Expert: Paul Henneman - 10/4/2005

Question
Hello I have been dealing with investment properties for almost a year now.  My first property that I bought was a two family property in the city of Fall River Massachusetts.  Now I purchased this property for 185,000 and then put 37,000 into it to fix it up (including mortgage payments). I later sold the property for 265,000.  Now after paying closing costs and Realtors, and moving costs and everything else I really did not do so well.  After that I purchased a three family home for 230,000.  Now I have put 100,000 into this property including all mortgage payments closing costs fixing it up everything.  (Also keep in mind that I live or lived in each house that I have bought.)   Recently the house was just appraised for 390,000.  Meaning there is 60,000 in equity in the home.  My question is how can I make some real money with real estate?  Because from what I am doing I'm not really making that much money.  I only make about thirty grand a year at my regular job.  How can I take my sixty grand in equity and turn it into something?  Thank you for your response in advance.

Answer
Michael,
   Thank you for your question! Yes, I agree that real estate can take alot of work for the returns. However, your returns are actually quite good. In your second example, you will make about a 25% profit after all expenses in a year. This is very, very good. There is unfortunately no reliable way to make money faster than this. The way that investors become wealthy in either the stock market or in real estate, is by doing it over and over again for many years. If you continue to be profitable on your properties, you should be able to work on more properties at the same time. For example, next time buy two houses, and if you make 25% or more in profit in a year on both, then do it with four houses at the same time. As your operation grows, you could hire an assitant to handle much of the paperwork and organization for you, freeing yourself up for more important tasks and allowing you to work with even more properties. No one gets rich off a single real estate investment, unless it is commercial property or entire buildings. Even then the profit margin is similar, but since you are working with much higher value the profit is greater.
   I do have one word of caution. The real estate market has been very, very good. This will end sometime, perhaps soon, or maybe in many more years. It is impossible to say for sure. If you have everything you can invested in real estate and the price of properties even levels off, or even worse drops, you could lose everything. This can happen quickly. I would recommend that you take a portion of each house sale and put into another type of investment. The stock market generally moves opposite to the real estate market, so you could put something into a stock portfolio or mutual funds. Perhaps 20% of the profit from each real estate deal would go a long way in protecting you. You probably made about $35,000 in your first example, so I would suggest that $7,000 be put aside in other types of investments. In your second example $12,000 could be put aside.
   Also, note the trend: You have twice as much potential profit in your second real estate deal as you did in the first. You are learning and will continue to get better at it. It takes skill to identify undervalued homes, to know which areas are in demand, and to figure out which homes require a realistic amount of investment to make more attractive for resale, what formula produces the most profit. The longer you own a home the faster it will apprciate, but as a rule of thumb anything over a 20% return for a home within a year is fantastic.
  So to sum up my suggestions for your $60,000: If you are still interested in realestate, take $12,000 of it to go into stock and/or mutual funds. The rest could go to your next real estate investment. Or, that should be enough to get into two real estate investments at the same time.

I hope this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
(800) 381-5576