Investing in real estate has become more popular in the last 50 years as more people seek real estate investments as means to diversify their investment portfolio. When you invest in real estate investments, you enjoy excellent rate of returns, and great tax advantages, while building on your wealth.
How to make money in real estate? How to become a real estate investor? Which investment strategies to adopt? How to start a real estate business?
These are questions that pop into mind when considering investing in real estate. But, you don’t need to worry. Investing in real estate is much simpler than you think. Using cogent investment strategies backed by proper real estate education will make you one of the most successful real estate investors around.
In this article, we will explore the benefits of investing in real estate. We will also go on to provide you with information that you should consider when becoming a real estate investor.
Why Should You Be Investing in Real Estate?
Investing in real estate has become more favorable over other investment vehicles. This is because:
- Investing in real estate comes with numerous tax benefits: As opposed to other vehicles of investment, investing in residential properties gives you the advantage to get tax deductions on mortgage interest, property taxes, insurance, and depreciation.
- Real estate investment properties appreciate over time: Owning a rental property offers real estate investors security in the form of home value appreciation. The longer you hold onto your real estate investment property, the more money you will make. While home values are constantly moving up and down, over time, their values climb higher and higher. This makes investing in real estate a predilection for real estate investors providing them with long-term financial security. In fact, today, real estate investors in the top performing markets have been enjoying a windfall where homes have appreciated significantly.
- Real estate investment properties will always have a tangible asset value: What makes investing in real estate more desirable than other investment vehicles such as stocks or cars is the fact that investments will always have value. Stocks, for example, can dip to zero leaving you with little to no tangible asset value. Take cars as another example. When you purchase a car, your car will have a depreciation schedule. At the end of the schedule, your car value will decrease significantly and your car will eventually lose value. In real estate, on the other hand, investment properties appreciate in value and are worth more over time. In the case of contingencies and risks associated, insurance will protect you against them. So the bottom line is that no matter what circumstances your investment property might face, it will still have a tangible asset value.
Now that you have a better idea of some of the benefits of investing in real estate, you should be more confident about your journey to becoming a real estate investor, the most successful one. Below are four things to know before you start investing in real estate.
#1: Property Management
Being a landlord can be a bit assiduous, and especially for those real estate investors with investment properties out of state. Fortunately, today you can hire a third party property management service to run your investments for you while keeping you updated. If you have a busy schedule and investing in real estate is not your primary job, property management services will come in handy. We recommend that you refer to third-party management services as they will, not only help you manage your investment property, but also ensure that tenants are happy and stay for long periods of time.
Hiring a property management company to deal with your investment properties for you will be beneficial because:
- You will not have to deal with messy legal problems
- You will be able to diversify your investment portfolio and buy more properties
- Management companies will be in charge of the maintenance and repair thus lifting off such burden
- You as a real estate investor will be able to purchase more investment properties in remote locations while appointing a management service to run them.
#2: Annual Expenses
Often times, real estate investors fail to enumerate all expenses associated with an investment property. Before investing in real estate, you must assess the type of expenses that will be indebted to pay. By doing so, you limit any possibility of having a negative cash flow.
Investment property expenses that you should know before investing in real estate come in two forms:
- Fixed expenses: These are the routine costs associated with purchasing an investment property. They include annual property taxes, insurance, routine maintenance and repairs, and the cost of property management services.
- Variable expenses: When starting a real estate investment, it is important to set aside extra cash for any contingencies. Major unplanned expenses that you should be aware of include replacement of water heater, air conditioner, roof and/or flooring. If not planned well, you will incur expenses that will burden your cash flow.
#3: 1% Rule
The 1% rule is your cash flow formula. While many real estate investors have different goals as far as returns, the majority will agree that income generated from an investment property must abide by 1% rule. The 1% rule means that your monthly rental income must be at least 1% of the purchase price of the property.
For example, if you bought a condominium for $150,000, $1,500 or 1% of the value should be earned in rental income. Take this as a rule of thumb when considering becoming a real estate investor and purchasing a rental property. If you are interested in an investment property that does not abide by the 1% rule, make sure that the property is in a good neighborhood and shows growth prospects.
#4: Know Your Financials
Lastly, you should consider the financial analysis that precedes buying an investment property. Remember buying property at a higher price or on less attractive terms might influence the feasibility of your investment and can further deter you from generating a positive cash flow. Before you begin investing in real estate, you should understand the different figures that influence the feasibility of your investment.
The most important metrics that you should know to better evaluate a property are:
- Return on Investment
- Cap rate
- Cash on cash return
- Total ROI
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Many aspiring real estate investors have little knowledge of metrics used to assess an investment property. As a result, they hold back from investing in real estate. But you should not, because Mashvisor’s investment property calculator will do these calculations for you. Visit Mashvisor today to learn more about its investment property calculator.
Investing in real estate is certainly not arduous. Combined with a thorough research and sound investment strategies, you are set for growth. Remember the aforementioned points, as they will be the twin pillars of your success to score profitable investment properties.