A conservative, lower risk alternative to traditional real estate investing takes discipline and patience, but the means to financial freedom is a worthy venture for many.
For those who have considered investing in real estate and/or adding real estate to your investment portfolio BUT are too concerned about the risk of assuming too much debt, a conservative approach to real estate investing may be right for you. You remember the children’s story about the hare boasting how he would beat anyone in a race. The tortoise accepted the challenge and ultimately won the race with the morale of the story being "slow and steady wins the race”. This same strategy applies to slowly assuming wealth by taking a disciplined approach to conservative real estate investing.
Over recent years, purchasing investment properties within the Middle Tennessee area has been fruitful for many investors. Bargains were plentiful and ripe for the picking. The unfortunate reality is that thousands of people have lost their homes due to the recent deep recession and housing bubble. As a result, short sales and foreclosures flooded the market until Middle Tennessee recently saw some stabilization. Both large and small real estate investors vigorously jumped into the market to gobble up many of the distressed properties. Due to the significant demand for rental properties, occupancy and rental rates have continued to climb. Real estate values have steadily increased over the past year and the market is ripe for continued growth due in part to low mortgage lending rates and improved economic conditions.
For most real estate investors, the objective is to utilize leverage to maximize potential gains and use as little cash as possible when purchasing property. The strategy is to build up a large inventory of properties with the hope that the rent will cover the mortgage/loan, insurance, property taxes, expenses, and with any luck, have a positive cash flow. The problem lies with the more properties purchased with multiple loans, the risk increases and the higher probability for things to go wrong. For many investors, it is a risk worth taking and others are deterred by the “what if” factor. Most investors have a reasonable emergency fund set aside, but when one or two tenants get behind on rent, a roof and HVAC need to be replaced, occupancy starts to fall at the same time, and/or the capitalization rate drops, that emergency reserve fund can disappear in a hurry. The bottom line is the mortgage loan, property taxes and insurance still need to be paid and real estate is not easily liquidated. This is the problem that many investors have when they leverage too much and do not have enough cash to dig them out of trouble.
My philosophy is in line with the tortoise “slow and steady wins the race”. A conservative means of real estate investing is similar to compound interest building wealth over time. There are a few steps that I like to follow. First, I want to look at property that has a better chance of steady appreciation over time and can be sold relatively easily if the need arises. As a result, I tend to narrow my search to single family homes rather than multi-family or commercial property. It is much easier to find bargains below current market value when focusing in on single family homes. In Murfreesboro or the Nashville area, I would focus on homes in good school districts, minimum of 3 bedroom and 2 baths. In general, I prefer to find a home that was built within the last 20 years or less in order to minimize repair expenses and maximize the net operating income (NOI). I recommend staying under $110,000 and a minimum of 1400 square feet. If in Franklin or Brentwood, your purchase price will be 30-50% higher. The key to building wealth starts with buying the first investment property. If utilizing a mortgage, I strongly encourage a term of 15 years or under. However, you need to focus on paying off the first loan in 4-5 years. This is the biggest hurdle and requires a high degree of self-discipline as it relates to your finances. In today’s market, it is probable that you will have a positive cash flow that should be rolled back into paying down the principle. Next, determine if you are going to handle the rental management yourself or have a rental management company handle on-your-behalf. If you are managing the property yourself, it is vitally important to do your due diligence on finding good tenants to help minimize problems. Once the first property is paid off, immediately start your search for your next property. All of your net income in your first property should be applied to pay down the second property’s principle. Again, the positive cash flow should be used to reduce the principle. Now, focus on paying off the 2nd property in 3 years. After 3 years, you should have paid off your second property and start looking for your next property. Utilizing the first 2 property’s net income to pay off the 3rd property in 2 ½ years. I think you get the picture. In approximately 20 years, you should have paid off 10 properties not including your primary residence. As I stated before, this conservative approach is similar to compound interest, but it takes a great deal of discipline. Your net worth in rental properties should easily exceed $1,500,000 due to a conservative amount of appreciation. What is better is that you should live comfortably on the net rental income. In the end, the risk is significantly reduced by this conservative approach to real estate investing because "slow and steady wins the race“”.
Given the great value in residential real estate and historical low mortgage rates, now is the time to consider taking your first step into securing your future financial freedom. For more information, please visit my website at www.buyahomeinmurfreesboro.com
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