“An acre in Middlesex is better than a principality in Utopia.” – Thomas Babington Macaulay (Lord Bacon, 1837)
Last week, we talked about wealth building in terms of “five secrets”:
Secret #1. Get to work an hour early.
Secret #2. Practice a financially valuable skill devoted to profitable endeavor.
Secret #3. Make an above-average income.
Secret #4. Invest a big part of that extra income conservatively.
Secret #5. Invest a smaller part of it in a part-time business.
I recommended that about 75% of the money you save by following Secrets #1, #2, and #3 should be invested in some combination of:
* the equity in your home
* debt-based investments like municipal bonds
* conservative stocks or stock funds
That formula leaves about 25% of your savings free to invest in a part-time business — something you don’t have to run yourself, but can exert some control over.
In my experience, the best side business you can get involved in is real estate. That’s what I’m going to talk about for the next five days. In particular, I’ll show you four ways you can make a lot of money, part-time, investing in properties in your local area. (There are certainly many more than four ways to get rich with real estate. But I’m limiting myself to what I’ve actually done.)
Today, let’s take a quick survey of those four methods, identifying the advantages and the most important considerations of each. In the days that follow, I’ll tell give you specific suggestions about how to get involved in these businesses based on my own experiences. I’ll give you specific advice about how to get in, how much to invest, what to do, and what not to do.
1. Buying and Managing Local Rental Properties
Get to know your neighborhood. Buy something, fix it up, and rent it out. You will make money three ways:
* as rental income
* in property appreciation
* with tax write-offs
The secret to this business is to buy solid structures. You don’t want to get into a property that has serious problems. You’ll lose a
fortune correcting them. Pay a little more to get a solid building and you will be able to concentrate on making it better the cheap way: painting, decorating, landscaping, etc.
2. Buying and Selling Fixer-Uppers
As you get to know your local realty market, you’ll have the opportunity to find properties that are undervalued. This doesn’t happen as often as the zero-down real-estate gurus would have you believe, but it does happen. There are three rules to this business:
* Buy the right property. Its cost has to be UNDER the market. Really and truly under the market. In fact, it should be so cheap that you could buy and flip it for a nice profit without fixing it up at all.
* If you follow the first rule, you can and should (ironically) put some money into fixing it up. But don’t spend on improvements that won’t bring you a positive return.
* Finally, you must be disciplined about selling. You can’t make money in a buy-and-sell business if you never sell. So you must be prepared to drop your asking price to move the property. If you can possibly avoid it, do not hold on to a building more than one season. In the long run, you’ll make more money taking smaller profits on each transaction but making more transactions.
3. Buying and “Flipping” New Properties
There’s a new development in town. You know it’s going to be hot. You can buy a pre-construction unit for $125,000. You are relatively positive you’ll be able to flip it when done for $160,000.
This is a very nice business. No mess. No hassles. And you can make a lot of money. The trick here is to make sure you have the legal right to sell the property when you want and for the price you want. Beware: These deals often come with contracts that need to be amended.
4. Investing in a Local Limited Partnership
You know some good people in town who know how to make money buying, developing, and selling local properties. You invest in them, and they give you a 25% to 35% return on your money.
In this type of deal, the general partners will always know more than you do. And there are a hundred ways they can rip you off if they
want to. So start small at first and invest only what you can easily afford to lose until you really, really know and completely trust your partners.
As I said above, I’ve made money with each of these four methods. But I’ve lost money too.
My first investment in real estate occurred 20 years ago. It was a total disaster — a nightmarish tale that I’ll tell you about in detail
tomorrow. This particular deal was a good lesson to me. Luckily, it didn’t completely and permanently sour me on real estate. In fact, almost immediately after getting rid of my condo, I put money down on my first home. A year after that, I traded up to a bigger one. Six months later, I had invested in an office space. And I was off and running.
My subsequent real-estate activity has allowed me to pay myself back the money I lost on that first deal and develop what is to me an
astonishingly large asset base that could provide me with enough monthly income to retire on — if I believed in retiring.
You can do what I’ve done. In fact, you can do better, and you can do it faster, because I’ll tell you about the secrets I’ve learned and
the mistakes I’ve survived.
We’ll start tomorrow with Lesson 1: Buying and Managing Local Rental Properties.