If you are a buyer with money to invest in today’s housing market, there are a number of strategies that have stood the test of time when it comes to property investment and realizing a return on those investments. Below are 8 tips from the authors of Investing In Real Estate (McLean and Eldred 2006) for maximizing your real estate assets.
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Maintain a positive cash flow. The rent on your investment properties should cover the mortgage, taxes, insurance, and any other related fees. When all is said and done and paid, there should be money left over each month. It’s also a smart idea to hold enough money in reserve to cover mortgage-related expenses in the event the property is vacant for a period of time. How much money you hold in reserve is your decision and will likely depend on how the rental market is performing.
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Leverage OPM. OPM, or other people’s money, is a principal factor in growing your own net worth. In other words, as your tenants provide you with their money to pay down mortgage debt each month, your equity as the owner of the property grows. This is often referred to as equity growth via amortization.
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Improve your properties. Perhaps the most common form of investment return, property improvements have the potential to result in a greater property resale value. Consequently, your ability to sell the property for substantially more than you paid for it results in a profit. For example, if you purchase a house for $60,000 that requires a little TLC, and you spend another $10,000 making improvements, you may be able to sell the more attractive and marketable house for $100,000 resulting in a $30,000 profit.
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Buy wholesale. In terms of housing, wholesale refers to properties whose prices are lower than market value due to foreclosure or tax sales. When you buy properties at a bargain that is well below market price, you build your net worth and equity holdings.
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Take advantage of tax breaks. Real estate investment comes with its perks. One of the biggest perks comes in the form of tax deductions, tax credits, and other government-sponsored programs for real estate investors that cut your tax bill, thereby increasing your bottom line and equity growth.
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Care for your assets. Property structures—be they residential or commercial—are no different than any other asset that needs regular attention and maintenance. Think of your property investments just as you would your own vehicle or home. Regular maintenance helps retain value and is a necessity, not a luxury of ownership. It’s not a good idea to wait until something breaks before you fix it. In fact, it usually costs more! Managing your property asset is just as important as buying smart and positive cash flow.
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Asset + time = equity. In many respects, property investments are similar to stock market investments; the longer you wait, the greater your return. As your property increases in value, so does your wealth. When you buy at today’s prices and take advantage of wholesale bargains, your asset grows in value over time because of local appreciation. When added to the amortization principle described above (see #2), you’ve got a number of factors working in your equity’s favor.
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Remember that rent is not a fixed price. When you are actively managing your property portfolio, pay attention to costs that are affected by the rising cost of living. For example, higher insurance rates, property taxes, and maintenance fees that you must pay are all legitimate pass-through factors to consider in increasing your rent cash flow.
