The popularity of residential real estate investment as a business strategy has fluctuated greatly over the last several years. It’s interesting how many individuals invest in things like stocks, gold, and real estate while the market is doing well, but then abandon these endeavours when the market starts to decline. It’s human nature, but it also means a lot of real estate investors are losing out.
It is possible to increase your profits in residential real estate investing by studying the dynamics of the market and taking counter-market actions, provided you also adhere to the basics of the business.
Buying residential or commercial real estate as an investment is not a fast way to amass wealth. You may earn a lot of money quickly if home flipping is your thing, but it’s a company that requires your whole time and attention rather than a passive investment. When you invest in anything, you sign on for the long haul. That’s often all it takes to turn a profit in the real estate market.
So while the commentators lament the decline of the housing market and the speculators wonder whether this is the bottom, let’s go back to the basics of real estate investment in order to understand how to prosper in both rising and falling markets.
Read More: Christian Hayes Danvers
Getting Back to the Basics of Household Investment
It’s tempting to get into the real estate market when prices are rising rapidly. Even if you acquired a business with no equity and no cash flow, you may still earn money if you’re in the right location at the right time, since “all ships rise with a rising tide.”
However, without much study and familiarity with the industry, market timing is notoriously difficult. Instead, you should focus on learning about the four profit areas for residential real estate investing so that your next residential real estate investment venture may maximise profits across the board.
The Flow of Money:
How much cash flow does the residential income property generate monthly once all costs have been covered? If you know the monthly rent and the monthly mortgage payment, this should be a simple calculation. Nonetheless, the costs quickly pile up when you consider things like vacancies, outlays, repairs and upkeep, advertising, accounting, legal fees, and the like. To estimate my property costs, I often use a factor of roughly 40% of the NOI. Debt payment is an around 50% of NOI for me. Which means I get to keep 10% of the net operating income as profit. I will be cautious about the transaction if those conditions are not satisfied.
Appreciation:
Having the property’s value rise while you possess it has traditionally been the most lucrative aspect of real estate ownership. Recent events, however, have shown that property values may fall as well. The use of leverage (a bank loan) may have both positive and negative effects. In a rising market, your rate of return may rise, but in a falling market, your rate of loss may rise as well. Residential real estate is a good choice for investors because of its low risk and high potential reward if held for at least 5 years. So long as you keep this in mind, you should be able to ride out the market fluctuations and capitalise when the timing is right.
Reduce Your Debt:
In exchange for the interest accrued on the loan, a little percentage of your monthly mortgage payment goes toward principal each month. Because of the way mortgages are set up, an amortising loan typically has a very small amount of debt pay down at the beginning, but if you keep the loan in place for several years, you’ll see that as you get closer to the end of the loan term, more and more of your principle is being used to retire the debt. Assuming, of course, that you have an amortising loan. With an interest-only loan, your monthly payments will be reduced, but you won’t make any progress toward repaying the principal. If you plan to keep the property for five years or less, I think it makes sense to consider an interest-only loan because the debt pay down you’d accrue during this time is minimal and having an interest-only loan can help your cash flow. This is assuming, of course, that interest rate adjustments upward don’t increase your payments sooner than you expect them to, which would be disastrous. It makes sense to acquire an accumulating loan that will gradually lower the amount of your investment loan and make it go away if you intend to keep the property for a long time and/or if you have a wonderful interest rate. Think carefully about whether a fixed-rate loan or an interest-only loan makes more financial sense for your real estate investment plan. If you’re looking to enhance your cash flow or rate of return without selling your house, refinancing might be a good option.
Also, Read More: Starting Out in the Real Estate Business
Deductions on Your Taxes:
Tax deductions may be a major perk of real estate investment for the appropriate individual. However, they should not be seen as a magic bullet. People who are subject to the Alternative Minimum Tax (AMT), who own a large number of properties but are not licenced real estate brokers, or who do not actively manage their real estate assets may discover that they are ineligible for favourable tax treatment. To make matters worse, the earnings of short-term real estate investors (those engaged in flips, rehabs, etc.) are considered as EARNED INCOME. Their effective tax rate on short-term capital gains is the same as the effective tax rate on the same income received via a W-2 position. In the 1980s, the Tax Reform Act led to the loss of a substantial number of investments, and as a result, many individuals concluded that it was unwise to invest in real estate only for the purpose of taking advantage of tax deductions. You should think of them as icing on the cake rather than the cake itself, but if you qualify, they may be a terrific profit centre.
If a residential real estate investment transaction can stand up to this kind of fundamentals-focused inspection, then it should be a safe bet for your portfolio and your bottom line regardless of the direction the market is trending. But it’s also acceptable to benefit from the current real estate market trends. The idea is to not put all your eggs in one basket and hope that one “plan” would bring you huge profits. Keep your goals practical, and focus on the basics. If you can afford it, invest in real estate and then intend to hold on to it for the long haul.
