Real Estate Investing: Understanding Returns
When investors purchase real estate, they usually expect their investment to net them considerable returns in the future. Buying a home has always been viewed as a solid investment, but the money doesn't come just from increasing real estate values. When you buy property, you make money through appreciation, cash flows, tax benefits and mortgage principal pay downs.
Real estate is a good investment, but there aren't any guarantees that you'll make money on it. If you do the proper research and analysis, you make it much more likely that you'll buy a property that will bring you large returns in the future. You lower your financial risk when you take the following factors into consideration:
Value Appreciation - A couple of years ago, people made tons of money from buying homes and waiting for their value to go up. This worked until the housing market crashed in 2008; people who were banking on housing price increases found themselves unable to pay for the homes they bought.
Home prices can be volatile in the short-term, but they always go up over long periods of time. If you are planning on buying a home, you need to give it at least 15 to 25 years to appreciate; when you do, it'll perform better than many other investment vehicles.
Cash Flow - When you buy a property that has the potential to consistently net you more money than you spend on expenses, you have a cash flow positive investment. When choosing a property, consider how much you can rent it out for. If you don't live in the home, it can still bring you a considerable profit every month. When rental payments cover the mortgage, everything extra is pure profit.
Many homeowners make the mistake of buying property that isn't cash-flow positive. When they do this, they need to take money out of their bank accounts on a monthly basis to cover their deficit. If you're investing your hard-earned money, you want to make sure it is working towards building your wealth.
Income Taxes - If you are buying property to rent out, you can get some great tax breaks. Rental properties come with tax benefits when owners make less than $150,000 a year. You'll still be paying taxes on the property, but they are a lot less than others have to pay. The government puts these tax breaks in place to stimulate the economy, so talk to a tax professional to see how much money you can save on taxes after you buy a property that will be used as a rental.
Mortgage Principal Pay Down - After the housing market crash of 2008, banks stopped giving away mortgages that didn't pay down the principal every month. If you are buying a property today, you'll get an amortizing mortgage, so you'll never get stuck just paying interest on a monthly basis.
When you pay towards the principal on your mortgage every month, it helps you pay off your balance faster, allowing you to gain wealth quicker. Paying your principal doesn't give you a positive cash flow, but every payment brings you closer to owning the property outright.
When investing in a new property, always remember that cash flow is important. If you buy a property that gives you a positive cash flow, you can use the money to invest, save and pay bills. It's important to build long-term wealth, but a lack of cash can cause you to lose the property.