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  • Writer's pictureSpring Valley, The Investor's Bank

A Father's Legacy: Invest in Generational Wealth with Real Estate

Updated: Jun 27

Looking at the June calendar, my eyes met with Sunday June 16th Father's Day. I got to thinking about the common characteristics of the Fathers in my life and the word PROVISION came to my heart. Fathers young and old are focused on providing for their children from the most basic necessity to building a legacy. Like many of you reading this, my husband and I have chosen to invest in real estate as a means to pass down generational wealth to our kids and their kids.

Real estate has long been an avenue to build generational wealth, as capital appreciation combined with passive income makes these investments scalable and repeatable. Generational wealth represents a significant aspect of financial planning that transcends individual prosperity to benefit future generations. It encompasses the transfer of assets and financial resources from one generation to the next, fostering a legacy of stability and abundance. Unlike the concept of immediate financial freedom, generational wealth focuses on creating a lasting impact through tangible assets, businesses, real estate, investments, and income-generating tools that can be passed down to provide long-term security and opportunities for descendants. By understanding the essence of generational wealth, individuals can establish a solid foundation for building a prosperous future that extends beyond their own lifetime. Based on these factors, it is no surprise that Americans surveyed for a recent Gallup Poll voted real estate as the best long-term investment for the 11th year in a row.

When looking at using residential real estate as a means to create inheritance here are 9 factors to keep in mind:

1. (Suprise!) Location, Location, Location

Investing in real estate is a thrilling journey filled with opportunities for success, and to truly thrive in this field, it's crucial to delve deep into your local market dynamics. Your investment decisions should be guided by the unique factors at play in your specific real estate environment, as this will significantly impact the outcome of your ventures. Remember, a key strategy for real estate prosperity is to steer clear of overly heated markets and regions overly reliant on a single economic sector, such as tourism. While some may boast about soaring property values or escalating rates, it's essential to exercise caution to avoid buying at the peak and potentially facing financial setbacks.

Market cycles ebb and flow driven by the pursuit of economic gains. Each housing market dances to its own rhythm, occupying a unique phase within the cycle. The key lies in identifying markets in the expansion phase, characterized by a surge in sales and prices, favorable affordability, limited construction activity, and increasing capital investments. By recognizing and capitalizing on these trends, savvy investors can navigate the ever-changing landscape of real estate with precision and success.

When selecting a property to invest in, it's crucial to consider its location within the market. Opt for neighborhoods with a high population density, undergoing development, and offering easy access to essential amenities. By focusing on these factors, you're not just investing in a property but in a potential thriving community with promising growth prospects.

There are commonalities in well performing neighborhoods:

  • Good school ratings

  • Walkability

  • Low crime rate

  • Access to entertainment

  • Access to medical care

  • Family-friendly

  • Access to public transportation

  • Access to highways

  • Access to shopping

2. The Act of Hidden Markets

Investing in real estate presents a myriad of opportunities, and one of the most lucrative strategies involves purchasing property from distressed sellers. By acquiring properties below the market value, you not only secure a great deal but also potentially help someone in a difficult situation. Instead of navigating foreclosure auctions with their associated risks, consider seeking out distressed sellers who have not listed their properties publicly yet. These could be individuals facing personal challenges like a divorce or families looking to sell an inherited home. By approaching these situations with empathy and a desire to find a win-win solution, you can not only secure a well-maintained property but also make a positive impact on someone's life during a challenging time.

3. Buy Right

Real estate investing is like stepping into the world of dividend-paying stocks, where the key lies in the initial purchase price. Just as with stocks, the return on investment is crucial in real estate. Imagine snagging a bargain on a small house in a dodgy area – sure, it might be cheap to buy, but the returns might not be as fruitful. It's all about finding that sweet spot where value meets potential for growth.

4. The Cost of Doing Business

It is imperative to grasp your expenses from the outset. Beyond the initial costs of acquiring properties and realtor fees, there lies a realm of additional financial considerations. From necessary repairs to unforeseen challenges like structural issues, electrical faults, or pest infestations, it is crucial to accurately estimate and prepare for these expenses. Additionally, overlooking expenses such as closing costs, insurance, and utilities can lead to financial setbacks. By being mindful of these factors and seeking professional guidance when needed, you can make informed decisions that truly enhance the appeal and value of your home.

By cultivating a keen eye for detail and a proactive approach to budgeting for all potential costs, you can navigate the complexities of real estate investing with confidence and foresight. Remember, thorough preparation is the key to long-term success in this dynamic industry.

Taking on DIY projects to improve your home may seem like a good idea, but it's important to approach them with caution and expertise. Rushing into renovations without proper knowledge and skills can actually decrease the value of your property. It's essential to understand the complexities of tasks like electrical and plumbing work to ensure your home remains safe and marketable.

5. Risk Management

When it comes to managing risk in real estate investments, one of the key strategies is to avoid taking on excessive debt. It's advisable to aim for a down payment of at least 10% when purchasing an investment property, with 20% being even better as it can eliminate the need for PMI and often result in a more favorable interest rate on the loan. By being mindful of your financial leverage and making strategic decisions, you can set yourself up for success in the world of real estate investment.

Secondly, keeping a substantial cash reserve is crucial. This strategy decreases the risk of being forced to quickly sell a property at a loss, as you'll have the financial means to support the property for an extended period before it needs to be sold.

Repairs are part and parcel with real estate, so the more reserves you have the easier it becomes to rectify foreseen and unforeseen maintenance issues. Securing the final $20,000 to repair a property through a hard money lender is an option, yet it carries a high interest rate that can significantly diminish your profit margin.

Avoid purchasing a property if the numbers don't add up, even if you fear missing out on the deal. It's crucial not to become emotionally attached to an investment property; after all, it's not you but someone else who will reside there. Understand your risk tolerance and take steps to mitigate it, whether that means steering clear of a fixer-upper that could become a financial pit or bolstering your cash reserves prior to acquisition. If the stress of fixing and flipping is too much, consider investing in turnkey properties instead.

6. Keeping up with the Jones'

In real estate investment, a prevalent error is overdeveloping a property to be the finest in its neighborhood. Investors might renovate homes in modest neighborhoods into luxury dwellings, but these cannot command the same prices as in affluent areas, leading to financial loss. Over-improvement is imprudent. Instead, aim for "best in class" enhancements rather than making an office building excessively luxurious or elite.

Repair broken or damaged items. Subsequently, implement minor yet impactful upgrades that are cost-effective. Opting for low cost wise choices like adding molding, painting, upgrading fixtures and hardware. Installing user-friendly soap dispensers and waste bins is another. Forego high-end appliances, and costly decor.

7. Due Diligence is Key

Before converting your basement into a rental unit, ensure it is permitted. Avoid transforming the first floor into commercial space if it violates local zoning laws. Exercise caution regarding food service regulations before changing a vending machine area into a sandwich shop. Do not presume the addition of extra rooms or floors is allowed. Understand the extent of work and what work necessitates a permit.

8. Discovering Income in Underutilized Areas

Exploring ways to maximize the value of real estate can lead to higher profits from the same investment property. This might include leasing a corner for a bank's ATM installation or renting out lobby space for a small coffee shop, thus generating rental income from previously underutilized areas.

In an apartment complex, consider offering value-added services such as coin operated laundry or offer concierge services. You can charge higher rent for a more attractive property.

Another variation of this applies to house flipping. Instead of buying the home, fixing it up, and selling it to a home buyer, fill it with a tenant, instead. Once the tenant has moved in with a lease, start looking for buyers. This is called a turnkey rental property, and it can easily be sold to a new investor who wants to jump into real estate investment without any hassles.

9. Non-Traditional Real Estate

Real estate investment offers a range of options beyond single-family homes, apartment complexes, and traditional office buildings. These include storage units, industrial facilities, warehouses, REITs, and real estate syndications, which can all generate rental income. Notably, with office and industrial properties, a triple-net lease can reduce expenses, as tenants cover basic insurance, property taxes, and maintenance, leading to steady cash flow with few extra costs.

When thinking about building generational wealth consider these real estate options to propel you forward in your investing.

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