Investing

I'm a huge proponent of real estate investment. I've come to realize that it's not the panacea and get-rich-quick strategy that infomercial gurus would have you believe, and it's definitely not easy money, but real estate investment can be a very lucrative long-term investment that can significantly enhance your wealth.

My latest realization is that around 45% of the gross rents of a residential property go to cover operating expenses, such as utilities, management, maintenance, taxes, insurance, uncollected rents, and legal and administrative fees. This leaves just 55% of the gross rents to cover mortgage payments. The most significant mistake that most new investors make is underestimating these expenses. Many investors simply compare the rents collected (or that they think they'll collect) with the PITI (principal, interest, taxes, and insurance) and consider the rest profit. This is naive. I did this when I bought my first property, a 4plex, and I can tell you that it has been much more expensive than that.

I can also tell you that, in most areas, it is almost impossible to find a property for nothing down that will truly provide a net cashflow in the first year. However, that doesn't make a nothing-down investment a bad one. On the contrary, buying an investment property without putting any cash down can be a great long-term investment, provided that you do it for the right reasons.

Other than buying for less than the fair market value (always a good idea), there are four ways to make (or lose) money through real estate investment:

1. Cashflow

I've been reading "The Richest Man in Babylon", a series of financial parables set in the Babylonian era. They've been around since the mid-1920's and convey (very simply) some basic principles of finances and money management. They're the kind of things we all know, but few of us seem to do. The highlights are the following:

1. A portion of all you earn is yours to keep. Save at least 10% of everything you make, no matter what
2. Do the above by controlling your expenses carefully with the use of a budget
3. Put those savings to work for you by investing
4. Don't be risky in your investments
5. Buy a house
6. Plan for retirement and future generations
7. Increase your earning potential

Again, very basic stuff, but apparently the majority of people just don't get it. For example, the average savings rate in America is now NEGATIVE. People who make $50k per year spend just over $50k per year and people who make $100k per year spend just over $100k per year. Average household debt goes up every year and the average American only has something like 15k set aside for retirement.

From an article in Men's Health on things you should do but probably haven't:

"Be debt-free. Compounding interest is like a sorority girl on Ecstasy. She'll go both ways, but you get a hell of a lot more out of it when she's going your way."