Investment Real Estate... Growing Wealth

Determining Reasonable Cash Flow
No doubt we have all heard of the instant riches awaiting us by investing in real estate. It's all over the TV, radio, internet, etc. Is it easy to make money in real estate? Not really "easy". Is it possible? Yes, it certainly is. Where do I start? The answer here is to do the research...be informed about what to look for and lay down a well thought out financial "game plan".

I have owned several investment properties over the years and my experiences may be of some help to you. Let's put aside the "get rich quick" methods where you somehow buy a property and sell it quickly for double the price. That type of activity is more pure speculation than solid principled long term investing. What I will follow with are methods I have adopted both through experience and from tips I have learned from others in regards to locating property and determining sufficient cash flow. Here we go…

1.	Find the right property at the right purchase price. Easier said than done but it can be done. You will make a lot more money by not overpaying. The property that has been on the market for some time and has had price reductions could be the right one. Also, paying the right price going in will help you have a lower debt to service.
2.	Determine what rental income you can expect from this Take special note of what updating and repairs, if any, might be required. This includes both short and long term. Any additional money you put into the property naturally reduces the overall return. Updating and repairs are not uncommon, but be sure to determine what they may cost from a trusted contractor. Work those figures into the financial equation and be sure to include expected maintenance even if it's two years away. A solid cash flow game plan will always include anticipated future expenses.
3.	Determine what the reasonable rental rates would be for this particular property. There are really two ways to do this. One is by actual rental history of your property. Was it a previous rental and if so what was the gross annual income and request to have it verified. The second way is to research current like kind properties in the immediate area and determine what those properties are renting for. Either way, you want to be certain to settle on a reasonable rental price you can fully expect to receive. Being conservative with this number is the best way to go.
4.	Create a financial cash flow analysis before making an offer on the property. Lay out a three to five year spreadsheet of anticipated income and expenses (take special care to include all expenses) including servicing the mortgage note. This spreadsheet should become your working "business plan". Why expose yourself to surprises when you can put together a realistic forward looking plan? Create the business plan and stick to it. Another important point is that rental income does not necessarily have to cover all expenses to make it a viable investment. The tax benefits associated with real estate coupled with the appreciation factor allows you to create long term wealth even if it is costing you a few hundred dollars per month to service the note. Add the tax benefits to the anticipated appreciation and you can easily see how the math works.
5.	As a side note, I have always found it helpful to learn about tenant/landlord laws. While you may think that all cities have similar laws in place, the fact is they do not. Issues pertaining to eviction, age related occupancy and notice procedures can differ from city to city. This information is easily obtainable from the city government and it's something I would recommend to any future landlord.

The question now is... Okay, I have found an investment property at a good price and believe I can make the cash flow work… what now are the real benefits? While any prudent investment advisor will recommend a diverse portfolio of investments (and I do also), I have personally found two benefits that only real estate can provide.

1.

The leveraging factor. Buy a $400,000 investment property with 20% down and you have essentially made an $80,000 investment. Let's say the property appreciates only 10% over the first three years. That translates to a $40,000 return on an $80,000 cash investment. Do you think that's obtainable with stocks? In addition to this you will be paying off some of the principle over those first three years if your rental income covers a fully amortized loan. So you're gaining two ways…appreciation and principle pay down.

2.

The second benefit I have found is the tax factor. While I am certainly not a tax accountant, I do know that with real estate you pay taxes on the gain only when you sell. If you have $80,000 in stocks that gain 6% over the first year you will pay capital gains tax at the end of the year and every year. That $4,800 your stock returned will end up being reduced by your particular tax bracket rate. In addition, with real estate investments, depending on your adjusted gross income, there are depreciation write offs available as well.

The case has been made that smart real estate investing can create serious wealth over time. That is the reason investors do it. While you will want to discuss tax issues with your accountant, the appreciation and tax benefits make it a solid long term strategy. In fact, I think you can see that having several income producing properties operating simultaneously can put you well on the way to financial security. As I pointed out above, the way you do your research in locating a property that can support a viable cash flow plan is what it's all about. Yes, you have to do some research but it is worth it. Not every property out there will fit your requirements. Find the right one at the right price…lay out your financial plan over a multi-year time span and you should do quite well.