Real estate investing is not rocket science. But it is a business. And like any business venture, it does require an ample amount of planning and preparation, commitment, and knowledge.
So in this article I want to provide an overview of real estate investing by focusing upon some of its financial benefits, important terms, and suggestive ways you can best prepare to get started.
What it is
Real estate investing involves acquisition, holding, and sale of rights in real property with the expectation of generating favorable rates of return on the amount invested.
Unlike stock investments (which usually require more investor equity), real estate investments offer the advantage to leverage a real estate property heavily – which is generally central to the investment decision.
But aside from leverage, real estate investing provides other benefits to investors as well.
- Use of other people’s money to magnify your rate of return and control a much larger investment than would be possible otherwise
- Use of other people’s money to pay off your loan
- Yields from annual after-tax cash flows
- Equity buildup through appreciation of the asset
- Non-monetary returns such as pride of ownership, the security that you control ownership, and portfolio diversification
Of course, its not a bed of roses. You’ll need capital. Investing in real estate does have risks. And investment real estate can be management-intensive.
Terms to Understand
Rental properties are not purchased, held, or sold on emotion. Rental property is about return on investment. Here are four basic elements of return you should understand when purchasing, holding on to, or selling an income property investment.
- Cash Flow – This is determined by the amount of money collected from rents and other income less operating expenses and loan payment. Real estate investing is all about the investment property’s cash flow. You’re buying income stream, therefore be certain that the numbers you use to calculate cash flow are truthful.
- Appreciation – This is the growth in value of a property over time. The fundamental truth here, though, 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. So make a determination about the likelihood of an increase in income and throw it into your decision-making.
- Loan Amortization – This means a periodic reduction of the loan over time leading to increased equity. Because lenders evaluate rental property based on income stream, present lenders with clear and concise cash flow reports that correctly reflect the property’s financial performance. Income and expenses represented accurately to the lender increase the chances that you will obtain favorable financing.
- Tax Shelter – This signifies a legal way to use real estate investment property to reduce annual or ultimate income taxes. No one-size-fits-all, though. The prudent real estate investor will always check with a tax expert to be sure what the current tax laws are for the investor in any particular year.
How You Prepare
- Form the correct attitude.
Purchasing a rental property is not like purchasing a home. Investing is business. So look beyond curb appeal, exciting amenities, and desirable floor plans unless they contribute to the income. Focus on the numbers. “Only women are beautiful,” an investor once told me, “what are the numbers?”
- Develop a real estate investment goal with meaningful objectives.
Have a plan with stated goals that best frames your investment strategy (it’s one of the most important elements of successful investing). What do you want to achieve? By when do you want to achieve it? How much cash are you willing to invest comfortably? What rate of return are you hoping to generate?
- Research your market.
Understanding as much as possible about the conditions and issues surrounding the rental property you want to purchase is a necessary and prudent approach to real estate investing. Learn about property values, rents, and occupancy rates in your local area. You can turn to a qualified real estate professional or speak with the county tax assessor or a local appraiser.
- Learn the terms and returns and how to compute them.
Get familiar with the nuances of real estate investing and learn the terms, formulas, and calculations.
- Create a relationship with a real estate professional who knows the local market and understands rental property.
It won’t advance your investment objectives to spend time with an agent unless that person knows about investment property and is adequately prepared to help you correctly procure it. Work with a investment specialist.
- Consider investing in real estate investment software.
Having the ability to create your own rental property analysis gives you more control about how the cash flow numbers are presented and a better understanding about a property’s profitability.
Here’s to your investing success.