If you’re bailing out of the stock market like so many others, perhaps you’ve made the decision to start real estate investing rather then stockpiling your money under the mattress. If so, then this article is for you. In it, we discuss three fundamental things cape residences for sale about real estate investing you should understand before you make your first real estate investment.
1) Understand the Basics of Real Estate Investing
Real estate investing involves acquisition, holding, and sale of rights in real property with the expectation of using cash inflows for potential future cash outflows and thereby generating a favorable rate of return on that investment. Moreover, investing in real estate is more advantageous then a stock investment (which usually require more investor equity) because real estate investments offer the advantage to leverage a real estate property heavily.
In other words, with an investment in real estate, you can use other people’s money to magnify your rate of return and control a much larger investment than would be possible otherwise. Moreover, with rental property, you can virtually use other people’s money to pay off your loan.
But aside from leverage, real estate investing provides other benefits to investors such as yields from annual after-tax cash flows, equity buildup through appreciation of the asset, and cash flow after tax upon sale. Plus, non-monetary returns such as pride of ownership, the security that you control ownership, and portfolio diversification.
Of course, capital is required, there are risks associated with investing in real estate, and real estate investment property can be management-intensive. Nonetheless, real estate investing is a source of wealth, and that should be enough motivation for us to want to get better at it.
2) Understand at Least Four Elements of Return
Real estate is not purchased, held, or sold on emotion. Real estate is not about love, it concerns return on investment. As such, at the very least, prudent real estate investors consider these four elements of return. They are what reveals to the investor the potential benefits of purchasing, holding on to, or selling an income property investment.
Cash Flow – The amount of money that comes in from rents and other income less what goes out for operating expenses and debt service (loan payment) determines a property’s cash flow. Furthermore, real estate investing is all about the investment property’s cash flow. You’re purchasing a rental property’s income stream, so be sure that the numbers you rely on later to calculate cash flow are truthful and correct.
Appreciation – This is the growth in value of a property over time, or future selling price minus original purchase price. The fundamental truth to understand about appreciation, however, is that real estate investors buy the income stream of investment property. It stands to reason, therefore, that the more income you can sell, the more you can expect your property to be worth. In other words, make a determination about the likelihood of an increase in income and throw it into your decision-making.
