"Makes you wanna build a 10 percent down white picket fence house on this dirt." - Florida Georgia Line
You can be extremely creative with the money you spend on dirt. First however, just need to understand how investing in dirt works.
Have you ever heard your grandfather ramble on about the old house he fixed up as a teenager? He is an investor. Have you ever seen a “fix and flip” show on TV? They are investors. Have you ever seen a sign saying, “We buy houses”? They are investors. Do your parents own a home currently? Believe it or not, they are investors.
There are many different Real Estate investment techniques out there today. The laws of your area determine the limitations you may have. Your creativity can take you the distance to being the next Donald Trump. Well, some may agree with that statement.
Real estate investing can be anything from buying a condo or single family home to a 500-unit apartment house to commercial retail space to a farm to be leased. Most commonly and with the least barriers of entry, single-family homes (SFHs) seem to win as the most prominent real estate investment venue. SFH’s are relatively easy to finance and seem to stick with the most basic rules of investing.
Like other real estate, SFH’s can be positive investment options for three major reasons:
- Leverage. This is also known as principal reduction. Principal is one of four parts in a mortgage payment. Simply put, most mortgages are made up of PITI:
- Appreciation. Homes tend to grow in value as time moves on. This growth depends on many factors in your housing market. A great Realtor will normally have an idea of what homes will go for in the market of your area. Plus, they can tell you the history of those home prices so you can make your best decision on where they may be heading. A home growing in value will not only get you more money over time if you decide to sell or refinance it, but in turn it will give you more equity in the property as the bank will not increase your loan amount just because the house value appreciates.
- Tax Benefits. Just like the two previous points, this is a book of its very own. The important point here is that you really need to look into tax incentives and breaks in your area. Mortgage interests and capital gains taxes will really increase profits when applied correctly. A great CPA is absolutely needed for this.
P= Principle, I=Interest, T= Taxes, and I= Insurance.
Principal is the amount you owe on the home. Interest is how the bank or mortgage lender makes money. Taxes are the Real Estate taxes you pay to the city and/or county (although your mortgage lender normally includes these taxes in your mortgage payment and will then pay them for you). And, finally, Insurance is what you pay for to manage risk against your Real Estate (e.g., Hazard, Flood, Storm), although again your mortgage company will include the cost of the insurance in your mortgage payments.
Next week, I will discuss how these three factors can be used to your benefit in investing in SFH units—with techniques like wholesaling, Fix and Flip, Fix and hold, rentals, and owner occupied.
Want more before then? Check out my favorite investor forum and podcast, Bigger Pockets. At the very least, you can now use some investment lingo and understand why dirt may not be such a bad investment.
