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What is real estate investing?

How does real estate investing work? Real estate investing is when you buy a property—not to live in yourself—but to rent out to somebody else. You’re buying property like a house, an office building, a real estate building, a strip plaza. This way, you can let other people live in or use this property, and in exchange they’re going to pay you rent every single month. That’s what real estate investing is.

What is not real estate investing?

Now let’s talk really briefly about what real estate investing is not. As much as your banker and all of your friends want you to believe this, real estate investing is not going out and buying a big beautiful fancy home for you to live in, because you think you’ll be able to sell it for a profit in a few years. That’s buying a liability. You’re buying something where your money is going out, and your money’s not coming back. Real estate investing is also not buying a property, fixing it up, and then trying to sell it three months later for a profit. That’s flipping. It’s very active, and it’s cool, and you can make money doing it, but it’s not real estate investing.

Why should you invest in real estate?

Why should you be investing in real estate? The simple answer is: so you can make money. The complex answer is: so you can be financially free. Real estate is a tangible investment, and it is robot proof, because people will always need a place to sleep, people always need a place to eat, and people will always need a place to work. When you are a real estate investor, you will be getting rent checks every single month, even if you’re sitting on the beach in Hawaii. Plus, real estate investors get tax breaks.

Have you ever wondered why people like Donald Trump can own a bunch of real estate, and they can make millions of dollars a year in rental income, and then they can turn around and pay close to zero dollars in taxes? It’s because the tax code says that real estate investors get tax breaks. And yes, it is legal. For instance, if you are a highly skilled, and highly educated, and highly talented heart doctor, you might be able to make 1 million dollars a year from all the heart surgeries you do. Now, a million dollars a year is a lot of money, but, because you are making this money from your job, you don’t get to keep all 1 million dollars, because that’s what the tax code says. You will get to keep somewhere between 500,000, and 600,000 dollars after paying your taxes. Still a lot of money, but you didn’t get to keep all 1 million dollars.

On the other hand, let’s say you are a real estate investor, and you bought this property for $100,000, and a few years later this property goes up in value to 1.1 million, so you sell it. You have a profit of 1 million dollars, and now, you think that you have to pay taxes on these 1 million dollars of profit, right? Well, the tax code says: if you take these 1 million dollars and you reinvest it into a bigger piece of property, you don’t have to pay any money in taxes today. It’s called the 1031 exchange, and now you own a bigger piece of property, and you’re going to get bigger rent checks every single month. So now if you go back to your beach in Hawaii, you’re going to continue getting paid. If you were this heart doctor that we just discussed, and you go to a beach in Hawaii, you won’t be getting paid anymore because, well, if you’re on the beach, you’re not doing heart surgeries, and you’re not getting paid. You also get a bunch of special tax breaks for the rental income that you get. So if you make a million dollars a year in rent, you get a bunch of special tax breaks for that too.

What kinds of real estate can you invest in?

Let’s talk about some of the kinds of real estate you can invest in. You have single-family homes, apartment complexes, shopping plazas, land, mixed use properties, mobile home parks, office buildings, retail, hotels. There’s a lot, but what you have to remember is that each piece of real estate has two different businesses involved. You first have the business of owning the real estate, and then you have the business inside of the real estate. Look, you can own a CVS building without operating a drugstore; you can own a hospital without being a doctor, or you can own an apartment complex without managing the tenants inside. When you own the building that CVS is renting, now you own the property, and CVS is doing the work to find customers, and manage inventory, and hire staff, and sell their stuff. Your job is to collect the rent. When you are a real estate investor, your job is to own the real estate, not run the business inside.

Now, this is easy to understand when we’re talking about investing in a CVS building, or investing in a hospital. But what about when you invest in a house, or an apartment complex? Instead of being the person who gets the phone calls when the tenant says, ‘Hey, I didn’t eat something too good last night and I clogged the toilet. Can you come and fix this?’ You want to be the real estate investor. You can hire a property manager who will get paid a percentage of your rental income, and they will handle all the management work. So, they will pay your bills, they’ll make sure the tenant’s paying on time, and if they have to kick out a tenant, they will handle it for you. This way you can focus on being the real estate investor.

How do you start investing in real estate?

How do you get in? If you want to invest in real estate, you need money. Okay, you can buy properties with cash, you can go to the bank and get a loan, or you can get a bunch of friends who have money, and you can pool your money together to go and buy a bigger property. Beyond these ways, you have this whole world of creative financing. But you need to understand that the numbers have to make sense. You do not want to buy a property where you’re losing money every single month. Crunch the numbers; make sure that the income that you’re getting is enough to cover the expenses, and put some money in your pocket every single month. Once you’ve got your numbers down, make sure you have a real estate attorney, and you have property insurance for all of your real estate. This is not a recommendation; this is a must! You have to do this.

Moreover, you need to understand the real estate market. Not only do you need to understand where you’re buying, which is the micro-level, but also you have to understand the macro level, which is that real estate has cycles. There are times when the real estate market is booming, and then there are times when the real estate market is coming down. Remember that when you’re a real estate investor, you’re not buying property so you can flip it in six months for a profit. You’re buying it so you can create a positive passive income. This way you can make money each and every month. So when you’re buying real estate, make sure the numbers make sense.

Adding to that, you want to buy in a location where people are moving to, as this will prove to be much more profitable. The key here is to make smart money decisions, and in order to do that, you have to understand what’s happening in the finance and business world.