Let’s Dive Into Real Estate
Many of you already know that Real Estate is where I’ve built my wealth so I might be a little biased, but I love real estate as a high leverage way to build wealth! Although there are many ways to directly invest in real estate, for simplification purposes, we can break the investment approaches into two primary categories: investing in a property to potentially resell it quickly for a profit, and investing in a property for the long-term and renting it out.
Here Are Some Of The Benefits
One potential benefit of investing in a rental is that it has the possibility to provide two types of return. First, it can provide appreciation over the long run, if the property value increases over time and due to improvements made by the owner, and as the owner increases equity in the property by paying down the mortgage.
Second, the owner also has the potential to realize an ongoing return in the form of positive cash-flow on the investment — earned by renting the property out to tenants for monthly payments that exceed the owner’s overall monthly expenses to maintain the property.
Financing And Appreciation Are Common
If an investor can obtain attractive financing to secure a rental property that produces positive cash-flow in an appreciating market — and if the investor is willing to take on the responsibility of managing the property (or working with a property management company) — then rental property investing can be a viable real estate investment strategy. Of course, just as with any investment, it is important to understand that rental property investing carries the risk of loss and there are no guarantees of a return.
To determine whether a rental property investment can work for you, you first need to come up with an informed estimate of the return on investment (ROI) that the property is likely to generate.
Calculating Return On Investment
For many types of investments, you can determine the ROI by calculating a simple formula: gains minus cost, divided by the cost. In the case of a stock investment, for example, if you pay $10,000 for stock in a company and sell your shares later for $12,000, then you’ve realized an ROI of 20%. That’s a net profit of $2,000, divided by the original $10,000 purchase price — giving you a 20% return on your investment.
In reality, the ROI calculation will be more complicated than this, because you will need to factor in expenses such as capital-gains taxes on your stock sale and any broker fees you incurred while buying and selling your shares.
But things get more complicated still when you are attempting to determine the ROI potential in advance of investing in a rental property — because there are so many variables that can affect both the income potential and the expenses of the property.
Determining the possible ROI of an income-producing property will require you to make estimates (based on whatever historical data is available) on market rental rates, vacancy rates of similar properties in the area, ongoing expenses for maintaining and operating the property, and other variables that might change at any time. And bear in mind, as stated previously, rental property investments carry risk of loss just as any other type of investment, and returns can never be guaranteed.
More Real Estate And Investing Posts Coming Soon! Cheers To Your Success!