Investing in Residential Real Estate

More frequently than not, one hears about those who made their fortunes investing in the stock market, only to lose those fortunes overnight during a market crash. This same story is rarely heard about real estate investors, in fact investing in real estate is said to be one of the safest long term investments one can make.  Although lucrative, one does have to exercise caution and planning in order to gain financial success.

 

Unfortunately, it is not as easy as those late night commercials make it seem. Planning is key, make sure you are working with a professional who has the tools, experience and education to ensure that your investment makes sense.  Below are the basics of what you will need to consider in order to start investing:

  • Investment capital -  a legitimate means of attaining some without putting yourself in debt. Most lenders require a down payment in order to provide adequate financing, down payments can range from 10%-35% depending on the property and situation.
  • Hire a Professional - preferably a Realtor, Broker or Financial Planner who manages or has experience in real estate investments. In addition, one that can provide a financial analysis to see if your investment makes sense.
  • Obtain a management company - unless you want to "do it yourself" make sure you find a management company that has a team ready to complete inspections, repairs, tenant placement etc.

For some, the above may be a bit intimidating, but with the right planning, knowledge and representation one can reap all the benefits real estate investing has to offer, such as:

  

Market Appreciation

Market Appreciation is the increase in value of a property -- this increase in value versus the debt you owe gives you equity which is a part of your net worth.  Market appreciation can be somewhat controlled when you make improvements; lets say you purchase a fixer, through improvements/renovations you can increase the value of the home to equal or above your neighborhood.

 

Equity Liquidity

By owning the property you have the power to tap into a portion of your equity or sell the property and use your equity to purchase a better deal. Equity is relatively liquid, meaning it can be converted into cash in a reasonable amount of time with few restrictions. This cash can be used to purchase another property and/or renovate the current property to increase it's market value.

 

Cash Flow

Cash flow is the difference between your income and your expenses on a piece of property. Cash flow can be negative or positive.  Undoubtedly, positive cash flow is preferred, however negative cash flow can occur and still be a positive investment on a long term investment. 

 

Tax advantages

As with your personal home, you can deduct the interest paid on the mortgage from your taxes.  In addition, there is no tax penalty when refinancing (to tap into your equity for example).  Lastly, by successfully executing a 1031 exchange, upon a sale, you may avoid  the taxation of your gain or profits.