Noah George - The Changing World of Real Estate Investing THE REAL ESTATE FAD IS OVER! If you've been dreaming of "Flipping" real estate because you've heard of people making a fortune flipping houses - YOU ARE TOO LATE! The real estate fad has come and gone! Like all fads, the "Flipping Real Estate Fad" lasted only a short period of time. This is not the first get rich quick fad to occur and it certainly won't be the last. Whether it's flipping real estate, day trading stocks, breeding ostrich eggs, or trading tulips, our history is replete with examples of get rich quick fads that took the world by storm and ended badly for nearly everyone. As time went by, the middle class took notice that this flower was so prized by the rich, and also started collecting the flowers. Before long, everyone wanted tulips and tulip bulbs and the prices started going up. As the prices rose, people started trading tulip bulbs as if they were a commodity or a stock. Someone would hear of a neighbor that had traded a tulip bulb and made a big profit. The neighbor also wanted to cash in on this new venture. Before long, it seemed like everyone was trading tulip bulbs. It got so ridiculous, that entire estates and life-savings were traded for a single tulip bulb! At some point, prices became so ridiculously high that a few smart investors realized that the tulip fad couldn't continue forever. These "smart money" investors sold their entire stock of tulip bulbs and locked in their massive profits. Others followed suit and soon it became apparent that the market for the bulbs had disappeared. Suddenly, everyone wanted to sell their tulip bulbs and there were no buyers. The economy of the United States took a double hit in the first two years of the new millennium. First, the tech bubble burst taking the entire stock market down with it. Then, a small group of terrorists brought our country's economy to its knees with the attack on the twin towers of the world trade center. In response, the Fed lowered interest rates to a 40 year low. This lowering of interest rates along with the introduction of relaxed lending practices kept our country's economy strong and opened up the possibility of home ownership (and real estate investment) to more Americans than ever before. The increased demand for real estate also increased the demand for all real estate services. Homebuilders, realtors, rehabbers, appraisers, lenders, and everyone else in any real estate related business prospered. The demand for houses exceeded the supply and many smart investors began to speculate on houses.
This was the birth of the house flipping craze! As the smart money began to make money "flipping", the middle class took notice and also started flipping. Before long, it seemed like everyone was flipping property for a nice profit. Demand for houses increased and it seemed like there was no limit to house prices. New investors entering the flipping business drove up the demand for houses, which increased the prices. The more prices went up, the more new investors entered the market and bid up prices even higher. It became a vicious cycle. It got so ridiculous that new "investors" would camp out in hot markets just for the chance to bid on pre-construction projects. The real estate fad is over. Demand has dried up and the number of houses on the market is increasing. In many areas, prices have already started down and this trend will surely increase as time goes by. The home buyers and "investors" who used interest-only loans, negative amortization loans, and adjustable rate loans over the past few years will soon have payments that are drastically higher, when their promotional rates expire. Millions of these people will not be able to afford the higher payments and will lose their homes to foreclosure. All of these millions of additional houses on the market will further depress prices and prices will likely stay low for many years to come. The flipping fad is ending as suddenly as it began. With the lack of retail buyers, there simply isn't a demand for flipped houses. Millions of the new "investors" that started flipping during the recent fad will go out of business, losing a lot of money.
Why are rentals such a great way to make money, grow rich, build wealth, and retire early? The answer lies in the 5 different ways that we can make money with rentals, often without using any of our own money. The 5 ways to make money with rentals are:
1. Equity at closing! Rental Properties MUST be purchased at a discount. It is almost impossible to buy a rental property at retail price and then rent it for a profit. The difference between what we pay for the property and the market value of the property is our equity, and can amount to tens of thousands of dollars for each rental property! 2. Cash flow With rentals, we receive rent from our tenants each month and then pay our operating expenses and the mortgage. The amount of money left over is our cash flow. This is money you can spend for living expenses, to buy a car, for your mortgage payment, or anything else that you like. Cash flow is the lifeblood of every business. 3. Pay Down of Principal One of the exciting things about rentals is that the tenant pays the mortgage payment and all expenses for us. Over the term of the loan, the mortgage will be paid off and we'll own the house free and clear! 4. Appreciation Historically, houses appreciate at 3% to 5% per year. Think of this as the icing on the cake. Let's consider a $50,000 rental property. Even if it only appreciates 3% per year, that is another $1,500 in equity that we pick up each year! You'll note that we didn't have to do anything to get this equity. All we had to do was continue to own the property! 5. Tax Depreciation As if the previous four ways of making money weren't enough, the government has seen fit to allow us to depreciate our rental property. This can be a significant savings on our taxes and is the same as making additional money on your property. As of the writing of this book, properties are depreciated over a 27 1/2 year period. This yearly depreciation can be thousands of dollars per year on a single rental property.