Investing in real estate can be quite profitable if done intelligently. However, in addition, it can cost an investor a great deal of money if pursued with no investor’s getting used due diligence. Notably in major metropolitan regions like San Francisco, where demand for home is obviously high, real estate investing is a fairly safe bet, assuming the investor can make the monthly cash flow work.
Real Estate Investing Defined
Investing in real estate means that you are purchasing pre-exiting constructions and property to bring in money from leasing or renting the house, or reselling it at a later date, perhaps with renovations and improvements. The key here is that the property is already developed to some degree. If, on the other hand, you buy raw land with the notion of creating it for a specific purpose and later selling or renting it, that is known as”speculating” not investing.
Lease Property
Investors often purchase property to lease out. Some leasing property, however, isn’t a good investment, and the investor has to run the numbers carefully to make sure there is enough of a yield to make renting profitable. This is accomplished by carefully balancing the actual monthly expenses of owning the house with the monthly income the house can create. .For example, you may buy a lovely three bedroom, 1 bathroom house for lease purposes and protected a monthly mortgage payment of $900, including insurance and interest. Houses in that area, however, may not control a monthly lease payment of $900, in which case the investor loses money every month. Renting property becomes profitable if, in addition to gaining equity in the property every month, the investor isn’t outlaying any cash not covered by the property’s income. If you are considering purchasing a property for lease that is already being used as a rental house,ensure the property really is as profitable as the present owner claims it’s. The best approach to do this is to ask to see the owner’s Schedule E tax form. Assuming the owner is reporting costs and income related to the property, you will get a clear image of the property’s revenue generation capacities.
Resale Property
Some property is better invested in for resale. It is often possible to buy property at a lower than market value cost because it is in disrepair or it has been foreclosed. It’s possible to mend or renovate the house and offer it for sale in a much higher cost. If you are also handy enough to do a lot of the work yourself, then the profit margin can be even higher. Run the numbers and check to see what the total cost of purchasing and renovating the house will be, and compare it with what cost is reasonable to expect from the sale of the house, minus closing costs.
Down Payment
It is usually perfect for investors to put little or no money down on investment property, as this frees up cash. But, it’s often difficult to create positive monthly cash flow on property having a tiny down payment. Many investors can simply earn monthly cash flow work by putting a substantial down payment on the property. For example, in the case given above concerning a house using a monthly mortgage payment of $900, a larger down payment on the loan might signify a lower monthly payment. If, for example, the investor can put enough money down to make the mortgage payment just $400, then a $700 monthly lease creates positive income every month.
Property Worth
General wisdom in real estate retains the three most important considerations concerning property value is”location, location and location.” But, real estate investment author John T. Reed states that some of the greatest investments are found in less than desired places, because there is a high need for property to rent. Check the local home market to see whether or not property values in the region have been stable over time. Fantastic bargains are found in depressed areas, but remember that these properties come with higher risk for the investor.
Contingencies
Have contingency plans, because conditions often change. Bear in mind that renovations on property could take longer than expected, and the local home market could change downward. This could make resale of the house not wise until the market improves. Be ready to change course and lease the house, thereby minimizing any investment reduction while increasing equity in the house.