Rather than sock your money away in a savings account or CD, you may want to consider an investment in real estate. Some real estate investments occur when a house takes time to sell and you decide to rent it rather than leave the property empty. Other times, you may purposely set aside some of your savings to purchase a rental property. Deciding how much time you have to spend managing real estate is one important factor in your buying decision. Also, real estate investments may not always yield income from the get-go, so you should view a rental property as a longer-term commitment.
Making the Most of Real Estate Investments
Before you purchase an investment property, you may want to consider how you intend to generate a profit. Like an investment, the value of real estate can fluctuate. It may take time for the property value to appreciate. Flipping homes is one way to make money in real estate. Often, older homes in up and coming neighborhoods are targeted for flipping. You may hold on to a property that’s not expected to appreciate, but still yields a decent cash flow from rental payments.
Thinking in Terms of Cash Flow
Successful real estate investors like Scott McGillivray consider cash flow to be an even more important factor than market value when purchasing an investment property. Cash flow is the amount of money returned to you each month after all property-related bills are paid. In most cases this is the rental income minus costs such as property taxes, insurance and repairs.
Real Estate Management
The one key difference between managing real estate versus other investments is that some degree of active management is typically required. When first starting out, many real estate investors manage their properties on their own and take care of minor repairs and maintenance. Property management companies can assist with managing real estate, but their fee will add to your monthly expenses and cut into your profit. Smaller properties such as condos may require less care and maintenance, but condo association fees can be expensive.
Typically, lenders view taking out loans for second homes or rental properties as carrying more risk. This often results in a higher interest rate and a larger down payment requirement. Adding rental income into the mix can help with loan qualification. An established real estate management track record may also give lenders additional confidence. When applying for a loan for a rental property, consider your profit and cash flow goals. A longer term loan means less cash flow for a greater number of years. If you wish to build equity faster, you may choose a higher payment and lower term.
If you’re thinking of purchasing a property as a real estate investment, talk to a BrightPath Mortgage specialist today and ask about your financing options.