Making Money Investing in Real Estate

On April 21, 2011, in Uncategorized, by David Monsour

More people have gotten rich investing in Real Estate than anything else but that doesn’t make it easy. The reason real estate has so many benefits as an investor is because it allows you to take advantage of leverage and other peoples money.  Any business prospers by taking advantage of other peoples efforts and the difference between what that person is paid and what is charged for the service.  This is possible in real estate as well.  Another reason I personally like real estate as an investment is because it’s tangible.  What if the stock market crashes and you lose everything?  That money just goes to “money heaven” but even if real estate values fall there is a tangible object and there is some level of mental security in that.

I will focus on a buy and hold strategy in this post. Other methods such as purchases tax sales, auctions, and flips are also great opportunities but not for everyone.  The most common investment strategy is to purchase a multi-unit property or single family home and rent it.  Bank requirements for these investments are always changing so check with your mortgage professional before looking at properties.

Money is made in three ways with rental properties.

1.) Equity: Assuming you didn’t purchase your property with cash each mortgage payment accrues more equity. The best part about this equity is that you’re building equity with other peoples money.  As time goes on and more payments are made the rate of equitable growth increases.  As you move toward the maturation date on your loan you’ll be quite impressed with how fast the equity builds.

2.) Appreciation:  Some skeptics might say that in our current market there isn’t much appreciation. I will agree with that statement to some degree, however increased rents result in increased income and increased income provides more value to the property.  As long as your making small rent increases when you’re able the value will continue to increase which is appreciation.

3.) Profit:  A few years ago (its 2011) it was a common practice to purchase investment properties with 20% down.  With 20% down it was expected that the income and expenses would basically break even. The owner would build equity and get appreciation so this practice was acceptable to most investors.  The economy hasn’t allowed for as many rent increases as most investors would like so the appreciation is probably a little less than most investors calculated when they purchased.   Profit is the money left over after all bills have been paid.  Buying in today’s market should allow for some larger margins of profit.  Mortgage payments are referred to as debt service in real estate investing.  The common practice in today’s real estate market is to have 25-30% down and have 120-130% debt coverage.  This means you’ll have to put more money down, but you should make 20-30% more money than you need on a monthly basis.  Banks are strict about this criteria.  It’s not a great thing for property owners, but if you’re looking to buy and have some cash you should see decent returns in terms of profit.

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