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Real Estate Investment

Owning property can be a real money pit that ends up costing more in taxes, mortgage, insurance, and gray hairs than you'd ever like to think about.

But, with that warning in mind, there are ways you can make money with real estate. Check 'em out.

(1) Own and then sell

Owning and then selling is what most people think of when they consider real estate investing, and it works like this:

Back in 1950, Ma and Pa Shtetl bought their house in Reseda, California. They paid $40,000 (by paying $5,000 in down payments and getting a home loan) and lived in the house for 50 years. Thanks to the magic powers of inflation and the fact that land in California grew in value, their house grew in value about 8% a year.

The house cost a lot of money. There was insurance, repairs, a mortgage, taxes, and other payments. But they made it work, and they had to live somewhere, so they just considered it "costs of living."

The key number here is the 8% a year compound rate—and the 50 year duration. Divide the 8% into 72 and that's the number of years it takes to double the value of the entity being considered. In this case, the home that cost $40,000 in 1950 was worth $80,000 just 9 years later (8 into 72 is 9). In 1959, the home carries a market value of $80,000 and the $35,000 loan has been paid down to $30,000.

So the equity value in the home is now $50,000. But Ma and Pa don't just pull up roots and move. They stay in that house, baking cookies, making small repairs, and watching reruns while complaining about the new-fangled shows. By 1968, the house's value has doubled again, now to $160,000. By 1977, that doubling-up thing is doing its work and the home is worth $320,000. And their mortgage is almost paid off.

Jump ahead to 1995 and the house is worth $1,280,000. That's a figure they like to think about over pots of tea. And now that Ma's knees are weak those stairs start to become a bother, they start thinking what they could do with $1,280,000. Pa gets brochures of RVs and maps of Florida ready.

It's not until 2000 that they sell, though. The house is listed for $1.6 million and sells for $1.5 million. After commissions, closing costs, and everything else they get to keep $1.4 million from the sale of that house. They invested $5,000 in 1950 and have made $1.395 million in profits. That's about 300 times their original investment. Not too shabby.

They might have to pay long term gain tax of about 23% in California (Federal plus State taxes). But since this long-term is probably a one-time thing, they might not be charged much or any gains taxes at all. In either case, they're doing pretty well with a $5,000 investment.

So can you do this, too?

Don't get your hopes up. Ma and Pa rode the greatest real estate bull market in history. Bless 'em.

You didn't luck out as much. When it's time for you to buy, you'll find that the cost of everything has risen sky-high (just like Ma and Pa are always complaining about) but wages have not kept up. Back in the day, you could buy a house on a decent job at the factory. Today, you're going to struggle to rent an apartment with three roommates on an entry-level salary.

Property prices are no longer heading up higher than hemlines, either. You might buy a house and watch its value go up. But you could also buy a house, fix it up on loaned money, and lose your shirt when property values plummet.

We never said it was pretty.

(2) Flip

You can't always wait fifty years for property values to go up. After all, how will you enjoy a huge real estate windfall if you don't have your own teeth to enjoy your lobster bisque and champagne, arewerite? Flipping takes time out of the equation and inflates property values via your own hard work.

You've seen the reality shows: you go in, buy a rundown house, fix it up really fast, and then turn around and sell it at a profit. At least that's what the networks would have us believe.

Can you make money flipping houses? Sure. But there's also a big risk. It's how a lot of people lost their shirts when the housing crisis of 2008–2009 hit. Investors bought multiple properties at a time with loans. They were hoping to sell at a profit but ended up finding out that the houses were worth far less than they had invested in them.

If you do it right and get lucky, though, it can pay off.

(3) Rent

You can buy property—either homes or commercial spaces—and rent them out to other people. You become the landlord.

The money you make from renting pays for the mortgage, and you keep the difference as an investment. Once the property is yours free and clear, all the rent money (except for what you pay for maintenance) becomes yours.

Of course, if your rental property looks like the Amityville horror house, chances are you're going to have a lot of vacancies, which means that means you can end up paying for the upkeep of the house with no money coming in.

Ouch.

(4) Have your house star in movies

Yep, this is a thing. Talent scouts need houses and all kinds of property to star in their TV shows and movies. You can earn a couple hundred bucks a day if your house is photogenic. No word on whether property can develop a Hollywood attitude, though.

Bottom line: when most people think of real estate as an investment, they think of putting money into a house in the form of a mortgage and then watching its value grow. It might have worked in the 1950s, but that strategy has gone the way of duck tails and soda fountains.

Today, if you just buy a house and sit on it, you might not make money. That property can even become a liability if you end up pouring in money for repairs and the market value drops.

Don't say we didn't warn you.

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