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Having investments in the stock market or mutual funds can be key to your financial future. However, it has to be done responsibly and should be started early to take advantage of compounding interest.

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Furthermore, I’m sure many of you have thought about real estate as another investment tool.

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I’m convinced it’s a great way to build the foundation to a strong financial future. Much like traditional investing, there are huge advantages to starting earlier in life.

The 1% Rule – If a house rents for at least 1% of the acquisition cost, it might be a good investment. Acquisition cost takes into account remodeling or other costs getting the house move-in ready. An example would be buying a house for $80,000 and fixing it up for $20,000. Its acquisition cost is $100,000. Calculate live currency and foreign exchange rates with the free Xe Currency Converter. Convert between all major global currencies, precious metals, and crypto with this currency calculator and view the live mid-market rates.

It’s also the most misunderstood and easy-to-screw-up ways to invest.

We’ve all seen people make a fortune on appreciation or heard about people who went from being deep in debt to millionaires using no-money-down strategies.

This can be misleading.

I’ll give you my take on real estate investing today. I’ll point you in the right direction and give you the tools you need to make smart decisions about real estate.

Rich On Money (And Real Estate Investing For Beginners)

I’ve been in the military for the last 18 years, currently living in Seoul, South Korea. I’ve spent most of my career living overseas. I’ve flipped several homes and invested in new construction while moving every 1 to 3 years. I now own 20 single family rental homes that are all paid off.

I’ve gotten where I am today simply by living frugally, investing well, and making sound real estate investments. I’ve certainly made mistakes along the way. Maybe I can help you avoid some of them!

I’ll introduce the basics of real estate investing today and show you a few prevalent misconceptions.

What you’ll learn will help you make smart financial decisions about a property you are buying to live in yourself or an investment property.

It starts with understanding the numbers.

Know the Numbers

I will show you some rules and concepts that will change the way you look at real estate. For my money, the most important rule in real estate is the 1% rule.

Once you know this rule, you’ll have the ability to instantly look at the price of a home and know if it has a chance of being a good investment. You also know if you are overpaying or have a chance of getting a really good deal.

This rule is so easy, it can be done in your head.

Here we go.

The 1% Rule – If a house rents for at least 1% of the acquisition cost, it might be a good investment.

Acquisition cost takes into account remodeling or other costs getting the house move-in ready.

An example would be buying a house for $80,000 and fixing it up for $20,000. Its acquisition cost is $100,000.

According to the 1% rule, it should rent for at least $1,000 a month (1% of $100,000) to have a shot at being a good investment.

This rule is an estimate. Once you’ve determined this could be a good deal, you’ll do more research, and get all the info you can about actual income and expenses to have a true estimate of what your future return on investment will be.

High Cost of Living Areas

Ever heard anyone complain they live in San Francisco or New York City so they can’t invest in real estate?

I would argue they are correct, and the 1% rule shows you why. If you buy a house for $900,000, but it rents for $3000 a month, you are nowhere near passing the 1% Games that give real money as prize. rule. It’s a money-losing investment.

Some will argue you’ll make up for it on appreciation. I call this the appreciation myth. While appreciation is sometimes larger in high cost of living (HCOL) areas, it’s sporadic in timing, and over the long term, only slightly better than the rest of the country. Don’t fall for the hype.

Many argue it’s still better to buy then waste your money on rent. When you crunch the numbers, you’ll often find that renting can be superior to buying in many situations.

One reason is, for the first several years of your loan, you are actually paying off far less of the principal portion of the loan than you realize. It’s mostly interest. This is because of the way amortization on loans works.

It kinda sucks.

Additionally, some argue the mortgage payment may be cheaper than the rent payment in certain cities. That may be true, but there are lots of expenses to pay after a mortgage payment each month (repairs, maintenance, capital expenditures, taxes, insurance, HOA, etc).

There are usually no expenses beyond rent.

The Cash Flow Myth

Many people already own a rental property and think they are making money on it, when in reality they may be barely breaking even or even losing money.

To understand this concept, I’ll introduce you to my second-most favorite real estate rule, the 50% rule.

The 50% Rule – Approximately 50% of your gross rent on a single-family home will go to expenses.

Examples of expenses are: taxes, insurance, repairs, HOA, capital expenditures, property management, etc.

Remember, a mortgage payment is NOT included in this 50%.

This is very important!

The amount of money you bring home as extra income or “cash flow” is after the 50% expense AND after the mortgage is paid. Most people ignore this 50% expense when they tell people what their cash flow is.

Example:

You bought a house for $100,000. It rents for $1000 per month. $500 per month is considered expenses.

Let’s say your mortgage payment is $600 per month.

You tell your friends that your cash flow is $400 a month because of $1000 rent – $600 mortgage = $400 profit.

Right???

In reality, you have approximately $500 in expenses and a $600 mortgage. Your total expenses are $1100 a month. With $1000 in rent, you have a negative cash flow of $100 a month.

Don’t freak out yet. There are several ways to remedy this:

Find a way to have a lower mortgage, be it higher downpayment or better rate
Buy the house cheaper
Find a way to raise the rent
Manage the property yourself (50% rule assumes you have a management company)

Finances

I want to talk about finances. When are you ready to buy a house of your own? an investment home?

As you may remember, I own 20 paid off houses. I’m not going to sit here and tell you paying off mortgages early is the only way to go, but it does have its advantages.

I do want to talk about what I consider aggressive or irresponsible real estate investing.

I believe you should invest in real estate from a position of financial strength. You should get your finances in order before diving in.

I’m sure you’ve heard people buy real estate with no or low money down and with bad credit. There

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