Commercial Real Estate for Beginner: 1

By Stephen K. Marchant and Stephen Kolarin

Real estate has long been one of the most popular investment assets. After all, people will always require land to build their homes and businesses on. Real estate, as an asset, has the potential for multiple income streams.

You can benefit from real estate investment in a variety of ways. As a direct owner, you can renovate a building and rent it to a tenant for a relatively passive income, or you can resell (flip) it. However, you can make money without owning any property.

Property values typically increase over time. This means you can sell it for a higher price in the future or use it to raise capital for reinvestment.

Real estate investments can generate passive income. There are ways to make money in real estate that do not necessitate a lot of effort or time. You don't even have to own real estate to make this happen.

Furthermore, the income generated by real estate investments is not affected by inflation. In fact, your rental income will rise in tandem with inflation. This means you'll be able to enjoy a higher cash flow while maintaining or improving your money's purchasing power.

There are also tax advantages. If you own an investment property, you can deduct the depreciation of the building as well as any additional capital investments, lowering your taxable income. In addition, depending on your investment strategy, you may be eligible for additional tax breaks.

In this book, we will go over the various methods for investing in real estate. As previously stated, you do not need to be a direct owner of the property to profit from it. We will provide you with an overview of each investment method, including the benefits and drawbacks of each.

• Language: English
• Publisher: Stephen K. Marchant
• Release date: Sep 1, 2021
• ISBN: 9781915018076

Book preview

Chapter 1: Why You Should Pursue Real Estate

You must understand the difference between an asset and a liability as the foundation for investing with the right money mindset.

Assets are things you own that can provide future economic benefit, whereas liabilities are things you own that require you to pay someone else in the future due to a legally binding contract. A purchase order, bond issuance, taxes, wages, or a mortgage are all examples of liabilities. Simply put, assets generate profit while liabilities necessitate spending.

A business is considered relatively successful if it has a high asset to liability ratio. It demonstrates that the company has a greater ability to pay its liabilities on time, a process known as liquidity.

However, liquidity is more than just having a high asset-to-liability ratio; it is also the ability to convert assets into cash in order to pay liabilities on time. If assets cannot be easily converted into cash, liabilities will not be paid on time.

The difference between total assets and liabilities is referred to as equity, which is the net amount invested by a business's owner or the owner's actual ownership of the business. This also includes any retained earnings, such as profit.

If you want to become wealthy and live comfortably, you must maintain a laser-like focus on asset accumulation. Real estate investments can be either assets or liabilities, depending on how they affect your bank account. If your real estate investment necessitates spending, it is a liability. A mortgage with little or no rental income is a good example. If, on the other hand, a property generates a profit after deducting all expenses (including mortgage payments), it is considered an asset.

Building Asset

You must always aim at building an asset column that is robust enough to give you income to cover all your liabilities while leaving you with some money. The growth in whatever you are left with after covering the entire liability column indicates where you stand with your retirement goals. This is also your net worth, whatever is left if all your assets were sold and debts paid. Focus on increasing this value's growth rate, as it is indicative of whether you are earning enough to retire.

Building assets is simply the gradual process of purchasing them (in­vestment), so you can accumulate them and increase your net worth. Investment is basically acquiring an asset that can earn you some returns in the future. But asset accumulation is what makes investment meaningful. This is what leads to financial freedom.

Why Should You Build Asset

The short answer is to pursue financial independence, or as others call it, financial freedom—that is, the point at which your assets generate enough income to cover all of your living expenses even if you are not working (i.e., keeping a job). This is referred to as passive income. It is not an easy goal to achieve, but it should ideally be a basic goal for everyone, and understanding why you should work toward it is the first step.

Although we may not all enjoy our jobs, most people must work in order to earn a living. It is a voluntary compromise that someone is forced to make when they are completely reliant on their jobs to make a living. However, this will not be the case indefinitely. In fact, you are guaranteed that you will have to retire at some point, and even if you are not in formal employment with a set retirement age, as you age, you will be less able to perform your job and will naturally desire to do less demanding work.

To begin reducing and eventually eliminating your reliance on employment, you must first recognize how financially dependent you are on your current job. Following that, you can gradually reduce your reliance by developing alternative sources of income. This income will be generated by the assets you are amassing.

As you increase your asset base, you will increase your alternative income and, as a result, lessen your reliance on income from employment. You will eventually be able to survive solely on the income generated by your assets, even if you quit your job. As a result, you should consider asset creation as a surefire way to free yourself from the shackles of employment.

Why Should You Prioritize Alternate Sources Of Income

The simple reason is that you have much more control over your alter­native income compared to income from employment. To make this easier to understand, let us look at why we need money in the first place. We need money to maintain our standards of living while managing associated living expenses. These expenses are uncompromisable and basic.

For most people, meeting these expenses means they have to work hard and get a job to earn them an income. However, there's one small problem—our expenses have a stubborn way of growing over time, meaning that our incomes must grow in the same way to maintain our living standards. And therein lies the reason why alterna­tive income is supposed to be our number one focus rather than income from employment.

How does income from employment grow? As Jim Rohn famously said, "You get paid for bringing value to the marketplace, and if you're not very valuable, you don't make much money."

The problem here is that value is not really self-assigned. You cannot say, I deserve to earn X amount an hour, or, I think it is time I got a sal­ary bump due to my good performance. Although you may do your best, work hard, and hit milestones to improve your value to the market—in this case, your employer—there are many outside forces beyond your control that may hamper your salary growth. Your employer (or rather, the marketplace) will ultimately have the last say regarding how valuable you are. In short, the marketplace will assign value to you.

On the other end, the growth of your alternative income can be calcu­lated mathematically in a sense, giving you more certainty. Since alter native income depends on the volume of assets you accumulate, you actually have more control. This is compared to income from employment, whose growth is dependent on your employer. The higher the asset base you have, the higher your passive income will be. How­ever, as you would work to improve your reputation and value in the workplace, you will also need to build the skills necessary to increase your asset base.

Initially, the proportion of your alternative income to your total income will be lower compared to what you are earning from employment. This makes sense and should not discourage you from building alter­native income sources while on the job. Keep buying more and more as­sets and investing, and gradually, your alternative income will grow.

Three Steps To Asset Building

People born into affluent families will not build their assets in the same way as the ordinary Joe. They already have a significant head start. But everyone else, regardless of how much money you have right now, can start this journey toward financial freedom by following these three steps.

Step 1: Saving Money

This is probably what anyone will tell you about building wealth. It is actually more important than the actual act of investing. Putting aside at least 25% of your total income is considered decent saving. You can achieve this or even increase the amount by reducing unnecessary spending once you recognize that achieving financial independence is your number one priority. Maintaining a standing order with your bank to deposit that percentage of your salary in savings account at

the beginning of every month is a great way to ensure you stay consist­ent.

But merely saving money alone is not enough. You have to save it the right way to ensure you accumulate enough cash to buy investments. This involves considering the following:

An emergency fund: Without considering the effects emergencies can have on building assets, you will have to learn the hard way when an emergency strikes and wipes out all your assets. We have all seen how, for example, medical emergencies destabilize families that were otherwise on an upward trajectory. This is why you need to put some money aside for a rainy day. Ensure your emergency fund comprises an insurance plan and actual cash.

Use recurring deposits: This allows you to make your saving automatic. You are concentrating on saving money first in this step before getting into the returns you want. Your money will be safe and accessible to you. However, do not use this money to buy any liabilities, such as a car. These savings are purely for making investments.

Step 2: Investing

This is a very important step in the asset-building process. The aim of investing is to multiply your savings. You may argue that you would rather keep increasing your savings, say for years, and then use them to buy assets directly instead of investing.

However, it is not advisable to keep savings in monetary form because it can be quite easy to spend it while investing increases your chances of multiplying it. You, however, must invest your accumulated savings wisely. Some common investment avenues that can give you good re­turns over time include gold, stocks, mutual funds, and real estate.

Remember that the goal of this step is to increase the multiplying power of your savings. Many people may lack the investment know-how necessary to multiply their savings; however, I will equip you to invest wisely and accumulate assets in the lucrative real estate industry.

Step 3: Lock Funds

At this point, you would convert your savings into income-generating assets. The whole point of saving is to redeem them eventually and pur­chase an asset that can earn you an income. Whatever method you use to multiply your savings, at some point, you will need to redeem and buy income-generating assets.

Remember not to underestimate the need to have a solid emergency fund to keep you afloat in times of crisis. You should also aim to manage your debt prudently, or most preferably, be debt-free.

Again, note that a real estate investment can either be an asset or a liability. If the property you have purchased is costing you or not earning you any surplus income, it is a liability. In addition, if you are paying a mortgage from your pocket, it is a liability. It will only become an asset when you are earning more from it than spending on it.

Why Real-Estate Is Surefire Way To Build Income

When compared to investing in mutual funds, bonds, or stocks, real estate can provide numerous advantages on top of being a safe investment. As you work toward accumulating assets for your retirement, real estate income can not only cover you indefinitely but also leave you with something for your children. This is because real estate is a self-sustaining asset, whereas stocks are self-liquidating during retire­ment.

Real estate provides predictable cash flow and appreciates in value, thus keeping up with inflation, and provides higher returns due to positive leverage and growth in equity from debt reduction.

Below are some of the reasons that make real estate one of the surest ways to increase your asset base.

Better Returns

The stock market is highly volatile. The value of your investments can go from millions to nothing within a matter of days. What's worse is that you have little control over the value of your investments. Real estate, on the other hand, is a lot more stable. It is almost unheard of for a real estate investment to lose a significant percentage of its value within a short time.

Will Appreciate In Value

According to the National Association of Realtors, since 1968, annual real estate appreciation levels have been at 6%, including during the 2007 economic downturn. The real estate market has historically been able to recover from bubbles that reduce appreciation. It shows that holding your investment long enough will pay off and earn you more money. Those who did so during times of uncertainty are enjoying windfalls after prices stabilized. Ment after deducting mortgage payments and other expenses.

You Can Increase The Value Of Your Real Estate

Since it is a tangible asset, one of the most attractive and unique advan­tages of real estate is in how it can improve on the property and actu­ally increase its value. You can do this through major structural repairs, cosmetic improvements, or both. Either way, the option of improving is always there, and it comes with the reward of increased worth—you can charge higher rent or sell it at a higher value.

Leverage

This is probably the most important advantage that real estate invest­ments have. Leverage is using debt to improve the income potential of an investment. In real estate, leverage is when you use debt to reduce your need to acquire a property. That means you can increase the percentage of income you would get from a property by actually investing less.

When the value of your property increases, you can leverage that by taking a second loan against the increased value and purchase another property. Note that leverage is a double-edged sword; it magnifies both gains and losses. If the value of a property falls consistently year by year, you could end up with a debt higher than its value. When leverage is used prudently, however, you can avoid this risk.

Predictable Cash Flow

With a good real estate investment, you would be expecting at least a 6% cash flow. This is the income you would be left with from the invest-

Although other investments such as stocks can leave you with little to no tangible value, your property and land will always have some value. Stocks could tumble to zero, just like a car loses value

Reviews for Commercial Real Estate for Beginner

[Purple Tree · Rating: 5 out of 5 stars]

The author goes into great detail about commercial real estate and gives the reader great points on how to start