Investing in real estate seems like the most stable way of making money and earning an income that will ensure a comfortable retirement, but, as with anything, delving into real estate does have its share of risks. It’s essential to ensure success by following some common sense rules and doing your due diligence in choosing properties for your investments. Even once that first step has been taken, making certain you make your investment back and turn a profit can be tricky.
Three Things To Look For In Your First Real Estate Venture
- Cash On Cash – One of the first concerns in choosing to invest in real estate is to make sure you’re aren’t losing money on the initial investment. Many people look to the real estate return on investment without considering the journey it takes to get there. For starters, where is the money coming from? If you’re drawing on money already invested in stocks, bonds, or funds, you’ll want to look at the rate of return you’re already earning and compare that to your probable return on investment on the real estate property. If it’s a lesser value, you might want to reconsider the property and look elsewhere.
- Avoid Lengthy Projects – While the idea of buying a fixer-upper or land for development seems like guaranteed ways to double or even triple your money, these investments are fraught with problems. Any manner of unseen expenses can crop up and reduce your profit in the long run. Instead, it may be better to consider an investment property that has already established its value.
- Will It Cost You More Time Than Money? – When looking for a good investment, it’s necessary to also look at the long term obligations that might be required. Even after any required remodeling has been done, consider whether or not you will have to maintain a presence on site to look after tenants or make repairs. A property in a problem area may also pose security issues that will make ownership undesirable.
The Nitty Gritty
While expert advice on finding the right properties goes a long way toward ensuring one’s success, what people really want to know is what they can expect in a real estate return on investment in practical terms. In determining this, you will need estimates as accurate as possible with knowledge of whatever repairs and/or remodeling will be involved.
In one example, a subject buys a property for cash at a sale price of $150,000 and spends an additional $12,000 on closing costs and updates to the property, bringing his total investment to $162,000.
Charging a tenant $1,500 to rent the property per month ($18,000/annually), the property owner wants to know what his return on investment will be.
The formula to figuring that out is:
$18,000 ÷ $162,000 = 0.111 or 11.1%
Annual return ÷ total investment = return on investment
That’s an 11% return in the first year.
Adding a loan into the mix, which may be necessary for many investors, complicates matters, but, in the long run, it may allow for a greater return on investment. In this case, it will be necessary to deduct the cost of monthly expenses, such as mortgage payments, taxes, and insurance from the $1,500 rental income, before proceeding. Paying out a monthly total of $908.02 leaves $591.98 per month of income. Multiplying that sum by 12 gives you a total yearly income of $7,103.76.
Now perform the equation same as above. In this case, the total investment will be comprised of your down payment, closing costs, and repairs.
$7,103.76 ÷ $45,000 = 0.157 or 15.7%
In this example, the property earns a higher return on investment, making the option of financing worth the cost.
Whichever route you choose, always be wary of your investments and consider every possibility to eliminate most unexpected costs. Investing in real estate can be a profitable and worthwhile endeavor, if approached with clear goals and educated decisions.