Real Estate as an Investment

Real estate has long been viewed as a solid investment when it comes to your primary residence. It allows you to build equity and personal wealth over time, can be passed down to heirs, used as a nest egg, seniors can take equity out of the property through reverse mortgages or it can be sold at a profit to invest in a bigger, better house down the road.

With investments in the stock market having taken a tumble over the past few years, many individuals have turned to investment properties to generate positive cash flow. Of course, you should always consult with your tax professional and an experienced investment property agent prior to getting started.

In today’s market climate, typically you will need some cash to get started. Banks have tightened up lending requirements for investors considerably. When getting into rental properties, you need to calculate what the potential cash flow is that the property will generate to determine whether or not it will be worth it to you. An agent can help you determine cash flow.

Many people today are interested in “flipping” homes as a profit generator. The key to being successful at this method is to focus on the buy side, not the sale. You need to be able to buy the property for the right price and then calculate what your carrying costs and renovations will be. Carrying costs and renovation costs are fixed; your purchase price is not.

Example A:

House bought for $100,000. Renovations cost $15,000 and carrying costs for six months is $6,000. Right now you have $121,000 into the property. Renovation estimates almost always come in higher than anticipated….so add another $5,000 for unanticipated expenses. Now you have $127,000 into the property. If houses in the area sell for $140,000 on average, your anticipated profit is $13,000. How can you increase your profit? If you could buy the house for $95,000 that would bring your profit margin up to $18,000. Then you have to determine if that amount is worth it to you.

Again, an agent experienced with investment properties can not only help you find “good buys” but will also help guide you as you analyze what your cash flow will be. Don’t forget about taxes….capital gains and other taxes may apply so always consult with a tax professional.

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