Compared with other asset classes, real estate has been the best way for people to build wealth, generate income, and lower their taxes. However, investing in real estate can be a complicated process. This is a comprehensive list of the things you should consider.
The cash flow that an investment property will generate is essential to understand when you’re buying real estate. Cash flow is the net amount of money that remains after the expenses are paid. If the amount of money left over is more than your liabilities, (mortgage, maintenance cost, insurance) that represents a positive cash flow. For example, if you purchase a property with a $1200 mortgage and get $1450 a month from tenants, that $250 difference is your cash flow.
Needless to say, the area where your property is located will determine a lot of its current value (and future value) and how much income you can hope to get. Luxury condos in Houston tx will likely appreciate more in value compared to condos in other areas of Texas. Houston is the ‘#1 Market in the US for job creation‘ and that will bring in workers from across the country and increase local demand for houses. Information like this should be a part of your strategy.
Getting The Best Price
You’ve probably heard of the famous investing adage “buy low and sell high”. It seems like such a simple thing to do, but if it were really simple, why would most new real estate agents leave before 5 years in the industry? Partly because they underestimated what to expect. As someone who’s buying property, you can likewise expect to face the same risk of underestimating your respective local housing market if you’re not careful. Look and see what houses in your area are Real estate owned. These are properties that have already been foreclosed and lenders (normally banks) will look to sell them at a discount below their market value. Consider paying cash if possible (it saves on closing cost) or try finding short-sale properties; there’s a lot you can utilize to save on cost.
Leverage allows you to borrow capital and increase your potential return. The great thing about leveraging in real estate is that the terms on loans are more accommodating and easier to acquire relative to other types of loans. You can put a down payment of less than 20%, borrow the rest from a bank, pay interest only on the loan, use the the monthly rent from your tenants to pay the mortgage, and keep what’s left over. Just make sure you don’t over-leverage.
Decide What Kind Of Buyer You Are
Do you want to buy property that appreciates in value or buy something that provides a source of income? Is your goal to buy and sell quickly or hold for the long-term? Are you going to buy locally or pursue investing over long distances? Developing strategies based on the type of buyer you are will take you further than just arbitrarily trying things as you go along.
The 1% Rule
This is a helpful principle for buyers deciding on a prospective rental property. If the property can make 1% of its total value from rent ($3000 a month on rent from a $300,000 house), then it’s definitely worth considering but this is not a catch-all approach.
Passive vs. Active
You can find various anecdotes online from people who thought real estate would give them a source of passive income only to realize how much active management is actually involved. Those same luxury condos in Houston tx can require a great deal of maintenance and might turn out to be a boondoggle. It’s better to plan proactively how much time and resources you can allocate for ongoing expenses and upkeep.