Investing in real estate has some ups and downs over the course of history, but it never goes out in significance. This is because no matter what the economic situation is, people always need shelter to stay at.
The house is a basic commodity that people’s needs all their lives. Many investors are taking advantage of this fact to put their money on the table and expecting for profits. So, while some people are crying over the residential real estate market slump, you study how the situation can favor your interest in the long run.
If you are thinking about investing in real estates, take note that it can be both very profitable and very risky at the same time. When the real estate market is in a good condition, the ROI is quicker and can give 20% to 40% profit. However, the investment in real estates can be a get-rich-quick scheme. Sometimes, it is better to practice holding your property until the market bounces back and favors your interest in selling the property.
The first step in real estate investment is to know the fundamentals of the market.
A better strategy is to make sure you understand these terms in residential real estate investing:
Cash Flow – How much money does the residential income property bring every month, after expenses are paid? The amount of money left from the rental payment less the mortgage plus maintenance and operational expenses is called the cash flow. I like to use a factor of about 40% of the ROI to estimate my property expenses. I use 50% of the ROI as my ballpark goal for debt service. That leaves 10% of the ROI as profit to me. If this is not what I get, I become worried.
Appreciation – Historically, most properties tend to go up in value over time. However, as we’ve seen recently, real estate can also go DOWN in value, too. Leverage (your bank loan in this case) is a double-edged sword. It can increase your rate of return if you buy in the value of the property is appreciating in that area, but it can also increase the risk of losing when your property goes down in value. The most realistic, low-risk approach is to hold your property for at least 5 years.