Real Estate Investing and Compounding Interest

I am constantly reading books on real estate investing, marketing and other similar topics that interest me. Right now I am reading Warren Buffet Wealth by Robert P. Miles. In the book, there is a section where Warren Buffet addresses compound interest. He poses a hypothetical scenario, where if Queen Isabella, instead of investing $30,000 in Christopher Columbus’ scheme of charting a new passage to Asia, had invested in anything else that provided only a 4% compound rate of return, she would have made $2 trillion by 1963. In 2003, her investments would have been worth $9.6 trillion, which, according to the author, is more than the value of all the publicly traded stocks in the same “new world” that Columbus stumbled upon some 500 years ago.

Why am I sharing this with you? Because one of the benefits of investing in real estate is the compounding effect that comes from long-term appreciation. Let me explain.

To make the discussion easier, let’s make an overly-simplified assumption. Let’s assume that all the income you receive from your rental property exactly equals all your expenses for that property. In other words, we will assume that there is never any positive or negative cash flow. For our discussion, the house always has break-even cash flow.

If you purchased a house for $100,000 where all the income from the property paid for all the expenses of the property, what happens to the value of that property over time?

History has shown that, despite short-term downward fluctuations, real estate tends to go up in value over time. In Warren Buffet’s example, he used a 4% compound rate of return. Historically, real estate has gone up between 6% to 7% per year, but let’s use Warren Buffet’s 4% growth rate for this exercise to keep our numbers conservative.

If the value of your house were growing at 4% per year, what would the house be worth when you paid it off in 30 years? It would be worth approximately $311,865. At the 30 year point, when your mortgage has been paid off, you will also have a nice monthly income from the property.

This appreciation is one of the things that attracts investors to real estate as a long term investment. If, in 30 years, when you are preparing to retire you want to have a certain amount of money, you can calculate how many houses you need to purchase this year with break-even cash flow to achieve that goal.

For example, if you wanted to end up with $2 million in net worth 30 years from now and you think real estate will be going up in value by 4% per year, then you would need to purchase approximately $642,000 worth of real estate today. If houses in your area are $100,000 that would be about 7 houses. If houses in your area are $200,000 then that’s about 4 houses.

Making Self Directed IRA Real Estate Investments

If you have a self directed IRA real estate is one option that you should have for investments. The problem is that most custodians do not offer their clients the real estate option. In a truly self directed IRA, you would think that you could invest in whatever you want, but that is not always the case. The key is finding the right custodian.

In order to meet IRS and other government requirements, you must have an account trustee or custodian. This person is responsible for filing the appropriate paperwork and making transactions, among other things.

In a traditional IRA, the custodian makes investments, with your approval. In a truly self directed IRA, the custodian performs the transactions, as directed by you. The only consideration should be whether or not the transaction fits into the parameters outlined by the laws that govern the IRA.

Self directed IRA real estate investments must fall within those parameters, just like any other type of investment. Some custodians feel that there is a “gray” area in the law when it comes to real estate, but it’s really pretty simple.

You cannot use your IRA to purchase real estate for your own personal use and the property cannot be used by your family members. Purchases must be for investment purposes only.

Any funds required for maintenance or improvement of the property must be made with IRA, not personal funds. By the same token, self directed IRA real estate investment profits must be returned to the IRA. Otherwise, the profits would be subject to capital gains and/or income taxes.

In the truly self directed IRA, you can buy property, build, repair, remodel, resell, rent out…just about anything that you can think of. A knowledgeable custodian helps to insure that your transactions are allowed by law.

Equity Trust is a good choice for self directed IRA real estate investing. Each custodian is familiar with the dos and don’ts. One of the “don’ts” has to do with advice.

In a truly self directed IRA, the custodian is not allowed to suggest or persuade you to make this or that investment. That kind of advice could be construed as self-dealing, which means making transactions with IRA funds in order to benefit the broker or brokerage.

If you are unfamiliar with real estate investing, you may need some help on that front. They say that real estate is always a good investment, but not all real estate deals are profitable. If you have a good eye, you can grow your retirement funds quickly. If not, well, you could be stuck with swamp land.

Luckily, there are experienced investors that are willing to advice you about those self directed IRA real estate investments. They can help you find the deals that are most likely to be profitable and avoid the hassles and the headaches. With a little help, after just a few deals, your IRA may be growing faster than you ever dreamed possible.

Researching Property for Real Estate Investing

Much is being said lately about investments. There are many investments that one could make: stocks, notes, gold, retirement plans, etc. However, one of the safest ways to invest is in real estate. Credit Union Rate is your source for information on the market and the investment potential it offers.

It is important to note that no investment is safe, and that all investments have risk. However, real estate investing tends to have less risk, as most property values go up rather than go down. And even when interest rates are in flux, the overall value of real estate tends to increase. It is a good idea to talk with your credit union financial adviser about current trends in your area, and how real estate investing can diversify your portfolio.

But like any good investor, knowledge is required to make a wise investment decision. You should have a good idea of what it is you are investing in, as well as what its potential worth is. Making investments blindly is a good way to lose, rather than make, money.

Here are some tips for more efficiently researching property with real estate investing potential.

Understand the neighborhood. Thoroughly research a neighborhood before purchasing a property there. Know whether mostly young couples live there for starter homes. These neighborhoods often see turnover as families grow and young couples upgrade. In order to know how to best market the property, you should know about the area’s primary inhabitants. Is the neighborhood safe? And, of course, how is the location? The old saying “Location, location, location!” is a true one. If the neighborhood is near good schools, minutes away from shopping, and located away from main thoroughfares, it is considered much more desirable.

Determine the future prospects of an area. Like the previous tip, knowing whether the area has potential for growth is important. An area that is rundown and likely to end demolished to make way for a new highway or utility station is not a sound investment. However, if a developer is planning to open a high end shopping, dining, and entertainment plaza a few blocks away, you are likely to find that the area has great growth potential. If you are looking to buy land, check to see if the growth rate of a city warrants you buying a few acres on the edge, allowing you to hold it until developers need it for expansion.

Watch for new developments. Keep an eye on the newspapers and city council meetings. This will give you an “in” as to where ideal areas are located. Beautification projects in “rundown” areas are great things to keep in mind, as it usually means an influx of money and new attractions. Make sure the developer is reputable, however, or you may find that you have been taken in along with the rest of the city’s residents when delays, scandal, and stoppages sink the entire project.

Don’t forget the Internet. The Internet is a great place to look for potential real estate investing opportunities. Your range immediately widens beyond your immediate locale. In fact, you can search for opportunities across the country or even on the other side of the world. But, as with all things located on the Internet, you should be wary. The Internet is also a prime place for scam artists to find unwitting victims.

As with all investing, it is important to avoid something that looks “too good to be true.” Real estate investing is not about making “easy money.” Whether you plan to invest by buying and then actually using the space for a few years before selling, or whether you plan to rent or lease the property out to somebody else, real estate investing can be a lucrative proposition. By doing thorough research before making a purchase, you can be sure that you are making the best possible use of your investment dollar.

Post-Retirement Fun With Real Estate Investments

The baby boomer generation that has survived the 2008-’10 recession must have realized how vital and essential it is to save. There’s a point of time in everyone’s life, when they have to retire from their work. However, life’s demands do not cease to exist along with your retirement. You need to fulfill your daily necessities that are same as they used to be. On the other hand you have no job, which means you have no income. Would you leave your post-retirement life to such uncertainty?

You might not be too much worried about your post-retirement financial concerns. You might be too confident with your life-long savings. True, you have no reason to worry or feel concerned about if you have been saving a part of your earnings. And yet, can you ever be so certain, especially when it concerns ‘finance’ and that too in ‘future’? Many retired professionals who had never ever feared financial uncertainty found it tremendously tough to put things together during the recession.

I have no intention to demean the fact that you save or the ways you save for your retired life. In fact, I wonder at the fact that most elderly people are content with their savings and the interests gained on it while they have no intention to earn further. I understand, you might argue the point of retiring if you have to work to earn. However, I do not mean to suggest you to carry on with your work and earn even when you are past sixty. I rather feel surprised, why don’t you invest in those business sectors that will reward you with greater returns – so significant that you will consider them to be your regular earning rather than mere bonus?

You might like to some prudent ways of investing, which will help you earn when you are already retired. One best way to earn without working is to bank on your experience. You might have worked as a professional during your professional life. However, at the same time, you should also try your genius as an entrepreneur. Try to grow the same business while you play a completely different role. With optimal utilization of your experience you can beat your competitors who you have known for years.

Why don’t you think of real estate investments? You need not be a hard core realtor to earn through real estate investments. There are various ways you can invest in the land, property or construction business. You can start investing in real estate business even before your retirement. In fact, the earlier you start the more lucrative it is for you. However, even if you feel you are late, let me remind you, you are never late when it comes to investing. Al you have to do is to make sure that you choose the right realtors to partner with or the right business to invest in. Checking out a few perspectives before you start investing will make you understand what is right for you and what not.

Maximizing Your Profit With Real Estate Investing

One of the best places for a person looking for good returns over time and minimized risk is real estate investing. Worldwide real estate markets are following an upward trend, that are creating exceptional returns for investors which has led to more people getting involved in this sector, and pushing gains even higher.

One of the reasons why investment in real estate is so attractive is the fact that as well as the appreciation in value of your asset, you can also take tangible benefits from it over the lifetime of your investment.

When you are investing in real estate there are several different strategies that you can follow. You can sit back and watch your investment grow over the period of time and then sell it to make a profit out of it. Downsizing is a popular option for seniors who no longer need a family home when they retire, and would rather take advantage of the value of their property.

Developing properties is a more aggressive means of earning income from real estate ownership. By buying a rundown home, and redecorating and improving the building, you can turn it around for a quick profit which you can then reinvest in more projects.

More ambitious investors will consider the possibility of full scale construction projects, and certainly taking a building from ground level through until completion is ultimately very satisfying both on a personal and financial level. Construction is not for the faint hearted through, as hands on project management will take up a lot of your time and requires very specific skills, so amateurs need not apply.

Although it requires greater investment of your time as well as money, building a portfolio of rental properties offers some of the best returns of any real estate investment strategy. Aside from the long term appreciation in the value of the properties that you own, you can also enjoy a consistent stream of rental income from your tenants that should easily cover any outstanding mortgage payments on the property.

It is important for people to realise that whichever method of real estate investing they choose, profit is not guaranteed nor is it easy to earn money. If you are developing properties, you should take into account the cost of any work that you carry out, and maximize your margins by doing as much of the work as you can yourself.