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Automatic wealth The 6 steps to financial independence - Masreson M.

Masreson M. Automatic wealth The 6 steps to financial independence - Wiley & sons , 2005. - 291 p.
ISBN 0-471-71027
Download (direct link): automaticwealththesixstepsto2005.pdf
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The wonderful thing about real estate is how quickly your equity in it seems to expand. You buy a condo this year with the cash you got back from last year’s taxes. It’s barely enough to get you to closing, but you throw some extra dollars at it and fix the property up.
Eventually, as your rent increases to match the property’s appreciated value, what was a net cash expense becomes a net cash positive.
Year after year, you purchase more and better properties. Some you keep for the long haul. Others you sell for a profit and then invest that money in two (or more) up-and-comers. You develop an intimate knowledge of the market. You can see the specs for a property in a given neighborhood and, sight unseen, know just how much you should pay for it. You learn to separate your feelings from your actions. You buy value and you sell into a rising demand.
186 AUTOMATIC WEALTH
Before you know it, 5 years have passed. Then 10. And then 15. One day, you add it all up and realize you have accumulated more than $10 million worth of real estate. What seemed like a part-time hobby has become, in retrospect, a retirement windfall.
In Chapter 4, I described how to create a second income by buying and flipping local properties—both fixer-uppers and higher-end properties. This chapter is about buying and holding onto rental real estate.
Buying and Managing Local Rental Properties: An Overview
There are two big secrets in making rental real estate work for you. One has to do with the old “location . . . location . . . location” axiom. The other is about the condition of the property you buy.
Let’s start with these four rules, keeping in mind that rules are made to be followed until you understand the principles behind them.
1. Buy properties in your local area. To be a successful investor, you have to know what you are doing. And if you’ve been living where you are currently living for any number of years, you already have more knowledge about local real estate than you think. You have a clear idea of the good neighborhoods, the not-so-good ones, and the ones you need to stay out of. And you may have developed a feeling for the up-and-comers. By staying in your local area, you give yourself the chance to really know the market. And this is the most important factor in limiting your risk and increasing your chances for profits.
2. Invest in good or up-and-coming properties. The old saying about the three rules of real estate being “location . . . location . . . location” is true. But there are two kinds of good locations: those that are already established as good and those that are on their way to becoming good. You can make good money with both. Here’s how:
• In good neighborhoods, buy the least-expensive property you can find. That way, any money you spend fixing it up (if you fix it up wisely) will bring you double or triple your invested dollars. When you buy a poor piece of property in a good neighborhood, you get the benefit of the neighborhood to lift your selling price once the property looks acceptable. Of course, it’s not easy to get the least-expensive
Step 5: Get Richer While You Sleep 187
piece of property in such a good neighborhood cheaply. Most of the time, the property owner realizes what’s going on. But with really dilapidated homes, and sometimes with owner-sold properties, you can get a real bargain.
• In up-and-coming neighborhoods, buy properties in clusters—either by yourself or with a consortium of buyers. You will upgrade the look of the area, and this will bring up prices—sometimes even more than you’d guess.
3. Whenever possible, buy newer, solid structures. There’s nothing worse than managing a rundown building. The tenants complain. They are reluctant to pay the rent. They treat you like a crook. It’s bad. Be extra careful about the critical and costly things. Don’t buy any property that has major problems—a bad roof, rotten plumbing, or burned-out electrical. The cost will eat up any profit you can make.
4. Develop a network of reliable contractors. You’ll need a plumber, an electrician, a heating/ventilation service, a painter, a landscaper, and, most important, an inexpensive handyman. Choose wisely. Hire reliable workers who will give you eight hours of competent work for eight hours of pay. If you find contractors who are giving you substandard work or charging too much, let them go.
There is a natural tendency in this business for things to go from bad to worse. Don’t lull yourself into passivity by hoping for the best. Be tough. Be fair. And act decisively.
As in So Many Businesses, Real Estate Is All about Buying Right
If you get a property for a good price and don’t overinvest in fixing it up, you’ll be 95 percent certain to do well in the long run.
What do I mean by a “good price”? A price that allows you to make a sizable (say, 25 percent or more) medium-term profit. And how can you figure that? There are several ways.
One way is to make sure that the net rental income you’d get would be at least 11 times the gross investment. Say, for example, that you found a $90,000 triplex that needed about $10,000 worth of work to make it attractive. Your total investment in such a building would be
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