Want to Get Rich in Real Estate? Top 5 Tips of a Real Estate Insider
It’s human nature to be intrigued by get-rich-quick schemes — just look at the number of television shows centered around making money in real estate. They almost all focus on short-term profits.
Believing that short-term profits will make you rich in real estate is a fallacy. A more likely result is that big tax bills and hefty realtor commissions will result in your handing 70% of your profit over to others.
A wise colleague of mine described real estate as “the greatest get-rich-slow scheme” there is. That says it all.
If you want to get rich in real estate, here are the top five lessons I have learned in over 30 years of investing. Do these five things to tilt the scales in your favor and be on your way to creating real wealth in real estate:
1. Leverage the Law of Supply and Demand
When you invest in real estate, the cards are stacked in your favor. Why? Because the supply of land is finite. At the same time, more humans are born every minute. Owning real estate is like owning a casino — you cannot lose over time.
The limitless demand for real estate makes it a unique and desirable asset to own. Acknowledging this should help you sleep at night. Using this fact to your advantage and amplifying the effects of limited supply and growing demand leads to my second tip.
2. Maximize Location to Turbocharge Appreciation
Be very thoughtful about where you buy. The potential for strong return directly correlates with strong job growth potential. A city with an established history of reliable job growth — like Austin, Texas — is a notably safer investment location than a city such as Flint, Michigan, for example. Austin has a long track record of significant job growth that continues to this day, while Flint has struggled in that area and shown little to negative job growth in recent years. Pro tip: The higher the job growth, the faster your real estate investment will appreciate.
The average employment growth rate in the U.S. is 1%. Look for a city with at least 3% job growth — the higher, the better. A location with average job growth is unlikely to appreciate more than one showing growth above the national average. Imagine your real estate investment is a sailboat. Zero job growth is stagnant air, while positive growth is a tailwind, and job losses are a headwind. Look for a tailwind!
Many young real estate investors limit their potential profit by buying commercial real estate in their city because it’s comfortable and familiar. If you break out of this comfort zone, however, greater opportunities for higher returns may be beyond the horizon. Just follow job growth.
If you are investing in a larger metro area, invest in areas that are experiencing the fastest job and population growth. This will turbocharge the appreciation of your real estate, tipping the scale in your favor.
3. Look for Low-Rent Properties Where You Can Create Value
In commercial real estate, a property’s value is a simple equation based on the income you can collect by renting to others. The reason you want to buy low-rent real estate is because of its greater “value add” potential. These are the properties where you know you can add value by improving the asset — maybe with a new coat of paint or other minor renovations — and then rent it for a higher price. The more you are able to increase the rent, the more you increase the value of your investment. Making improvements that tenants will pay more for creates built-in profit and cash flow. You build instant equity while retaining your original (low) cost basis, which means a bigger profit when you sell the property in the future.
“As a general rule, I recommend holding real estate
for somewhere between 10 to 12 years.”
4. Hold Over Time
Flipping a property may put some quick money in your pocket, but in most cases, that return is comparatively limited to what you could gain if you wait for the right time to sell. Holding a real estate investment is the true path to building wealth but it takes time and patience. As a general rule, I recommend holding real estate for somewhere between 10 to 12 years. This seems like a long time to wait for an investment to mature, but it takes time to grow real estate value beyond the value you build through improvements, not to mention real estate cycles are — well, real!
5. Real Estate Cycles are Real
Like all things in life, real estate exists in cycles. Sometimes property values are up; sometimes they are down. If you apply the economic strategy of buying low and selling high, the last thing you want to do with your investment is to sell it for less money than you put in it. So, when real estate values are down, hold. Watch the cycle and wait it out. When financing real estate, opt for longer maturities so the loan does not come due during a downturn and quickly turn into a bad investment.
I always say, “honor the cycle”. Half of real estate value is governed by the cycle and long-term supply/demand, while the other half is governed by created value (see tip 3). When you can’t add any additional value, you must wait. This is a particularly important lesson for young investors, especially those who have only seen the expansion phase of a real estate cycle. Success can build confidence, but it can also fuel ego, and ego is the last thing you want driving your decision-making when it comes to real estate. Once a cycle turns downward, the name of the game is patience. Cycles rarely plummet. More often, they peak, dip 15–40%, and then rise again to even higher levels, as illustrated in the below graph. Use your understanding of real estate cycles to your advantage.
To review:
1. Recognize that real estate is a limited commodity. As an investor, you should dictate how long you hold onto your investments.
2. Look for areas with high job growth potential as your guide in selecting where to invest.
3. Add value to your commercial properties by improving them, then raising rents.
4. Allow your real estate investments to mature over time.
5. And last but not least, respect and understand real estate cycles.
Buying low-rent properties with the potential to add value in areas with strong job growth is half the successful recipe. The other half is timing your investment so that you buy in lower parts of the real estate cycle versus higher.
And while either of those strategies will increase your odds of making money on a real estate investment, you can maximize your odds by leveraging both strategies together.
Take these tips to heart, and apply them with a calm mind and abundant patience. If you’ve done your research on investment locations, taken steps to improve your properties, and read real estate cycles properly, real estate investment success and the wealth it creates can be yours!
Barry Raber is a serial entrepreneur, president of Carefree RV Storage, a 22-year member of the Entrepreneurs’ Organization (EO), the founder of Business Property Trust, and EO Portland’s Entrepreneur of the Year. He shares his successful business secrets at realsimplebusiness.org.
