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Invest in Real Estate |
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Invest in Real Estateby Matthew MartinezReal estate investing is one of many wealth-creating options that you can pursue in your quest to solidify or surpass your middle-class status, ensure your financial security, and/or create generational wealth that will help not only your immediate family but perhaps even several generations that follow. More millionaires have made their fortunes in real estate than in any other business. In fact, the IRS reports that 71 percent of all Americans declaring $1 million or more on their income tax returns during the past 50 years were in real estate or related activities. Indeed, real estate can be extremely lucrative and has proven to be the most statistically likely way to achieve financial independence. According to CNN/Money, the number of households with a net worth of at least $1 million (excluding primary residences) increased to an all-time record of 8.9 million in 2007. Millionaire households had an average net worth (excluding their primary residence) of nearly $2.2 million, of which more than $1.4 million was in liquid (readily accessible) assets. More than 50 percent of the millionaires surveyed by CNN/money said that their financial success was the result of long-term wealth accumulation, and real estate remains the primary means of that wealth accumulation for many of these families. In fact, 46 percent of those surveyed owned investment real estate. According to author Robert Frank, the newest members of Affluent America (many of the families who live in the counties with the largest number of millionaires) did not inherit their wealth; instead, they were middle-class citizens who made their fortunes by owning assets such as stocks, bonds, and, of course, real estate. According to Frank, the über-rich “don’t buy mutual funds; they buy timber land, oil rigs and office towers.” This, more than anything else, should give you hope for a better way of life, given what you will learn in this book. The Benefits of Real EstateReal estate is a tangible asset that has the potential to produce passive income and appreciate over time. If you're searching for a brick-and-mortar investment opportunity, real estate is your best option. Like other investments, real estate undoubtedly will be affected by the ups and downs of economic cycles (as it most certainly is in today’s down cycle), but well-located, well-managed apartment buildings offer enduring value. Also, real estate has historically generated attractive returns compared to other equity investments. Finally, you control 100 percent of the investment, as opposed to buying stock in a company, where you have little control or influence over the company’s activities.DiversificationI’m not proposing that you invest only in real estate. Rather, you must understand that including real estate in your portfolio will help you as an investor increase your diversification and allow you to participate in an asset class that complements the stock and bond markets. Diversification is one of the critical methods employed to achieve success. Because movements in the real estate market historically have had a low correlation with movements in the stock and bond markets, many investors consider real estate a key component of a fully diversified financial plan.Staying Ahead of InflationReal estate also provides protection from the erosion in earning power caused by inflation. For example, if the interest rate you earn on your capital is equal to the inflation rate, your overall rate of return will be neutralized. Ideally, the goal is to invest in assets that stay substantially ahead of inflation. Real estate is generally considered an investment whose returns will, more often than not, exceed the rate of inflation—and certain investments, such as apartment buildings (when the techniques you’ll learn in the book are applied), may provide substantially greater returns.Wealth AccumulationFor generations, wealthy individuals and institutions with vast financial resources have invested in institutional-grade multifamily real estate. These investors have been seeking to preserve their capital, achieve superior returns, and increase their wealth. As discussed, real estate can provide a substantial passive income stream and is one of the best means for accumulating wealth. Passive income from rental properties can augment your earned income while you continue to work for someone else. Eventually, you could be making enough from your rental properties to be able to freely elect whether to continue working for a wage. At that point, you will decide to work because you love it or decide to quit because you no longer require the income from your day job to sustain your standard of living.You could invest in many different types of real estate assets, including multifamily (apartments), retail (shopping centers), office, and industrial buildings (warehouses). This book will deal primarily with multifamily assets . In particular, I will discuss how to buy them, where to find them, how to manage them, how best to improve their value, and how ultimately to profit from them through what’s known in our industry as a “capital event” (more on that topic later in the book). Is This the Right Time?Timing the market is impossible, so I never try to do it. Instead, I merely attempt to buy very good value, regardless of the prevailing conditions. Buying outstanding value is the most important factor in your future success as a real estate entrepreneur, no matter what advice is being offered by the so-called real estate gurus on late-night infomercials. Nevertheless, great fortunes in real estate or any other industry are often made during times of economic distress—in particular, when market corrections, like the current one, dramatically undervalue assets.Down (Market) CycleBill Gross is the manager of Pimco, the largest bond fund, with nearly a trillion dollars in assets. He was interviewed by the New York Times and commented that, “The current crisis feels different—in both size and significance.” Given that Mr. Gross has lived through a number of economic cycles, his evaluation of this particular one should be noted. By the way, he plans to use some of his firm’s $50 billion in cash to go “bargain shopping” during the next few years. On March 25, 2008, the Wall Street Journal reported, “Lenders describe the current situation as the worst since the Great Depression.” One of the greatest beneficiaries of real estate cycles is Sam Zell, the founder of Equity Group Investments. He is the largest landlord in the country, owning more than 200,000 units from coast to coast. The very shrewd Mr. Zell acquired a massive portfolio of undervalued properties in the market crashes of the early 1970s and late 1980s. Depressed valuations allowed him to purchase real estate assets at a fraction of their true value. He managed to acquire apartment buildings from banks that had inherited properties from landlords who defaulted on their loans. He offered the lending institutions a percentage of the upside in the form of equity in his deals, and in turn the banks (really the Resolution Trust Corporation) provided him with an abundant selection of distressed apartment buildings at steep discounts. Zell built his fortune during the down cycles, so much so that he is known today as the grave dancer because he profited immensely during the bursting of real estate bubbles and it was said that he would dance on the graves of other people’s mistakes.When the market makes a dramatic correction and valuable real estate assets can be purchased at substantial discounts, be prepared to go shopping for the best deals you can find. The odds are in your favor that real estate assets will be selling at discounted prices every 10 to 15 years, and when the real estate market finally does recover (which historically is inevitable—and it seems as though the down cycles are shorter each time), your portfolio will profit from the smart, patient investment decisions you made when everyone else was in panic mode. Unfortunately, most unsuccessful investors subscribe to the herd mentality, buying when everyone else is buying and selling when everyone else seems compelled to sell. There’s not much upside to be gained when you follow the herd! The secret to success in real estate is to buy when everyone else is selling and sell when everyone else wants to buy. Being a contrarian undoubtedly will test your resolve, since you will be doing the exact opposite of what the rest of the market is doing. But stay the course, because real fortunes are made during such times. You must remember that more real estate fortunes are made in down markets than are made during presumably prosperous ones. Don’t believe me? Just ask Sam Zell. Adjustable-Rate Mortgages (ARMs), Home Equity, and Second LoansThe typical family with an ARM will see its mortgage payments rise by $10,000 a year, according to the Center for American Progress. It is estimated that about 2.8 million homeowners will have the payments on their subprime mortgages reset higher in 2008 and 2009. If these homeowners can't afford the new payments or are unable to refinance because of the significantly tighter mortgage market, they are likely to become renters again.In addition to the primary or first loan, many home buyers took out second loans to bridge the gap between the first mortgage and the purchase price. Moreover, when home values soared, homeowners withdrew money from their homes in the form of home equity loans. As a result, not only are ARMs going to wreak havoc in the real estate market, but second loans (both piggyback and home equity loans) will also negatively influence homeownership and add to the mortgage crisis. Equity loans reached a historical high of $1.1 trillion in 2008. Any additional debt will decrease the equity an owner has in his or her home and make it more challenging for the homeowner to make their mortgage payments. More than 1 million American properties entered foreclosure in 2007, and it is estimated that many more will do so in 2008, 2009 and 2010. A significant number of these foreclosures were rental properties acquired by speculators. When the lenders foreclose on these assets, the tenants typically are evicted. In fact, according to the New York Times on November 18, 2007, the Mortgage Bankers Association reported that 12.5 percent of foreclosures are non-owner-occupied. As many as 2.3 million households may move back into the rental pool as a result of out-of-reach mortgage payments on reset adjustable-rate mortgages, according to Will Balthrope, senior director of Marcus & Millichap in Dallas, as quoted in www.ciremagazine.com. This significant displacement is hardly talked about but will most certainly benefit (in terms of greater rental demand) owners of rental properties for years to come. USA Today reported in April 2008, “The demand for low-cost apartments is soaring. In some cities, those rentals have become so scarce or hard to get into that one-time homeowners either move in with relatives or leave town. . . . Many economists are calling this the most serious financial crisis since the Great Depression.” Positive Future TrendsInvestor demand for apartment buildings will continue to strengthen because these assets remain attractive investments that can generate a stable and reliable cash flow and an above-average return, especially while the volatility in the stock market persists. If you are buying for cash flow and have been patiently searching for moneymaking opportunities during the past few years but haven’t been finding them, your perseverance will be rewarded soon with an ample supply of properties that should produce an above-average return on your equity. In fact, barring the shadow effect (a shadow inventory is created by overbuilding of single-family homes and condos or by the attempted conversion of apartment buildings to condos), the healthiest apartment markets throughout the country are experiencing lower vacancy rates, higher rents, fewer concessions, and increased demand. If you’ve been thinking about starting your real estate investing career or adding more properties to your existing portfolio, this is a great time to do it. You should be able to acquire some outstanding properties at very favorable cap rates during the next few years. You don’t need to be an institutional investor to reap the benefits of a down market. By duplicating their investment strategies (albeit on a smaller scale), you’ll realize above-average returns. If you want to reap these significant financial rewards, follow the lead of seasoned investors who have lived through several market cycles and are now deploying their capital to buy as many discounted apartment buildings as they can find during this down cycle. The above is an excerpt from "Investing in Apartment Buildings." If you are considering investing in multi-family properties, I suggest you pre-order "Investing in Apartment Buildings", on Amazon before it hits the shelves. BIO: He has been featured in The Wall Street Journal, Money Magazine, The New York Times, Reuters, Miami Herald and The Daily Business Review. CNN called him a Tycoon in the Making! Investing in Apartment Buildings won’t be published until November, but he’d like to offer you two FREE chapters of this book. To download the FREE chapters in PDF form, simply visit this site |
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