Tuesday, January 24, 2012

Real Estate Wealth - Focus on the Cash Flow

It's no secret that many of the wealthiest people on this planet have made their fortunes through investing in Real Estate.

There are many good reasons why every investor should consider Real Estate as a portion of their overall wealth building plan. One of the main reasons is that there is a finite amount of land on this planet. In other words there isn't any more of it being made. This should have the long term effect of gradual price increase. This does not mean however that there won't be setbacks along the way. This we have recently seen the in U.S. real estate market.

                                                          Smoothing out the Market

To smooth the ups and downs of the market, one way is to do your analysis based on how much income a property puts in your pocket each month. Of course, we are talking about revenue real estate that generates rental income each month.

As long as the rent you receive each month is more than all of your expenses each month, what the value of the property is each month doesn't really matter.

                                                                 Dangers of Flipping

There have been a number of tv shows over the past few years that promote the flipping of homes. Basically this is buying a property, fixing it up, and hopefully selling it for more than you paid plus all renovation costs.
This strategy can work well in a rising market, however, in a falling market you could lose your shirt, literally.

You must have a good market to sell into, otherwise you will be forced to wait until the market turns around or sell at a loss. There are always costs associated to holding a property, such as mortgage interest, realty taxes, insurance, utilities, etc.

                                                                  A Better Solution

 A safer way to buy Real Estate is to focus on the long term. Plan to keep your property for a very long time and rent it out. As long as you can receive more rent than you pay out in expenses each month, it would be pretty hard to lose money.

The expenses you must allow for are as follows. Interest costs on the full purchase price plus renovations needed to rent it out, realty taxes, property insurance, property management expenses, repairs and maintenance, an allowance for periods of vacancy, common element (hoa) fees for condos, any utilities that must be paid by the owner.

If the property still has a positive number after the above calculations, it should be looked at further. If this number is negative, toss it out. I would recommend not considering any property that has a positive cash flow of less than $100.00 per month per door. The reason being is that you can make this amount much simpler in other forms of investment.

There are many courses on Real Estate investing available. I would not recommend buying Real Estate until you are well educated in this area. Real Estate investing is much more complex than other forms of investing and there are many factors that should be considered before jumping in.

As always, I welcome your feedback and suggestions for future topics.

No comments: