Hard Money
Hard money can be made in two ways: Over the long-term and over the short-term. In order to make hard money in the real estate investment world, there are basic skills you need to learn in managing your money that will help you make money in the long run. These basic skills will help you learn how to respect money, control money, save money, and invest money to get more return on your real estate investment. The more experience you gain with hard money and real estate investing, the more you learn how to invest in property to make money in the short term.
Managing Your Money in the Long Run
Respect Your Money
In order to learn how to manage your money, you first have to learn the value of a dollar and particularly of a dollar invested or saved. You first learn the value of a dollar by holding a job and working for your money. The more you work, the more money you make. The more you work, the more experience you get. The more experience you get, the potential for making more money goes up.
Control Your Money
As you make more money and spend more money, it is important to learn methods for controlling your money. Learning programs, such as Microsoft Quicken, can help you organize your finances and learn exactly where you spend your money on a month to month basis. By regularly reviewing your expenses to find legitimate monthly expenses and expenses that can be trimmed down, you can gain more control over the money you have.
Save Your Money
Learning how to control your spending and regularly review your monthly expenses is the precursor to controlling the flow of money coming in. As you work and make money, you should have a plan for saving some of the money. You can save money in big ways by doing your own taxes and in little ways by clipping coupons. Make a list of ways you can save money and stick to it. Regardless, develop your own savings plan to include how you will pay off your credit cards, build your emergency savings, and build your retirement savings.
Making Money in the Short-Term
Flipping Versus Sleeping On It
Most people only make five to fifteen percent in flipping properties and usually have cash to pay for the property outright. It may not be as easy to make money when flipping properties as it would be to just buy a property, such as a home, and just sleep on it. By keeping a property for two or more years, you have a chance to build some equity in the property and then potentially use the equity to purchase a larger, more valuable property.
Return on Investment
Return on Investment or ROI is a formula that shows, over time, whether a real estate investment is good or bad. It is used to give a percentage of how much money the investor will make over time. It is calculated by taking the equity at the end of the current year or the total increase in equity divided by the equity at the beginning of the same year.
The formula used for finding yearly ROI is:
ROI = Yearly Increase (in Equity) / Equity Total (for previous year)
Where Increase in Equity = Principal Paid on the Loan + House Value Appreciation
To find the ROI for Year 1, the Yearly Increase in equity is divided by the Equity Total (i.e., $6,105 / 10,000 = 61.0%). For Year 2, the ROI is 40.0% or $6,424 / 16,105 = 40.0%.
There will usually be more return on your investment in the first few years of the loan than in the few years of the loan. Some would argue that this is reason enough to invest in the short term and then move on to another property. Remember though that you must consider all costs before you move on to another property. If the closing costs for your current property and the down payment on your new property adversely affect your ROI on the current property, then it is most likely better to stay where you are at.
