Just like the other sexy topics Midwest Money Mentor discusses, real estate investing is SOOOO Sexy. Right? Am I right?

I know that I am right, because so many people talk about it, dabble in it, and brag about it. And that includes the people who were never successful with it (which many people are not).

Midwest Money Mentor does not have a bias towards investing in real estate or not investing in real estate. If you would like to invest in that area and are financially in the position to do so, then it could be a great fit. You will see in some of the blog posts that we do encourage investing a portion of your “portfolio” in areas with greater opportunity. This encouragement is to give you the possibility to increase the speed to which you can reach financial freedom.

What do we mean “areas with greater opportunity”? We simply mean that we know the historical returns of investment options like bonds and stocks (specifically broad based returns of the total bond market and total stock market). Those investment options are extremely helpful for building wealth, but are unlikely to perform much better than their historical returns. So, if we want to speed up your path to financial freedom and are already maxing out your savings rate, it could be good to use some of your savings rate towards something with higher potential return.

The key word there is “potential”. The stock and bond market, if you do not try to trade in and out of by trying to time the market, is very simple and consistent. You consistently put money in and let it do its thing. As long as you believe the US economy will continue to advance and innovate, you can safely expect it to continue to give you positive returns over time.

Physical real estate is much more hands-on. This is both SUPER awesome and potentially hazardous. To a large extent, you are the key to a real estate investment getting you above stock market returns. Yes, things like unexpected repairs and other unforeseen events do impact your bottom line, but more of the final result relies upon your effort and due-diligence.

So, if you are thinking about investing more in physical real estate, let us go through a couple things you can do to provide yourself with the highest likelihood of safe returns.

1. Make sure you are knowledgeable in your real estate market, inside-and-out, or work with a professional who is–
   • People often come to Midwest Money Mentor with a property they feel has great opportunity. Sometimes the property actually does, and sometimes it does not. Most of the time, the reason it does not is because those individuals are pricing the value of the property off of other properties located in other “areas” of town. If they bought that property they would have quickly learned they did not understand the area the property was located in and their “good investment” was actually one that was going to lose them money. Before diving into real estate, make sure you thoroughly research the location of an interested property. If you are not well versed in the area, work with a real estate agent or someone who is. Asking real estate agents and others simple questions, like “how much of your business comes from real estate investors” can open your eyes to whom would be an advisor worth paying. If less than 40% of their business comes from real estate investors, you likely can find more experienced options. Either way, knowing the area a property is in and the true values that come with that area is crucial.
2. Make sure you are knowledgeable in construction or work with a professional who is–
   • After understanding the area, the next biggest thing to focus on is to understand the property. Each property will be unique and come with its own unique current and future issues. If you do not do your due-diligence on the property, you will often find later issues that will damage your pocket book and wipe out your potential profits. If you are already extremely knowledgeable with construction processes, material and labor costs, etc. then you are in a very strong position to protect yourself from issues. If you are not a construction wizard, which most of us are not, then it is as simple as finding a very trustworthy lead contractor and a very thorough home inspector to navigate each property with you. Once you look at the property and think their could be potential for investment, do another walk through with the contractor to learn everything you can about what they would do to the property, what they would worry about, and why. If their estimates of costs and future costs make sense, and you move forward with an offer, take advantage of every moment you are under contract to have every inspector possible vet the property. Do not close on a home that you have not looked over every inch of.
3. It is all about the buy –
   • Outside of understanding the values in the area you are looking, and every detail you can of the property, the next biggest factor is how you buy it. It is all about the buy does not mean purely getting it for a good price. It means structuring the total purchase to be best for you (and often a win-win for the seller, also). That could be focusing on purchase price. Or it could be buying it contract for deed instead of with traditional financing. It could mean including a fast closing time or a slow closing time. And it could mean many other scenarios, combined. Your job is to find a way to structure the purchase so it is the most advantageous. If you cannot get a property to pencil out, then it is not meant to be and you need to walk away.
4. Don’t be too optimistic on your cash flow –
   • Another area people often mess up on is their overestimation of the cash flow they will receive from the property. This normally is two-fold: expecting too high of rental income and not anticipating the full extent of expenses. I, personally, offset my rent expectations by simply having the property management company I use walk the property with me prior to my offer. They will provide truthful rent possibilities so I don’t make poor calculations. On the flip side, I get mortgage payment costs (including taxes, insurance, etc.), vacancy projections, repair cost expectations, management cost expectations (both percentage and property marketing) and more from every expert beforehand. On top of that, I build in a reserve for more costs. I do not want surprises and neither should you. Surprises make it so you make less money.
5. Make sure you understand your tax burden–
   • If you are buying a property (whether to flip or rent), make sure you understand every tax cost that could come about with your property plans. Many people do not incorporate taxes into their returns, and definitely to their detriment. Get an experienced CPA or Accountant and review opportunities with them before you make decisions. They could save you hefty amounts of money.

This was a lot of cautionary tale conversations. It is not meant to scare you off from investing in real estate. It is simply to protect you so you can have the highest likelihood of great returns. If you do these things right (and maybe get a little lucky), you can see your net worth grow very quickly with adding real estate to your “portfolio”. Just do things the right way and ask for help as often as you can from professionals. For more information around real estate investing, feel free to check out our other posts and courses.

GOOD HUNTING!

Also, for something completely unrelated to this post, enjoy one of the “Best Science Images” of 2024 –