The basic rule of business is pretty simple:
INCOME - EXPENSES = PROFIT
In other words, what you make (income) minus what you pay (expenses) equals what you keep (profit). Simple, right?
Yeah...not really.
Novice investors think it's simple and overlook important details. They make mistakes. It doesn't take much of a mistake to wipe out all the profit in a real estate deal.
Many new investors don't realize that there are two primary types of real estate investing - and these two types of investing are very, very different.
Most investors get started buying, renovating and selling single family homes. This has come to be known as "flipping" a house. In reality, this buying and selling isn't that far removed from many other types of business - from car dealerships to grocery stores. I call it Merchandising.
In merchandising, you buy something then sell it for more money than you paid. In real estate, an investor almost always changes something to increase the value. There are many different ways to increase the value of real estate. None are free, and therefore they eat into your profit.
In addition to the cost of buying and improving the property, you'll have closing costs when you buy and sell, business costs like insurance and accounting, and taxes. At the end of the day, it can seem almost impossible to end up with anything resembling a profit
Let me be blunt here. During the real estate craze, there were several "reality" television shows about improving, renovating and "flipping" houses. Other than Hometime and This Old House, most of these shows were crap. They built up false hopes and unreasonable expectations in the minds of untold numbers of well-intentioned, hard working novice investors.
And that's the reason I decided to start this blog - to try my dead-level best to cut through the crap and tell you the way things really work. My goal is always to give you the plain, unvarnished truth (as I see it). If you disagree, feel free to call me on it.
Sorry for the rant. Now back to our scheduled programming --
The other kind of real estate that everyone knows about is rental properties. I'll refer these kinds of deals as Landlording. You own a piece of property and someone pays you to use it.
Obviously, rental properties like single family homes and apartments fall into this category. So do parking lots, campgrounds, office buildings, shopping malls and self-storage units.
There is a huge difference between Merchandising and Landlording. Merchandising is always speculation - you're hoping to turn a profit. But Landlording is a business. It's all about cash flow - money in and money out, month after month after month.
Merchandising can crush you all at once, in one fell swoop. But Landlording can seem like death by a thousand cuts when it goes wrong.
Obviously, rental properties like single family homes and apartments fall into this category. So do parking lots, campgrounds, office buildings, shopping malls and self-storage units.
There is a huge difference between Merchandising and Landlording. Merchandising is always speculation - you're hoping to turn a profit. But Landlording is a business. It's all about cash flow - money in and money out, month after month after month.
Merchandising can crush you all at once, in one fell swoop. But Landlording can seem like death by a thousand cuts when it goes wrong.
Even though Merchandising and Landlording are vastly different types of investing, the basic rule of business still applies to both.
Income - Expenses = Profit
If you're not in it for the money, you should save yourself a world of pain and frustration. Do something fun with your money instead of messing around with real estate.
Buy a boat or a motorcycle. Take a European vacation. Invest in old coins or antique musical instruments. You'll have more fun, and will probably end up with more money.
However, if you're still with me - then stay tuned for future postings. The key to making profit is to really, truly, deeply understand your business - whether you're a Merchandiser or Landlord.
We're going to jump into the deep end of the pool for both types of investing. Stay with me until the end and I promise you'll be able to structure your real estate deals with a better-than-average chance of turning a profit.
And that's why you're in this game, after all.
NOTE: If there's anything you'd like to see discussed in this blog, please use the contact form below to send me a message.
Buy a boat or a motorcycle. Take a European vacation. Invest in old coins or antique musical instruments. You'll have more fun, and will probably end up with more money.
However, if you're still with me - then stay tuned for future postings. The key to making profit is to really, truly, deeply understand your business - whether you're a Merchandiser or Landlord.
We're going to jump into the deep end of the pool for both types of investing. Stay with me until the end and I promise you'll be able to structure your real estate deals with a better-than-average chance of turning a profit.
And that's why you're in this game, after all.
NOTE: If there's anything you'd like to see discussed in this blog, please use the contact form below to send me a message.
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