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7-Ways to Make Money On Investment Properties
The market has cooled in various cities across the country and fair
weather investors are starting to worry about how they'll be able to
make money now that their houses aren't escalating at astronomical
rates.
I just have to
say to these folks -- breathe. If all you want to do in real estate is
make money on the basis of appreciation (asset growth), then you need a
primer on how to make really good money in real estate.
The authors of
Investing In Real Estate, Andrew McLean and Gary Eldred (2006, John
Wiley & Sons Inc.), have provided that primer, listing eight ways
to grow your wealth in investment real estate.
The key to
building true wealth in real estate is through buying and holding. A
good tenant can create wealth for you by paying for the mortgage,
insurance, taxes and monthly fees through their rental payment to you.
In addition, consider this: you have just taken over an asset leveraged
by a fraction of the value. In other words, let's say you purchased a
condo at $150,000 for $15,000 down payment. If it grows at 5 percent
per year ($7,500 first year, etc.) you're making more than 50 percent
on your money that you actually invested -- can't get that kind of
power behind mutual funds.
Real estate
investing allows investors several ways to make and/or save money that
other investment tools will never allow or have the ability to provide.
As Mr. McLean and Mr. Eldred point out, no one can predict short-term
price increases -- but that's why the savvy investor doesn't look to
just appreciation to make money. Here's how you can build wealth
through your real estate investing:
Positive
cash flow. This is simply what it sounds like -- the rent covers the
mortgage, taxes, insurance, fees, etc., and once all that's paid, you
have money left over at the end of the month. A wise investor will also
have enough money in reserves to cover all these expenses for a few
months in case the property goes vacant.
Equity growth via amortization. As the mortgage
shrinks from the mortgage payments, your equity grows (and so does your
net worth). This is one of the most powerful means of wealth growth --
using OPM (other people's money) to build your net worth. The tenant is
providing the investor with hundreds or thousands of dollars per month
to pay off debt, which turns into equity for the landlord.
Capital improvement. This is the fixer-upper that most
people think about when investing in real estate. Purchase a property
for $50,000, put in another $25,000, and voila, the house is now worth
$125,000 ($50,000 more than the initial investment).
Wholesale purchases. The most effective way to build
net worth and equity is to buy a house for a bargain price. These
properties would be the pre-foreclosure, foreclosure, tax sales, etc.,
where the investor buys the property well below market price. In
essence, you make your money when you buy the house at such a low rate.
Lowering tax bills. One of the greatest benefits about
real estate investing is all the tax breaks allowed for these type
investments. Uncle Sam allows many tax deductions, tax credits and
other government-sponsored programs connected with real estate
investing that cut the investor's tax bill, thus, increasing the bottom
line and equity growth.
Smart asset management. Many novice or ignorant real
estate investors lose money simply by not managing the asset wisely.
For instance, painting properties before the wood is actually peeking
through will keep the asset in good shape, seal the wood, and protect
it from more expensive damage. Managing the asset is just as important
as buying smart and cash flow. The real estate investment is a
commodity, not a money machine, and must be managed and protected to
maintain future wealth growing potential.
Asset value growth. As your property increases in
value, so does your wealth. This is the old fashioned principle of buy
and wait. Buy at today's prices and with time, your asset will grow in
value because of local appreciation. In addition, your equity will grow
along with the amortization principle mentioned above.
Rent appreciation. As the cost of living increases,
so, too, should your rent cash flow. Increasing your rental income per
month by 5 percent could result in hundreds of dollars of cash flow per
year -- year after year.
Written by M. Anthony Carr
Wondering What Your Home Is Worth? -- Let me show you.
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