, I wouldn't have a problem with the speed of his growth, but because he had a well-paying job, I cautioned him not to move too fast. The second half of 2009 was a rough year for him as his $300,000 flip was not selling, and he's already had to do two evictions. Carrying the mortgage and his $300,000 flip was expensive and was already causing some tension in his partnership. It's not going to be all fun and games; as your portfolio grows, your problems grow with it and the workload grows.

Another thing I can say about the issues in the real estate business is that they seem to come in waves. Even when I owned dozens of homes, I would go six months where I wouldn't need to change a doorknob and then all of a sudden all hell would break loose. I'd be dealing with an eviction, two vacancies, and apartments that were destroyed. When it rains it pours in the real estate business; at least that's the way it worked out for me. I remember on two separate occasions during the summertime one year followed by the next summer a year later I was bombarded with all kinds of issues. In this business, you can't let a vacant property sit and wait because you're losing money every day it's not rented. The process of getting it renovated and re-rented is the highest importance.

As bad as I make it sound, I think you'll find it all to be worth it in the end. It seems that no matter how much money I made, I have learned in my career I never really save. As you earn more money, your lifestyle increases and you begin to upgrade your homes and cars to the point where your bills go right along with your salary. The real estate business is almost like a bank account you really can't touch easily without selling a building, so it continues to grow and feed off of itself. It's a terrific feeling when you realize that your $550,000 portfolio experienced a 10 percent increase in values in the last year and you're up an additional $55,000.

I'm using the same principles today in the commercial arena buying larger buildings with similar strategies. I can't buy a $3 million building with the technique, but there are many other things that can be worked out in the commercial world. Nowadays I use strategies that involve complex negotiations with the sellers where I convince them to carry paper or lease option the building. I can also borrow money from banks for commercial investments giving the bank that piece of real estate I am buying as collateral as well as existing pieces of real estate as collateral. I call it redundant collateralization and am seeing more and more of it every day from banks.

If you can go from broke to seven figures in one real estate cycle as I've suggested easily making yourself $1 million during your first real estate cycle, then just imagine what you can do in your second real estate cycle. I plan to be carrying a real estate portfolio with the value north of $10 million and have that portfolio under my control before the real estate market begins to show any gains. I expect the gains will begin to show sometime around 2013 or later. Can you imagine if you're holding a $10 million portfolio and the real estate market goes up a meager five percentage points? It doesn't matter how much money I made that year in income because as long as I can keep my business afloat I am up half a million dollars in equity in one year. If I'm ever lucky enough to see the crazy increases that we saw in 2005, can you imagine what it will feel like to see a 20 percent increase in values in one year when you're holding a portfolio worth eight figures?

"Far better it is to dare mighty things, to win glorious triumphs even though checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the gray twilight that knows neither victory nor defeat." Theodore Roosevelt

Let's dream about holding a portfolio worth $12 million when the market goes up 20 percent giving me a one-year tax free gain of $2,400,000. I believe that this is a realistic expectation for my second cycle of the real estate business. In the year 2025, I will be sixty years old. I feel certain that if I continue to just do what I've been doing my whole life, I surely should have a net worth of many millions of dollars strictly for my real estate holdings. I know of no other way to make money in these types of numbers as easily as I do in the real estate business. I don't deny that other people have the means to make this kind of money or even more, but I am not familiar with those methods. I consider myself an expert on real estate, and I certainly feel as some of the things I'm talking about here will happen to me as long as I'm lucky enough to still be breathing when 2025 rolls around.

This is why I love the real estate business, and this is why I'm pumped every day to get out and keep it going because I can see my future is filled with bright and sunny days. I feel terrific about getting up in the morning and going to work, and when you have that kind of attitude, there's no way you can fail. This morning I woke up at 5:30 a.m. and went to my office building to reorganize some equipment in our communication room. I'm spending some afternoon hours on a Sunday working on my book and feeling great about my possibilities. If you love what you do, you will be much happier and much more successful at whatever you try.

I don't even consider the things that I did this morning or writing this book as work in the regular way people think of it. Obviously, it is work that I'm doing, but I don't have a negative feeling about the word work or what it entails. I get a terrific sense of accomplishment from getting up in the morning and making things that happen furthering along my career each day in baby steps toward the ultimate goal of massive wealth accumulation. I hope that some of you reading this book will really grasp the things I'm talking about above. I feel that may be the most important message in the entire book.

Here's an idea you should think about after you buy your first property. Make sure that you take some time after you bought it to really analyze what's going to be involved in being a real estate landlord. If you like it or even love it, let's get the party started, and if you don't get out right now. If you're going to proceed in the business just for the money but despise dealing with tenants and working on buildings, you really have to be careful and reconsider what you're about to do. This business is not for wimps, and it takes a heck of a lot of guts to be a real estate investor. To get to the level that I have achieved, you may have to take half of your net worth and roll the dice on some large commercial building risking the twenty years of hard work on one deal. Until you go through that process, I can never truly explain to you what that will feel like. My name is Phil, and I'm addicted to real estate.

Divorces and real estate go hand-in-hand because when a husband and wife get a divorce, they divide their assets. Most family's largest asset is their home which can't be split down the middle, so divorce will most likely lead to the disposition of an old home and the acquisition of new ones.

To answer some frequently asked questions about divorce and real estate, we interviewed Kelly Chang Rickert, a prominent Family Law attorney in Los Angeles. Kelly was kind enough to share her expertise as a Certified Family Law Specialist with our readers.

California is a community property state... what typically happens to a home after a divorce?

Typically when you go through a divorce and you own a home, the parties would try to settle and reach an agreement as to what happens to the home. If the parties cannot agree, then the court will order a sale.

Does the agreement usually happen through mediation or in court?

It can happen at any moment. Divorces run the gamut. You can have an amicable divorce where a spouse will say, "You keep the house until the kids are in college and then we'll sell it" or "You keep the house. It's in your name. You can buy me out." Or, you can have a hateful divorce where you can't agree about anything, and you go to Court every week. Expect to spend between 5k - 20k per court appearance.

I think a lot of people get confused about divorces and think "We hate each other we're going to court," but that's not necessarily true. A divorce is a break-up with children and assets. You should sit down and figure out what's going to happen because if you don't figure it out, the courts are going to figure it out for you. And they don't know anything about you and your life except for the paperwork you filed. Don't leave your fate in the hands of a judge. If you get divorced and you own property together, I would sit down and amicably divide it.

Which means selling the home?

Well, if there's a ton of equity, you can refinance and buyout the other person. If the home was purchased during a marriage, it is community property. If there is $100,000 in equity and all of it was earned during the marriage, then $50,000 belongs to each side. The person who wants to buy the home would pay the other side fifty-grand. Then he or she can keep the house and make the mortgage payments on their own.

Would a prenuptial agreement affect who gets the property?

Yes, absolutely. If you get married and already own a home, during the marriage, all of the payments that you make on the home are community. So if you want to keep the house separate, because it hasn't been paid off yet, you want to make sure that you get a prenup saying that all the payments are going to be made from a separate account and there's not going to be any community funds involved. NEVER CO-MINGLE ACCOUNTS. When you leave, you still own the home--your spouse can move out and own nothing of the home.

Once the home is finished being paid for, does it eventually become community property or does the prenup protect you forever?

Well the prenup is pretty limited in coverage. You have to make sure that your actions follow what the prenup says. In California, anything that's acquired after the marriage, before the date of separation, is community property--which means, all earnings.

Typically you'll have a couple where one spouse bought a home before the marriage and they took out a mortgage, so basically they don't own the home outright because they still owe the bank a ton of money. During the marriage, all of the payments that he or she makes come from income earned during the marriage which is community property. Basically a portion of the home from the community payments become "community". It's still separate because it was purchased before the marriage, but the payments made on it--if they're coming from earnings while married and they don't have a prenup--become community. And that's how we get the Moore/Marsden Equation which calculates what the community component is.

If you have any properties before the marriage, you want to make sure you get a prenup that says nothing is community property. If you own a home, get married, but still owe the bank--you want to make sure the payments made during the marriage on the house payments come from a separate account and nothing is ever comingled. That way if the time comes and G-d forbid you get a divorce, there's no community component. It is very clear, and there is nothing to argue about.
"A divorce is basically one family split into two."
Can you provide any tips for a husband and wife to prepare for a divorce?

I would make a list of all your assets, and most importantly--be amicable. When people are angry and jealous they try to use money to cut each other's throat. The best thing to do, especially if you have children, is to sit down and really work out the logistics.

A divorce shouldn't be handled by attorneys - except for the simple paperwork. A divorce is basically one family split into two. You have to sit down with your spouse and be like "We have kids together; how do you want to handle this? I can't presumably be the mommy and the daddy."

In my experience as a divorce attorney, it's difficult when a parent says, "I want full custody." It's not going to happen. Unless the other side is a drug addict, in jail, or killed someone, or moved cross-country, you're not going to get full custody-it's going to be joint. America likes that. Now, other countries are different. Japan is different. Japan doesn't believe in joint custody. Japan usually awards custody to the mom, period. But in America, unless there are extenuating circumstances, it's always going to be joint. Now, Joint Custody doesn't necessarily mean 50-50 share. You may have Dad seeing kids once a week, or once a month - but that is still considered "joint custody".

When you go through the divorce, make sure to value your house. If you bought it for $500,000, and you owe the bank $450,000, and right now the market says it's worth $400,000--you have a loss. You should figure out what you want to do about that loss. I would probably sell it and walk away.
"When the divorce happens and you try to refinance based on one person's income, it's going to be very hard, especially these days when the banks don't want to loan to anybody."
If one of you thinks that you can hold onto it and the bank will refinance while the other side can walk away without debt--then I would refinance and keep it. It's often hard to do that though, because many homes are purchased with both spouses' incomes and credit scores. When one person leaves the equation, the banks are not as likely to offer you a loan in that same amount.

So refinancing becomes more difficult in that situation because you don't have the combined income?

If it was always a single income family then we have no problem, but most of the time you have a two-income family that buys a home. When the divorce happens and you try to refinance based on one person's income, it's going to be very hard, especially these days when the banks don't want to loan to anybody.

I hear people say, "My wife divorced me and took the house." Does that ever happen or is that just how assets were divided up? Like one person gets the house and the other person gets other assets...

Exactly--it's the latter half. So when one person is like "Oh we got a divorce and she got the house" they're not really telling you the whole story. She may have gotten the house, but he may have gotten equity in other things in the same amount that the house is worth. These days homes are not worth anything unless you bought it 30 years ago. Typically what we have these days are very short-term marriages where couples bought a house at the height of the market around 2007 and 2008, and the home has actually lost a lot of value, so there's no worth.

Do you ever see couples walk away from a divorce because they can't afford to?

Yes, definitely. I had a guy once who realized he had to pay a ton in alimony so he said, "It's cheaper to keep her." And dismissed the divorce.

I heard that you often encourage people to work it out instead of get a divorce?

Oh yeah--it's always cheaper! I mean basically, you're going to fight in a divorce. Nobody ever wants to go to court-why would you? Lay people think that court is like Law and Order and everybody has to go, but the reality is, you never have to go to court unless you can't agree on something. If it comes down to something like "who gets the garage door opener"--do you really want to spend thousands of dollars to go to court and see who the judge is going to award the garage door opener to? No! You want to work it out-it's much simpler.

Does a divorce hurt your credit?

It depends... if you let your home go into foreclosure, your credit is going to suffer, but it has nothing to do with the divorce. If you get a divorce and all your payments are still being made, that's not going to affect your credit. However, if you get a divorce and suddenly the wife can't make the payments and she goes into foreclosure, but the home is in both the husband and wife's names, both of their credits are going to be hit.

The divorce itself doesn't affect your credit-it's what can happen in a divorce that could affect your credit.

How should someone choose a family law attorney to work with?

First thing I would do is research them. These days Google is your private eye. If you go online and research divorce attorneys, I would make sure they are a Certified Family Law Specialist.

If you were having heart surgery, would you go to a general practitioner to do your open heart surgery? Probably not. Would you go to a brain surgeon? Probably not. You'd go to a heart surgeon. The reasoning is the same thing with a divorce attorney. Pick an attorney that specializes in family law and not a general practitioner because they will screw up your divorce.

A lot of people come to me and ask, "My first attorney screwed it up, but since the case already started is it cheaper?" I have to say, "No--it's more expensive because I have to undo the screw up." It's like if a roofer is supposed to patch your roof but instead messes it up. Now the second roofer has to take off the roof and then fix it--so it's double the money. If you pick the wrong attorney who's going to screw up your case, it's going to cost you tenfold to fix it.

Specialists charge more. General practitioners charge anywhere from $100-$200/hour while a specialist is going to start you off around $500-$1000/hour. It's expensive but it's worth it.

Is there ever a time would a divorce attorney would handle both spouses or is it always one or the other?

No, it's always one or the other because otherwise there's a conflict of interest.

What is your outlook for the real estate market in the coming year?

I think it's going to stay low. I don't think it'll pick up and I don't think it's going to drop anymore... I think it's going to stay status quo. So if you have real estate, hold for now. It should pick up in the next 5 years, but not this year.

Thank you Kelly for the great interview full of valuable information about California divorce!

Early last year Temecula Valley Real Estate started off pretty strong. As we moved into Spring and Summer, the traditional busy season was slow. And in August 2006 was saw a severe oversupply of homes on the market. This increased competition and lowered prices. Through the rest of 2006 and now midway through 2007, the supply of homes on the market has remained very high with the market firmly moving into a buyer's market. Prices have retreated about 10 to 15%.

Over the first six months of 2007 we have seen business finally increasing. As we move through Summer things are looking brighter. Prices seem to be holding steady and some houses are beginning to move. But they are still moving very slow and sellers need to exercise patience and do what they can to make their house standout.

Right now there are some big challenges to home prices, namely foreclosures and short sales. Many people bought homes using 100% financing at the peak of the real estate market and those homes have lost some value. Buyers who used adjustable mortgages or even pick a payment loans with a short fixed period are now experiencing rising payments and due to the reduced market price of their home, can no longer refinance. If these buyers owe $300,000 (100% financing) and it is only worth $280,000 now, there really is no option to refinance their loan. On top of that their adjustable rate continues to climb making their payment even higher.

This is a tough financial bind. Once in this situation, many southern California properties go to either a short sale or even foreclosure. When these transactions close they lower the comparison properties on the market and thereby further impact market prices and people's ability to refinance.

Even with all this said nice homes in sharp condition are still selling. But sellers need to adjust their expectations from last year's pricing. And if a seller needs to sell their home in order to buy another home they often lose money on their sale but will gain it back on the new home they are purchasing.

With all this said, right now is an excellent time to be a buyer. Interest rates remain historically low. Buyer's ability to negotiate is also a major factor. As we move through summer some of that negotiating ability may dry up as demand increases andand rates stay low. If you know someone that has been considering making a purchase now is an excellent time for them to start looking again.

Overall, the market is moving in the right direction and many economic professionals say we are on the road to recovery. Southern California has always been a leading Real Estate market and historically averages 3-5% appreciation a year. It will take some time to get through the existing supply and the banks will be tightening lending options signficantly. You should expect the loan and sub-prime mortgage market issues to remain a drag on Real Estate for the next year minimally.

One thing that is very important to keep in mind while we negotiate through this challenging time, Real Estate remains the best investment with the most benefits. And while Temecula, Murrieta, Wildomar and Menifee Real Estate we won't see gains like we have over the last 5 years (29.5%), we should begin to level up a bit in 2008 and have a soft landing as the market starts to straighten out in 2009.

For most people, financing real estate using mortgages is a fact of life. Most people don't have the cash to pay for the entire purchase price of a property, and many people want to leverage their cash to boost their return on investment.

So mortgages are here to stay... at least until tenants pay them off. In the mean time, mortgage payments must be made every month, easily accounting for 50% or more of a rental property's monthly cash flow.

While it's true that for most mortgages, a portion of each payment is principal repayment (and not really an 'expense'), with such a significant impact to the bottom line, a good investor does everything they can to minimize the monthly out of pocket cost and keep the cash flow positive.

Choosing an appropriate mortgage that reduces out of pocket costs is not always an easy decision to make. Anyone who has ever obtained a mortgage knows what it's like... they may ask questions like:

• is the cheapest interest rate always the best one?
• what amortization period should I pick?
• should I choose a long or short term?
• what about fixed interest rates or variable?
• is an open or closed mortgage better?
• do I need pre-payment or payment increase privileges?
• which lender should I choose?

These are not always easy questions to answer, as the mortgage industry varies widely and the answers depend on the individual. The answers for a new home buyer may be substantially different than for a real estate investor. Even among investors, the answers can different based on their tolerance for 'risk' (ie. the chance their monthly payments may go up, etc.). The following are some things to consider when making decisions:

• Interest rates - The interest rate affects your monthly payment and therefore your cash flow. Obviously, lower interest rates are better, but all mortgages are not created equal (see the section below about lenders). Most banks will lock in rates for you (even on a refinance or renewal) for 90-120 days. Use this to your advantage while shopping around for the best mortgage.
• Amortization period - This also greatly affects your monthly payment and therefore your cash flow. Longer amortizations are better, but as a result, it takes longer to pay off the mortgage. Normally investors don't care about paying off the mortgage early, so it is best to select a longer amortization (ie. 25 years or more)
• Long or short term - Deciding the answer to this almost requires a crystal ball. An investor must predict things like where interest rates will go over time, and how long they will hold a property. There is a measure of risk when using short-term mortgages, as rates could go up at renewal time, causing a severe reduction in cash flow. Long-term mortgages reduce that risk, but can prevent taking advantage of drops in interest rates, so it ends up costing more. Ultimately, flips should use short term mortgages, while the term can vary for buy and hold properties based on investor preference and risk tolerance.
• Fixed or variable - Most people use mortgages that are locked in for a fixed term. This can be a disadvantage if an investor decides to sell a property or interest rates drop substantially. On the flip side, variable rate mortgages allow an investor to take advantage of rate drops, but they can also easily increase. Variable rate mortgages also tend to have lower interest rates than fixed mortgages, thereby boosting cash flow. Flips should use fixed mortgages, as this allows accurate forecasting of holding costs. Long-term buy and holds can use fixed or variable, depending on investor preference and risk tolerance.
• Open or closed - Open mortgages tend to have higher interest rates than closed ones, but have no penalties for full repayment. Closed mortgages should be used for long-term buy and hold properties, while open should be used for flipping.
• Pre-payment or payment increase - For long-term buy and hold properties, ensure the mortgages terms allow partial pre-payment (at least 10%-15%) and an option to increase monthly payments. This provides flexibility to use excess cash flow to pay off the mortgage faster. For flips, a good sized pre-payment privilege will help reduce penalties if the property is sold before the mortgage term is complete.
• Lenders - This is a tough one and an investor will have to rely on their mortgage broker and referrals to find good lenders to work with. Some lenders may have the lowest rates, but the mortgage is difficult to qualify for, they may have high fees for breaking the mortgage, etc. Find a lender who is flexible, without high fees for everyday items (like extra statements, NSF charges, etc.), good customer service (this is important), and of course the easiest qualification criteria (would you rather jump through 37 flaming hoops to get a mortgage, or just 3?).

The above sections don't really provide the answer to choosing fixed/variable or long/short term because it really depends on the individual. However, the following articles published by Moshe A. Milevsky, Ph.D, a Finance Professor at York University and Executive Director of the IFID Centre, may help an investor make a decision.

• Mortgage Financing: Floating Your Way To Prosperity - Published in 2001, this article describes his approach to finally answering the question of whether to go long or short on a mortgage. He uses sophisticated mathematical analysis based on historical interest rates to come to his conclusions.
• Mortgage Financing: Should You Still Float? - Published in 2004, this article discusses his original suggestions in light of today's very low interest rates, and provides recommendations for different types of people (ie. new home buyers, etc.)

Once an investor has had a mortgage for awhile, they may discover that their cash flow is low, so they make want to find ways to boost it. The following are some suggestions on how to do this:

• Skip a payment - This is our favorite and one of the easiest. Many mortgages have the ability to skip one or more payments. Even if this isn't part of the mortgage agreement, many banks will make exceptions. The advantage of this is that you can boost your cash flow with one phone call. If you pay $1500 per month on a mortgage, that's $1500 you can keep in your pocket.
• Interest only - This requires refinancing, and may not be available in all cases (especially for rental properties), but it can dramatically boost cash flow. No principal repayment is included in your monthly mortgage payment -- only interest costs. The disadvantage is that no equity is being built up through mortgage 'pay down'. Instead, the equity is kept in your pocket every month by not having to pay the principal.
• Extend amortization period - If you've had a mortgage for a few years, normally upon renewal or refinance, the amortization period is reduced by the length of time you've held the mortgage. To reduce your monthly payments, extend the amortization period back out to 25 years or more.

Using the above information to select the proper mortgage, and the extra techniques to boost cash flow, an investor should be able to keep their monthly debt servicing costs to a minimum so they can keep more money in their pocket and for long-term buy and holds, keep the property long enough to benefit from one of the best parts about real estate -- long-term appreciation.

Real estate is a great investment vehicle. Often, real estate investments outperform stocks, bank CDs, bonds, gold, and many other investment alternatives. Please read on to find out why.

Leverage is a powerful wealth building tool when used correctly. Let's compare purchasing stocks to purchasing real estate to highlight the power of leverage. If you are faced with the decision of how to invest $100,000, how much buying power do you have? Put another way, how many dollars worth of stock can you buy versus property? The answer is you can only buy $100,000 worth of stock however, you can buy $1,000,000 worth of property when leverage is utilized. Assuming a 10% appreciation in both markets (stock & property) let's look at realized returns. In the stock market, your $100,000 increases to $110,000 and you realize a 10% gain. Conversely, the same 10% appreciation increases the value of your $1,000,000 property to $1,100,000. The realized gain is $100,000 and since your initial investment was $100,000, you've doubled your money. You realized a 100% gain.

When you buy $100,000 worth of stock, what is the value of your portfolio the day you buy it? It is $100,000. This is not that case with real estate. The price of a property can vary tremendously making it possible for an investor to over pay or under pay for an asset. The $1,000,000 property purchased with a $100,000 down payment may only be worth $825,000 if the investor overpaid for the property. Alternatively, it may be worth $1,500,000 if the investor purchased the property from a distressed seller and negotiated a strong transaction. My students always pay 40, 50 or 60 cents on the dollar for properties they acquire thereby giving them instant equity.

Another positive to investing in real estate is the fact that the tenants pay off the mortgage. Assuming the purchase was made correctly, the tenant's rent payments are paying off the mortgage while you are enjoying monthly positive cash flow after all expenses are paid. Typically, the rents are being increased year over year and your mortgage expense remains constant, therefore after annual rent increases your positive cash flow increases. At the same time, the equity in the property is increasing as every month passes due to the amortization of the mortgage and the appreciation of the property. The market appreciation is driven by local influences. In some parts of the country, appreciation rates are negative and in others they are positive. I encourage my students to invest in areas where the economy is improving, jobs are being created and the values are on an upward trend.

Additionally, there are plenty of tax advantages to owning income producing properties. Depreciation and tax write offs make real estate investing very attractive. Please consult with your tax advisor for details on all of the advantages applicable to your specific circumstances.

When you buy stock in a company, there is nothing that you, the individual stock holder, can do that will increase the value of the stock. This is not the case when it comes to real estate. Value is added to properties every day all over the country when someone takes a rundown property and updates the property, removes functional obsolescence, adds additional living space, adds a garage, etc. A large majority of the properties I have purchased over the years have been physically distressed. I have created enormous added value by redeveloping these properties and thereby creating tremendous equity in my portfolio. Not all property issues are related to the physical condition of the building. In the example from the second paragraph, a savvy investor can buy a $1,000,000 property with a rent roll that is below market rate. Within the first year, this investor can systematically raise rents and decrease expenses achieving an increase in the value of the property. This increase in value can be accomplished without having to rely on market appreciation or renovations. This type of value play is common and simply addresses an existing management problem.

Another fabulous advantage is the ability to access your equity in the form of a refinance. You can "pull money out" of a property by refinancing with a bank and then use this money to continue acquiring more revenue producing assets in your portfolio. The best part is this money is not taxable at the time you do the refinance. One word of caution here: Make sure that you do not over leverage your portfolio and create a house of cards that will tumble if you experience a tightening in the market.

If the world of landlording or the day-to-day dealings of being a hands-on real estate investor sounds scary, the good news is there are still ways to put your money to work for you by being a real estate investor. You can invest in real estate as a private lender in a specific real estate transaction by partnering with another hands-on investor. For those interested in this approach, I have several articles and videos posted on my blog explaining this option in more detail.

Real estate is such a wonderful tool to increase your net worth and create additional streams of income. I hope that this article has given you some insight and desire to get started in real estate investing.